In this blog we will discuss the legal definition of Office and taxation system that is applicable on term ‘Office’. In our discussion we will also go through, taxation policy on Pension and different tax laws on employment and profession.

The key point to consider here is that only those taxpayers of Hong Kong can avail the benefits of previously discussed double taxation policy that are residents of Hong Kong or Mainland China. As stated earlier, this taxation policy would be discussed in detail in following articles and reference would be taken from DIPN44. Generally, people of Hong Kong and Mainland China are beneficiaries of this agreement, as given in Section 8 (1A) (c) under double taxation agreement (DTA).

According to rules defined in Section 8 (1A) (c) if a Hong Kong resident as a result of rendering his/her services in Mainland China pays tax there, then he is not eligible to pay tax in Hong Kong on same income. If a person is accountable to pay tax for providing his/her services for more than 183 days than he would be liable to pay tax, there as a result of this agreement. Under this agreement named as DTA the candidate can ask for credit by setting off Mainland tax beside Hong Kong tax. A person can also claim the exemption of payment earned in Mainland. But in order to claim these, one have to show the proof that he/she paid the Mainland tax.

Understanding the term ‘Office’

While giving a decision for a case Rowlatt j in Great Western Railway Co (1922) * TC 231, as summarized the definition of term ‘office’ as defined an office is permanent, existing and functional position. It has a presence that is independent of a person who holds or fills it, which carries on and this is held or filled further by his/her successive holders in series.

The examples of offices are company secretary to provide secretarial services Hong Kong and company directors as both of these hold the seat when appointed and release the office for their successors after dismissal or retirement.

Source of Earning of an Office

As basic job of a company director is to manage the company. Company director can be appointed anywhere, where there are setups of company. But the source of earning of director is placed where there is control and central management of company as in McMillan (1942) 24 TC 190. As management and control of company is exercised by directors and other stakeholders of company so source of income of a company director is located at same place where meetings are arranged.

The office of a director of a foreign company that further incorporate HK company in Hong Kong or local company is wholly accountable for tax regardless of whether the director gave any services in Hong Kong or not. And it does not matter that whether director was present in Hong Kong during an assessment year or not. Office is asked to pay tax if that company is employing sole proprietorship HK. So the rules defined for tax exemption that tax is not applicable if all services provided outside Hong Kong, under Section 8 (1A) (b) (ii) are not applicable to office. It should be clear that in the same way 60 days’ exemption under Section 8 (1B) is only for all taxpayers except to an office.          

Even though if an office pays service in foreign, it would not be exempted from paying foreign income tax. This exemption was discussed in Section 8(1A) (c) for a taxpayer. In the same way double taxation agreement DTA between Mainland China and Hong Kong also does not apply on Office. So it is very clear from point of view of Hong Kong taxation department that the fee paid to director by a company and other benefits that he/she arises eliminating wages, salaries and some specific rewards like income earned as employee or consultant are taxable in Hong Kong. The tax on above described resources are to be paid irrespective of period of his/her stay in Hong Kong. This also does not matter in this case that rather the services are provided in Hong Kong or tax in Mainland being paid in regard of director’s fee. And all of this is due to double taxation agreement between Mainland China and Hong Kong. But if same income is taxed in both Mainland China and Hong Kong than a tax credit is given to taxpayer.

Dual Capacity as Employee and Director   

In Hong Kong it is legal for a person to hold two capacities at a time. One in the form of employment while other in the form of directorship of a business that may incorporate HK company or a company overseas. As in BR 6/72 by BoR it was accepted that a person was being paid for two positions in dual capacity as he was architect in a company and also a director. But only one of his income that too as architect was allowed to subject to 60 days’ exemption. As discussed earlier that directorship of company is to hold an office and income from office for a director or company secretary Hong Kong is not allowed to have 60 days’ exemption period.

In order to differentiate employment from directorship one have to consider that a director is not a position specified by government but it is specified by the Companies Ordinance (Cap 622). And this position or the office has responsibilities as defined by Companies Ordinance and articles of association of companies. The major responsibilities among these are signing accounts and attending the meetings of board of directors.

Superannuation after Retirement 

For the source of a superannuation there are neither the BoR cases nor the Hong Kong courts. By having the orders of inland revenue department the place of management and control of the retirement fund is considered as main factor of determining that whether the pension of a person arises in or got from Hong Kong or not.

If a taxpayer did not render his services in Hong Kong, then he would be exempted from the eligibility of getting pension after requirement, given in Section 8 (2) (ca). But this condition is not applicable on those government employees that are appointed by government of Hong Kong to provide services outside Hong Kong for its beneficious.

