What’s the effect of secondment on the contract for Hong Kong company incorporation and what are the tax on individual having non-Hong Kong employment?


In this article we will have thorough discussion on impact on the salaries tax of a person after transferring him/her temporarily to other position or employment within or outside Hong Kong by the company, place of payment for work or a service outside Hong Kong, and scope of income tax on a person if his/her employment is located outside Hong Kong. In our discussion we will also study some employment cases that would be enough to discriminate that who should be taxpayer of Hong Kong and who should not.

Secondment or Assignment

In order to attain some personal benefits companies sometime assign their employee in other territory. Usually the unit or branch of company is located in those territories. Sometime this transfer of employee in other company is temporarily for collaborative purpose. The definition of secondment in the rules defined by BoR is a period after which employee have to return to his/her original company. One thing to keep in mind that secondment have nothing to do with changing the location of employment. It is possible that employment of an employer is changed with new employer, if an employee was on secondment but an employment contract was made with him by company. As in D 55/19, when an employer was given an employee contract by Indian company upon secondment. Originally, the employer was taxpayer of Hong Kong. A new contract was made between that employer and Indian company upon this assignment. It was happened that the employment was changed to a non-Hong Kong company upon secondment. If an employee is directed to serve an entity in some other country that originally belongs to a company in Hong Kong and that employee was already serving to that company in Hong Kong, then it is not mandatory to have new employment contract. This type of employment is considered as running without any change. 

As viewed in a D 10/84, a secondary company in New Zealand of a worldwide group hired a taxpayer in New Zealand. Then on secondment he was assigned for two years to Hong Kong branch of associated company. The duties of his job were of territorial nature like to provide the services to Hong Kong and other Asian countries. It was held by board of revenue that taxpayer got the status of employee as a result of contract. His immediate superiors include one to whom he reported during his typical course and other from whom he uses to take orders were in Hong Kong.

As discuss before in Goepfert, US company employed a taxpayer. He was than assigned to Hong Kong company incorporation as a result of secondment. As branch of that US based company was in Hong Kong. He was neither a permanent employee of Hong Kong branch nor he was contracted by that branch after period of secondment. So he remained employee of foreign company.    

Let’s discuss an example of Assignment to Hong Kong incorporation here, this example is extracted from DIPN 10.

Company A employed an employee T. Employee T worked in US. T entered in new employment contract with Company B due to change his role and responsibilities in company A. The conclusion process and dialogue for both employment contracts between A and T, and T and B took place in US. The employee T was contracted and assigned immediately by company B to administer the Asia pacific operations of group in Hong Kong. During his throughout assignment in Hong Kong T remained the employee of company B. Both companies A and B were US based. Group X was US based amalgam of companies having business operations spreading all over the world and company A and B were affiliated with it. After being satisfied with the case of employer T the assessors were satisfied and accepted the non-Hong Kong employment of employee. Employee T presented the assessors with all necessary documents including information and document as a proof to demonstrate that management and control of company is in US and his salary is paid into his bank account by company in US. Employer also provided them with a copy of his contract with company B.

In this second example we will consider the reporting lines for transfer of employment to Hong Kong as extracted from DIPN 10.

C Incorporation employed an employee T who had worked in US before. The origin of C Inc.  was also US. An offer was given to T for appointment in secondary company of C Inc. in Hong Kong. T was decided to labor as director of marketing in secondary company from dated April 1st, 2005 as a result of agreement between T and C Inc. on 1 March 2005. The human resource director of C Inc. negotiated with employee T for this purpose. C (Hong Kong incorporation) Ltd. was offshore incorporations Hong Kong limited and its board of director’s resident in Hong Kong was responsible to manage its operation. C (Hong Kong) Ltd. was responsible for entry of employee T in Hong Kong as second party of contract. As a part of job it was duty of T to travel around Asia pacific. His traveling was purely based on meeting with clients. During his business meeting with clients’ T carried a business card showing himself as a marketing director of C (Hong Kong) Ltd. He was also given a Hong Kong telephone number and correspondence address. As being a marketing director T was responsible to report to board of directors of C Inc. After assessing the T thoroughly, it was concluded by assessors that as C (Hong Kong) Ltd. has its business in Hong Kong and T was contracted by this incorporation so T also have Hong Kong employment. So T is liable to pay tax based on his employment in Hong Kong.

From this example it is the concluded that for an employee who is contracted by a company in Hong Kong should be a taxpayer of Hon Kong and as a part of his job it might be his duty to report outside Hong Kong but it should not be a deciding factor for him as non-taxpayer of Hong Kong.

