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:
- 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
- The remuneration is paid by, or on behalf of, an employer who is not a resident of Hong Kong; and
- 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.