Tax Series Part 2: Moving to Hong Kong? Know your taxes: Territorial Concept

by Sanjna Melwani, international assignment (tax) expert in Articles

DatePosted on December 01, 2015 at 06:16 PM
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As part of the 8 part series covering international work assignments in Hong Kong, please refer to Part 1 which covers arrival matters and tax process specifically related to Hong Kong.  Part 2 goes on to discuss the territorial concept, while Parts 3 to 8 are outlined below. Sanjna Melwani, our tax expert and international assignment professional, outlines the scope of charge to tax in Hong Kong. 

Hong Kong tax is based on a 'territorial' concept.  Hence, if you have income arising in (or derived from) Hong Kong from employment, office or pension, you may be subject to tax irrespective of your residency.  Income also generally covers most perquisites, including holiday benefits and share awards.  Share options are also taxable upon exercise, assignment or release. 
 
Housing benefits provided by employer (or associated company) are taxable based on a four, eight or ten percent rental value (depending on type of residence provided).  'Rental value' is calculated as the percentage of income after deducting some allowable outgoings.  A more favourable rateable value may also be available.
 
Timing is all important when determining territorial concept in Hong Kong.When considering source of income, income for visits totalling not more than 60 days in a year of assessment is generally exempt from tax (this does not apply to income from office).  Also, where there are double-tax treaties in place, the income may then be determined to be non-Hong Kong sourced depending on the rules of the treaty (consult a tax expert to check if your home country has a double treaty with Hong Kong).

The key factor in determining whether income is arising in or derived from Hong Kong is to determine the location of the employment. After the case of CIR V George Andrew Goepfert case, the IRD considers that an employment is sourced outside of Hong Kong if all the following three conditions are met:

(i) the contract of employment was negotiated and entered into, and is enforceable outside Hong Kong;
(ii) the employer is resident outside Hong Kong (i.e. place of central management and control); and
(iii) the employee’s remuneration is paid to him outside Hong Kong.

If the first two conditions are met, the IRD may still consider the employment is outside Hong Kong if the employee simply receives his salary in Hong Kong for convenience purposes.  To this end, the IRD has adopted a 'totality of facts' test which will look at these factors in great detail and this is outlined in Departmental Interpretation and Practice Note 10 (Revised).

The key factor in determining whether income is 'arising in or derived from Hong Kong' is to determine the location of the employment.

Should an employee meet the above conditions, they may then consider making a 'time-apportionment claim' in their tax return.  Very simply, income earned in the year of assessment for services performed outside Hong Kong may be excluded and the net income will be subject to tax in Hong Kong.  Accurate travel schedules should be kept.  Making such a claim will trigger an IRD query but if the employee can satisfactorily prove a non-Hong Kong employment, then the claim may be agreed to by the IRD (having weighed all the factors) and the employee may carry on to make the claim in subsequent years of assessment.  The IRD may revisit the claim from time to time with additional queries to ensure that the employment continues as a non-Hong Kong employment and the employee has not localised (for the purposes of tax assessment) at any point during his assignment to Hong Kong. 

Special points:

a. Sailors and aircrew have special rules that apply to them regarding scope of charge to Hong Kong tax.
b. Persons who are employed by a Hong Kong company but assigned overseas may avail of another provision in the Inland Revenue Ordinance to be exempt from Hong Kong tax.  Should they need to visit Hong Kong, income from services rendered during visits not exceeding 60 days in the year of assessment should also be exempt from Hong Kong tax.
 

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Also in this series:  
 
About the Author

Sanjna Melwani, international assignment (tax) expert

After graduating from The Hong Kong Polytechnic, Sanjna commenced her international accounting career with Arthur Andersen, where she qualified for her ACCA. There then followed a tenure as an international tax advisor to globe-trotting Executives in the International Assignment Services (IAS) division of PricewaterhouseCoopers.  She has had a successful career which also covers expense management and HR advisory.

Sanjna now runs her own tax consultancy, Apex Tax Advisory, helping US citizens with their tax matters whilst working abroad, and assisting returnees to the United States.  She is based in Hong Kong.  

If you're an US executive looking to move to Hong Kong (or indeed already living in Hong Kong) and in need of understanding your tax affairs, you can contact Sanjna by email: sanjna@apex-tax.com

Sanjna Melwani, Director
Apex Tax Advisory Limited
E-mail: sanjna@apex-tax.com

Telephone: +852 5617 6573

Address: Room 2207-9, Tower Two, Lippo Centre,
89 Queensway, Admiralty, Hong Kong
www.apex-tax.com

Note: the views and beliefs expressed by our independent contributors are of their own and do not necessarily represent the views of Star Anise.  All tax matters of an individual are unique to that individual, and tax advice should be tailored to suit that individual's needs. 

 

 

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