Whether rendering of services for offshore company incorporation requires to be a taxpayer of Hong Kong and what are the impacts of Double Taxation system on a taxpayer? Or What are the impact of Double Taxation system on a taxpayer of Hong Kong incorporation?


In the following article we will have a thorough discussion on two different points. First point that we will consider would be that under specific circumstances like if a person has resident in Hong Kong but he is rendering his services outside Hong Kong than how tax would be applicable on his remuneration. And to clarify our concepts we will also go through some case studies as a practical approach. While as a second topic we will explore the impact of recently done double taxation agreement between Mainland China and Hong Kong. This would help those residents of Mainland China who want to set up Hong Kong limited company and vice versa for Hong Kong residents.

If a person provides all his/her services outside Hong Kong throughout assessment year then he/she would not be liable to pay income tax, as given in Section 8 (1A) (b) (ii). In the following discussion we would study some cases to interpret this fact in more details.

In D 26/96, a company in Hong Kong recruited a taxpayer and then stationed him in a factory. That factory was an offshore company incorporation outside Hong Kong. During his employment, he was allowed to travel to Hong Kong once in a week and that too on weekend. During the investigation by BoR, he provided heated arguments that as he only travel to Hong Kong to take some instructions from employer and provide no services to Hong Kong so he is not liable to pay income tax. But these of his contentions were rejected by BoR. After rejection of his contention, his income was evaluated for tax.

Now let’s discuss one similar case in which an employee was hired by a company to work overseas. He also used to spend time in Hong Kong during his employment but in Hong Kong he never performed any activity related to his employment. So after investigation by BoR it was clear that as he does not render any services to Hong Kong so he is not liable to pay income tax. So as a result he was exempted from paying income tax as discuss in D 74/99.

In D 129/98 by BoR department it was observed that, an employer in mainland during his visit to Hong Kong used to bring documents and samples of clothes to Hong Kong. After investigation BoR found that as his services are for Mainland not for Hong Kong so he is exempted from income tax. He was not bringing these stuff to provide his services to Hong Kong. Whatever he was bringing was unreasonably.       

In other D 39/40 it was observed during investigation of BoR that, for a person to be exempt from paying income tax is necessary that he should not carry out even on its own a bit of services in Hong Kong.

But there is also a well-defined criterion that for how much days, services provided by visitors in Hong Kong would not make them liable to pay income tax. And this time duration is 60 days for an assessment year, as define in Section 8 (1B). So it can be concluded that a person who visits and provides his services in Hong Kong for more than 60 days a year ago is liable to pay income tax legally. One key thing to note in order to avoid any inconvenience later, is that this principle is for both non Hong Kong and Hong Kong employments.

To avoid any confusion this should be clear that this 60 days’ exemption include working and non-working days both under Section 8(1B). In CIR (1986) 2 HKTC 174, during 108 days’ visit of a person, he spent only 28 days for providing his services to Hong Kong but due to his stay for more than 60 days even though he provided services for only 28 he was ordered to pay income tax. So he was not given this 60-days exemption.

There was a brief discussion about midnight rule in previous article. And it was discussed that as a courtesy, day of arrival and departure of visitor in Hong Kong is calculated as single day, but this rule is not adopted for these 60 days’ calculation. The day of arrival of taxpayer is considered as one day no matter when did he/she arrived in Hong Kong and day of departure of taxpayer is considered as another day no matter when did he/she departure, given in D 29/89 and D 12/94.

In following example we will discuss a case study of a resident, living in Japan named as Mr. Suki. He was employed as marketing manager a number of years ago by a company in Japan. As company was limited to Japan so it had no subsidiaries or divisions in Japan. The salary of Mr. Suki was credited to his bank account in Japan. It was responsibilities of him to travel overseas as per requirements of his duty. His remunerations equivalent to Hong Kong dollar were $732,000 during the end date of year 2016.

‘It is key point to note here that, IRD have a common practice that, in order to calculate Hong Kong dollar equivalent of taxpayer’s salary, it applies average exchange rate for the year to foreign currency’.   

Mr. Suki provide his services for 55 days during his 100 days visit to Hong Kong. Even though Mr. Suki was employed by a company that have no company incorporation HK and his salary was also deposited in his bank account in Japan, but he was charged with Income tax under Section 8 (1A) (a). And this tax was imposed on him for providing his services in Hong Kong for 55 days while having stay of 100 days.

The amount of chargeable income on salary of Mr. Suki can be calculated by simple equation as below:

   

It is common practice of IRD that to calculate the income tax on the salary of resident or non-resident tax payer number of days spent in Hong Kong in year assessment are total days of his stay in Hong Kong even though he/she provides services in Hong Kong for only 1 day. So in above case as stay of Mr. Suki was of 100 days so these were included in equation for income tax calculation. 