Sums are received by a way of commutation of superannuation if a person is retired after termination of his/her services under a known retirement scheme. These benefits after retirement including proportionate benefit rule (PB), death and inability or retirement are exempted. If sums are received after commutation of pension, then these are called lump sums. These lump sums are received by employee in place of periodic pension.

Even though a pensions are paid to employee out of recognized retirement scheme but this superannuation that arises in or derived from Hong Kong is still remains subject to salaries tax.     

Distinguish between Profession and Employment

A profession should be distinguished from employment. There are different rules defined to charge the income attained from these different resources. As in case of employment income charged is called salary tax while in case of profession it is called profits tax. In our following upcoming articles, we will discuss thoroughly that how expenses deduction is much more demanding under salaries tax as compared to profit tax. And this is the main reason that during tax deduction the employers argue heatedly that they should be charged taxes under profits tax rather than salaries tax.

In case of a profession a taxpayer is seized to work in the capacity of an individualistic contractor but in case of employment there is a relation of master and slave between employer and employee. In response to argument in the case Market Investigation (1969) 2 (QB) (173) it was stated that it is a fundamental test for an employer considering him an independent contractor that is he the person? who captivate him to perform these services by performing them as a business on his own account. So it is usually the stance of the BoR that in order to decide that whether a taxpayer holds a profession or he/she is an employee depends upon the entirety of the facts of the cases.

Given below are some facts that can be considered in order to distinguish an employment from profession.

Services Control Test

  • whether a person who pay income (payer) to another person in order to attain his/her services can instruct that taxpayer that what to do, when to do and how to do?
  • Whether the person how is getting the services of taxpayer and paying him provides the work place.
  • Whether it is mandatory for taxpayer to follow the rules of payer to render his/her services.
  • Whether it is mandatory for taxpayer to not work for any other person without the approval of payer.
  • Whether payer has authority to dismiss the taxpayer.

Organizational Integration Test 

  • Does the taxpayer is allowed to represent himself as the employee or payer or organization of payer outside?
  • Is the payer or his/her organization is totally dependent on taxpayer as he/she is part and parcel of organization.
  • Whether taxpayer also have supervisors and or team leaders that are also employees of organization of payer.

Reality Test for Economy

  • Does assistant, equipment and own tools are provided by the taxpayer to employee?
  • Does capital is also contributed by taxpayer and in case of his contribution does capital is own risk?
  • Does the profit or loss of taxpayer on his income is also dependent on his performance?
  • Does there are chances in the organizational framework of payer to get promoted?
  • Does there are long term relations between employer and taxpayer or exists only to provide results required by payers?

Correspondence of Obligation

  • Is under some obligation it is duty of the payer of remuneration to take the services of taxpayer?
  • Is under some obligation it is duty of gainer of remuneration to render his/her services?
  • These are the tests procedure that is adopted by Inland Revenue department in order to judge the stance of a taxpayer to determine whether Section 9A (4) is applicable on him or not. Further detail on these would be given in the subsequent articles. In order to further clarify his/her point of view about who is employee and who is not one can also refer to the DIPN 25.

Now we will discuss a case study to throw more light on such situation. It was mentioned in case D 54/90 that; a person was appointed as account manager by a company in Hong Kong. That company was totally based in Hong Kong having sole proprietorship HK. After sometime that person was appointed as marketing manager by company. During his job as marketing manager his responsibilities were to ask for orders for investing by other companies or trading with these companies in silver or gold or foreign currencies. There are also brokers in the industry that act as third party to help in obtaining such types of investments but he was not allowed to take the services of such brokerage houses. So after investigation by board Inland Revenue for income tax on the payment of that person and taking into account the above mentioned factors it was concluded by them that he was not employee of company as he was self-responsible to deal on the behalf of his company. Because his job was of consultant type so he was free to work. As he was not answerable to anyone so he was not also entitled to any job benefits like leave and other medical benefits. As he was free to bring the investment without overhead of company he also faced some financial risks. Like in some cases he had to compensate the loss of company if his clients failed to honor the required commitments. Beside these he also enjoyed the benefits of paying profits tax instead of salary tax.

Two other cases D 73/95 and D 74/95, belongs to property agents. These property agents were employed by a company. They were not independent contractors. Due to this employment one employee with case D 73/95 could not prove himself as an independent contractor even though that person got a business registration.

So above defined facts are necessary to prove by a taxpayer to distinguish his role of job as employment or profession.

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