In view of the closely-knit economic and social connection between Hong Kong  and mainland China (the Mainland), cross-border employment/secondment  arrangements have become increasingly popular. Employees from the Mainland who  are working in Hong Kong need to understand how their salaries and benefits will be  taxed in Hong Kong, and whether anything can be done to take advantage of double  taxation arrangements between Hong Kong and the Mainland. 

The Comprehensive Double Tax Arrangement between  Hong Kong and the Mainland (the Treaty) aims to minimise  the exposure of double taxation caused by overlapping of  tax jurisdictions and help investors to better assess their  potential tax liabilities. Besides the Mainland, Hong Kong  has entered into double tax arrangements with other  countries. 

Recently, the Inland Revenue Department of Hong  Kong (IRD) has attempted to clarify the application of  Article 14 of the Treaty (Income from Employment). The  interpretation affects a Mainland employee providing  service in Hong Kong whose remuneration is partly paid by  a Hong Kong resident employer.

Conditions to satisfy the Hong Kong salaries tax  exemption

Under Article 14 of the Treaty, remuneration paid to a  Mainland resident in respect of their employment in Hong  Kong will not be taxable in Hong Kong if all the following  three conditions are fulfilled:

  1. The Mainland employee stays in Hong Kong for a period  or periods not exceeding in the aggregate 183 days in  any 12-month period commencing or ending in the  taxable period concerned; and
  2. The remuneration is paid by, or on behalf of, an  employer who is not a resident of Hong Kong; and 
  3. The remuneration is not borne by a permanent  establishment which the employer has in Hong Kong.  A permanent establishment includes a place of  management, a branch, and an office through which  the business is carried on. 

In other words, the Mainland employee won’t have to pay  Hong Kong tax on their Hong Kong income if they don’t  stay in Hong Kong for more than 183 days per year and the  employer paying them is neither a Hong Kong resident nor  permanently in Hong Kong. Broadly, the salaries exemption  would therefore apply to expat Mainland employees paid  by Mainland China companies without a base or residence  in Hong Kong.

Allowance and hotel accommodation paid by Hong Kong  subsidiaries

Despite the above, there have been some doubts as to  whether allowance and hotel accommodation provided  by a Hong Kong subsidiary to a Mainland employee would  be regarded as remuneration paid by an employer who is  a Hong Kong resident (such that the Mainland resident  employee cannot enjoy the salaries tax exemption under  Article 14 of the Treaty, assuming the other conditions are  satisfied). It is also ambiguous whether in such a case, the  whole employment income of the Mainland employee  (including those borne by the Mainland employer), or only  the allowance and rental value of the accommodation is  subject to salaries tax in Hong Kong. The answer to these  questions, it seems, depends on two questions: who is the  true employer, and is the employer a Hong Kong resident?

Who is the employer?

The IRD gave partial clarification of these uncertainties in  its recent annual meeting with the Hong Kong Institute  of Certified Public Accountants. The IRD responded that  whether there is a Hong Kong resident employer will be  the crucial factor and has to be determined on a case by  case basis. In other words, if the Hong Kong company is  regarded as the true employer of the Mainland resident, remuneration derived from rendering services in Hong  Kong will be subject to Hong Kong salaries tax. The IRD  would assess the employee’s income according to the  number of days that they spent in Hong Kong during the  year of assessment concerned. Since the allowance paid  by the Hong Kong company is specifically referable to  the employee’s stay in Hong Kong, it will be fully taxable  and no apportionment will be allowed. The IRD has not  specifically addressed the question whether in that case,  the Mainland resident can still enjoy the tax exemption  under Article 14 of the Treaty in respect of the salary that is  paid by the Mainland enterprise. The predominant view is  that the salaries paid and borne by the Mainland employer  should not be subject to salaries tax in Hong Kong.

Is the employer a Hong Kong resident?

To determine whether an employer is a Hong Kong  resident, the IRD will take into account where the  company’s central management and control is located.  It is a question of fact and all circumstances in which  the company carries on its business should be taken into  account. Those factors include where the place of board  meetings, the provisions of the company’s object clause,  the place of incorporation, the place where the real trade  and business is carried on, the place where the company’s  books are kept or where administration is carried out,  the place where its chief office is or where the company  secretary is to be found, and the place where most  significant assets are. 

For the purpose of determining an employer’s residence,  a parent company and its subsidiary will normally  be regarded as separate entities being managed and  controlled by its own board of directors. A subsidiary  may not be regarded as a resident in the same territory  as the parent if the board of directors of the subsidiary  exercises substantive autonomy in relation to investment,  production, marketing and procurement without reference  to the parent. Therefore, where the management and  control of the Hong Kong subsidiary of a Mainland  company is exercised in Hong Kong, such subsidiary will be  regarded as a Hong Kong resident employer.

To prove that the corporation is not a Hong Kong resident  employer, information regarding the identities and capacities  of the management team, the tasks undertaken by them  and where they are located while exercising management  and control may need to be provided to the IRD.