In another example will be discussing a similar case of Mr. Smith. He holds an employment outside Hong Kong. During year 2016 he spent 6 months outside Hong Kong. Out of these 6 months 30 days were of holidays. During the year ended 31 December 2016 he was given total remunerations of $336,000. These also included leaves pay. By looking in depth in case of Mr. Smith it is clear that he provided services outside Hong Kong for 180 days. But his services rendered in Hong Kong were subjected to Income Tax along with income from paid leaves is deductible under the salary tax Section 8 (1A) (a).

His computable income for year assessment 2015/16 is calculated as given below:

               

               

                                                                    

A crucial point to be noted here is that if a person spends more than 60 days in Hong Kong in one-year assessment, he still has to pay tax even though he provides no services. As in this case his leaves for 30 days, Mr. Smith spent in Hong Kong were paid so he was not exempted from paying Tax.  However, it is mandatory for a person to prove that he provides no services to Hong Kong to be eligible for tax exemption.

 

Explaining the meaning of ‘Visit’

The exemption that is described earlier comes under Section 8(1B) of law. This exemption is only applicable for ‘visits’. One has to be very clear that following discussion on word ‘visit’ have to do nothing with set up Hong Kong limited company because there are separate rules defined in law for this matter. As statue law does not define the real meanings of ‘visit’ so its natural meanings are considered while taking into account the exemption. So it depends upon the base of visitor that whether he originally belongs to Hong Kong or from some other country. Like if a person resides in Hong Kong, his/her office is in Hong Kong, all of his/her services render in Hong Kong and he travel overseas for business or some personal issues then his returning to Hong Kong would not be considered as visit.     

As discuss in D 11/80 to understand this above issue in clear way, let a small example a taxpayer who was originally a native of Australia and was recruited by a company in his homeland. Later he was transferred to Hong Kong for two years to serve a company incorporation HK. During his two year stay in Hong Kong he travelled regularly outside Hong Kong. After investigation it was observed by BoR that, the guy worked for a company in Hong Kong, he got identity card of Hong Kong and he also had a flat in Hong Kong. So after investigation it was concluded that he is not just a visitor in Hong Kong.

It is also a key note to avoid any future inconvenience that if somehow it is proved that the presence of a person in Hong Kong is not a visit, then 60 days’ exemption is not applied to him/her. If a person although not stay in Hong Kong for more than 60 days but his employment is of Hong Kong, then during that assessment year he would be subjected to the tax on all of his income. But if employment of a person is not in Hong Kong and he/she still provides his/her services in Hong Kong then, he/she would be subjected to tax according to number of days he/she stayed and provided services.      

Getting Non Hong Kong services tax exemption, if tax is paid in Non Hong Kong 

The income of a person from Hong Kong employment that is taxed by giving his/her services outside Hong Kong is not applicable to tax, unless a person:

  • Is paying tax in respect of his income in the region where he/she is providing his/her services.
  • Proves the CIR department through documents that, whether by deduction or otherwise he is paying non Hong Kong tax of income listed in Section 8(1A) (c).

In following case study, we will throw more light on this scenario.

The salary income of Mr. Cheung is $30,000 per month. He holds a Hong Kong employment. He provided services to Australia for 3 months and paid tax in the year ended 31 March 2016 on income he received as a result of his services. In order to prove his non Hong Kong tax of income to CIR he gave proof of payment of Australian tax.

His salary income that was subjected to tax for year calculation 2015 to 2016 excluding three months of Australian employment is calculated as follow:

 

Double taxation system agreed between Mainland China and Hong Kong (DIPN44) 

The details of new arrangements of double taxation between Mainland China and Hong Kong would be discussed in details in subsequent articles. If employment of an individual is exercised on one side than his/her salaries, wages and other similar remuneration shall be taxable from that side where he/she is providing his/her services. And these would be only applicable to tax on other side, if also used there. If someone is providing services on both sides than payment of salaries and wages arising from one side would not be taxable on other side if:

  • In any 12 months’ period or year assessment, an employee visits for a period or periods not more than 183 days. This 12 months’ period should include beginning and ending of taxable period.
  • In case an employer is not resident on other side, payment must be paid by him/herself, or by someone on his/her behalf.
  • If employee has fixed base or other permanent establishment on other side than that payment should not be borne by these resources otherwise these would be taxable on that side also.

Now we will understand the given scenarios through an example.

 A Hong Kong based company employed a person named as Mr. Wong. He was resident of Hong Kong. He spent 100 days in Mainland China and provided his services during 2014 and 2015. His salary and other expenditures in the form of rewards were neither given by branch of company in Mainland China nor by a Mainland inhabitant employer were he lived. This was due to double taxation system agreement that he would not be taxed in Mainland China. He only to be taxed by Hong Kong government. And he may be subjected to individual tax in Mainland if he spends more than 183 days in Mainland China or his income tax is paid by a Mainland government. So this tax paid in Mainland be eligible as a tax tribute to act as a settlement against tax on salary that is to be paid by him in Hong Kong, in Section 8 (1A) (c). Sometime there are benefits to work overseas if your field is well flourished there as compared to your own origin country so having double taxation system would lessen the burden of tax on the resident of Mainland China who want to open offshore company in Hong Kong and same is for the residents of Hong Kong.

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