In this article we will discuss about the different sources of Hong Kong Tax Law, application of foreign tax cases and scope of charges on salary tax. In the discussion we will also go through the proceeding of courts on some tax cases, decisions of BoR on different tax cases and income tax exception for certain organizations. So, this is a key article to understand whole legal framework of Hong Kong Taxation system.
Legal Structure of Hong Kong
There are two major sources of Hong Kong tax law:
One has to be familiar with these sources of tax law before starting a company in Hong Kong.
The applicable tax statues are given below.
A taxpayer has right to appeal to board of revenue if he/she is not satisfied with an assessment. A taxpayer can also appeal against the decision of BoR to the court of first assistance of high court, then to the court of appeal and then to court of final appeal. The decisions made by courts and BoR are reported and case law is included in their decisions.
As BoR is not a court so its decision is not unalterable or final. But its decision may worth as a reference. This is because not all tax disputes are resolved by the courts. The majority of cases are resolved between taxpayer and assessors that carryout assessment. Those disputes are usually resolved at objection stage.
Decision made by court of appeal (CA) and court of final appeal (CFA) include judicial model. Decision made by CFA is final as it is the highest authority and ultimate court of appeal.
Foreign Tax Cases Applications in Hong Kong
In Hong Kong, courts are free to made decisions and have no binding force. Like many other countries in the world the tax ordinances of Hong Kong are based on model of Commonwealth countries (South Africa, Australia) and Britain etc. so decision made by courts of these countries may be accepted by courts in Hong Kong as a model authority.
Tax Cases and Decisions by BoR
While reconciling the different BoR decisions and tax cases, student usually get puzzled as why two tax cases with having many aspects in common produced opposing results. For example, Pritchard (1971) 47 TC 680 and Shilton case (1991) STC 88 dealt with payments to a taxpayer. The payment was held to be free from tax in second case while taxable in first case. So for the case analyzers and law students it become difficult to deduce some results from these cases and seem to apply different rules on same matter. In order to understand the decision of these tax cases one have to study the case thoroughly and find the differences in facts to identify the reason of contradicting decisions in both cases.
One has to understand that as discussed in principal of judicial precedent, the decision of lower court is bonded by high court. So decision of court of appeal is bonded by decision of court of final appeal.
Tax Statues’ Interpretation
Ordinary meanings are given by words:
In the tax statues words should be given their natural and ordinary meanings. While interpreting the meaning of word ‘agent’, In CIR case (1987) 2 HKTC 198, it was statement of Justice Mortimer that: Words in an ordinance….….then the court would strive to give those words a proper meaning.…
No arrogance in tax
If something is said clearly then one has to look barely. No intendment is allowed. For tax there is no equity. Nothing is to be suggested as legal consequences and nothing is to be read. One can just look justly at language used (per justice Rowlatt in Cape Brandy Syndicate case).
It was showed in CIR case that, it is duty of court to look at the legislation scheme, legislation purpose and context in interpreting tax statues.
Practice Notes and Departmental Interpretation
In order to interpret tax statues and concession in departmental understanding and practice notes, and extra-statutory practices, IRD issues the explanations of its own departmental practice time to time. These notes are only issued for guidance and information of taxpayers and have no legally binding force. These also have no effect on right of taxpayer to appeal or object to an assessment.
Here is the link to download departmental interpretation and practice notes (DIPNs).
It is recommended for locals and foreigner to take the services of professional firms to create a company in Hong Kong in order to avoid any legal consequences
Income Tax Exceptions for Certain Company Incorporation Hong Kong
Authority of Chief Executive to Exempt
Under the Section 87 of Inland Revenue Ordinance, chief executive of council has authority to exempt any institution, person or office from whole or any portion of chargeable tax.
For example, order 1998 in 1998 and 2003 were issued by chief executive to exempt the profit tax and tax exemption respectively. Under first order, the bank interest income which receive over time on/after 22 June 2018 are set free from profit tax. Under the second order the payable tax for assessment year 2001/02 is reduced by 50%.
Charitable Bodies Exemption
There is no payable tax on a trust of public character and a charitable institution. But there would be no tax on the business done by charitable institution and trust of public character if:
Scheme of Taxation for Income from Employment in Salaries Tax
By the discussion it would be clear that different tax rules are applied to the taxation of income from different sources. These resource can be office, employment and pension. If the income of taxpayer is derived from or rises in Hong Kong, he/she would be liable to pay income tax.
If employment of tax payer is located in Hong Kong even though some of services of taxpayer were carried out outside the Hong Kong, the income is fully taxable. If he/she visits Hong Kong for not more than 60 days in a year assessment and his/her services in respect to employment are outside Hong Kong, his/her income is fully tax free. If the employment of a person is outside Hong Kong but he/she derives income from the resources present in Hong Kong will be taxable due to rules defined in law.
Practice Notes 10 and Departmental Interpretation
It is accepted by Inland Revenue Department that employment is only located outside Hong Kong in majority of cases if these three factors are present there (DIPN 10):
There can be some scenarios where IRD have to look further than the external features of employment. One key point to note here is that, to look in above discussed three points is common practice of IRD. Totality-of-facts test is preferable by board of revenue (D 40/90, D59/03).
IRD is not bounded to follow that ‘three factors test’ strategy in all cases. The ‘totality-of-facts’ test is usually followed by IRD in the specific cases.
In Lee Kwong case (2005, it was stated by deputy judge To at para 26, while determining the source of employment income, contract of income must be regarded first. He also stated that: This must include consideration……. …….as totality test.
The only contract of employment that is to be considered by IRD is that which is:
Locality of employment may keep on changing if certain terms in the agreement have been changed subsequently. In that case addition and changes to initial agreement should also be taken into account. A properly executed copy of contract between employer and employee is required by the IRD in order to examine the locality of employment of an employee. In case if written contract between employer and employee does not exist:
Parties to the Contract
The genuineness of relationship between employee and employer in a contract of employment is verified by the IRD if warranted by conditions.
For example, let’s consider a scenario in which a company sponsors an employee from outside the Hong Kong as an employer and has represented to other departments of government to that effect. In this case IRD have to verify along with some other factors that whether an employee-employer relationship still exist or not between employee and sponsor.
In order to verify whether a true employee-employer relationship exists between two parties, IRD have to consider:
Contract Negotiated and Concluded
Following information is required by IRD from a taxpayer who want to provide evidences as a claim of non-Hong Kong employment.
Residence of Corporation
IRD have to take into account while determining the residence of corporation that where the control and central management of corporation is located. By considering this principal, a company is located where its real business is carried on. The real business of company is carried on where control and central management of company is observed in actual. The central management and control of a company is exercised through medium that consists of place of board meeting.
Hong Kong branch of foreign corporation
A person may have a Hong Kong employment if he/she is employed by a Hong Kong branch of foreign corporation. IRD may do not accept the claim of non-Hong Kong employment by employer that is resident of Hong Kong even if:
Parent and Subordinate
If IRD is going to apply ‘central management and control’ test in situation of secondary company and its parent operating in other country, it would consider the both secondary company and its parent as separate legal entities being managed and controlled by their own board of directors.
While it is normal practice that, parent company exert influence and pressure over secondary company but it is not mandatory that secondary company exists in same territory as the parent. Board of directors in the secondary company also deal with the matters such as procurement, production, investment and marketing on their own without reference to parent.
Establishing employer’s residence
IRD would require information given below in order to support of their claims that, employers are controlled and centrally managed outside the Hong Kong.
As far as documentary proof about the location, identities and responsibilities and capacities of these persons are concerned, only minutes of meetings and certified copies of reports of directors are accepted by Inland Revenue Department.