Place of Payment of Money Paid for Work or Services

The source of employment should not be determined by just viewing the location of payment or money for work or services that are made outside Hong Kong. Along with payment outside Hong Kong other factors also have to be considered. This money paid as a result of work and services provided by employee also include all the benefits and extras other than just monthly salary, which are covered by definition of income. In order to support the claim by employee that salaries are paid outside Hong Kong, taxpayer have to provide IRD with:

  • Proof of such payments in the form of documents.
  • Details of bank accounts and bank statements etc.

In this third example we will consider the salary and benefits paid to employee for doing business in Hong Kong, taken from DIPN 10.

E Ltd. was a company resident in Italy having an employee named as T.  In order to take charge of Hong Kong sourcing operations T was order to go to procurement workplace. To perform his duties and as per requirements of his job, employee T were order to book his visit towards the countries that are located in its neighbor land or the land consist of mainland. Before his arrival in Hong Kong the contract was made between T and E Ltd. in Italy. Contract was made between E Ltd. and T as a result of agreement. Although T was an employee of company having origin in Italy but now as E Ltd. was doing business in Hong Kong, and T was going to be part of it. So, it was negotiated that T would be taxpayer of Hong Kong instead of Italy as tax rates in Hong Kong were lower than Italy. Salary and benefits received by T was in Hon Kong dollars. A fund named as mandatory provident fund under the medical scheme is established in Hong Kong. He also joined that fund to insure his health treatment. So by assessing the given facts thoroughly, it was deduced by the assessors that T had a non-Hong Kong employment. The documentary proof was provided to assessors to support these facts.

Let’s have another example from DIPA 10, T was living in UK. F Asia pacific Ltd. offered him a job as Regional controller. The location of F Asia pacific Ltd. was in Cayman Islands. A recruitment agency was appointed by F Asia pacific company Ltd. and it reached out an agreement with T. T received offer letter in UK as sent by company. During his presence in UK, T signed the offer letter after accepting the offer. For the group of companies in Asia, F Asia pacific was a regional headquarter. Its office was in Hong Kong. A board of director in Hong Kong was responsible to manage it. T had to travel around Asia in different countries to carry out its business. The salary of T was not paid totally in his account in either UK or Hong Kong rather it was partially paid in his account in UK and other partially in his account in Hong Kong. The cost of T’s salary was recovered by F Asia pacific from its associates and subsidiaries. Assessors were satisfied by above mentioned facts that T had a Hong Kong employment. According to them now the source of his employment is Hong Kong as T had entered in to contract with Asia pacific limited and it is a company having resident in Hong Kong. By taking into account the relevant factor that all other companies who are employing the services of employer outside Hong Kong are free to charge the tax accordingly, the assessors of Hong Kong don’t thought to gather the charge made by their company from the exterior of Hong Kong nation.

Employment outside Hong Kong

The taxpayers may be liable to pay tax on income obtained from services in Hong Kong, even though their employment is located outside the country i.e. Hong Kong. This is statement defined in section 8(1A) (a). The only income that is derived from the sources that are rendered outside the Hong Kong would be tax free. This (section 8(1A) (a) is applicable to just employment but not the office. In order to calculate the assessable income from the total income of employee for non-Hong Kong employment on the basis of number of days spent by an employee in Hong Kong during his/her employment period outside Hong Kong a simple formula is used as given below.

This formula is totally on time basis. In order to count the number of days for which a person provided his services in Hong Kong other than those that were provided outside Hong Kong the midnight rule is generally applicable. In midnight rule one day is counted in respect of the days of departure and arrival as described in DIPN 38.

In D 53/96, D 28/04, D 49/94 and D 1/96 time division or allotment was approved on day-in-day-out basis. Among all the income of employee a certain amount is liable to tax as this come under the section of Hong Kong services. So on the basis of time there is no need to divide this income.

Let’s consider the example to clarify such situation. In D 106/89 the Hong Kong tax, payed by an employee was repaid to him by employer as the reward for services. As discussed earlier that employee is only liable to pay tax on income for his services that are related to Hong Kong. And these may include a company that reside outside Hong Kong. As reimbursement of tax by employer was based on the services that employee provided to employer in Hong Kong, so it was held by BoR that this reimbursement was totally chargeable to tax. Because this reimbursement amount was wholly mentioned to his services performed in Hong Kong so there was no need to apportion that amount.

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