Hong Kong: Taxation of Individuals Working in Hong Kong and Mainland China

Last Updated: 13 July 2010

The Mainland and Hong Kong signed an Arrangement between them for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the "Arrangement") on 21 August 2006 to eliminate any situation of double taxation that might otherwise be faced by a Mainland or Hong Kong investor or resident in the conduct of cross border activities.

To ascertain whether a taxpayer is entitled to the benefits of the Arrangement, it is first necessary to consider the definition of "resident of Hong Kong" in the Arrangement. It is worthy to note that the definition is different from the meaning given to "a resident person" in Section 20AB of the Inland Revenue Ordinance (the "Ordinance").

For the purpose of the Arrangement, a "resident of Hong Kong" means :-

  1. an individual who ordinarily resides in Hong Kong;
  2. an individual who stays in Hong Kong for more than 180 days during the relevant year of assessment or for more than 300 days in two consecutive years of assessment (one of which is the relevant year of assessment).

It is generally considered that an individual "ordinarily resides" in Hong Kong if he has a permanent home in Hong Kong where he or his family lives.

Resident of Both Sides

Often due to the close connection between the Mainland and Hong Kong, an individual may be qualified as a resident of "both Sides" as defined in the Arrangement (i.e. in Hong Kong and the Mainland and one "Side" refers to either of them). Then, his status will be determined in accordance with the order of priority set out in paragraph 2 of Article 4 as follows:-

a. he shall be deemed to be a resident only of the Side in which he has a permanent home available to him; if he has a permanent home available to him in both Sides, he shall be deemed to be a resident only of the Side with which his personal and economic relations are closer ("centre of vital interests");

b. if the Side in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either Side, he shall be deemed to be a resident only of the Side in which he has an habitual abode;

c. if he has an habitual abode in both Sides or in neither of them, the competent authorities of both Sides shall resolve the issue by mutual agreement.

The term "permanent home" above refers to a home owned or possessed by an individual that is permanent in nature. The circumstances will be examined as a whole, but it is obvious that considerations based on the personal acts of the individual will receive special attention.

If an individual who is a resident of both Sides, but deemed in accordance with the above provisions to be a resident of Hong Kong, the tax authorities in Hong Kong will treat him as a resident of Hong Kong when applying the provisions of the Arrangement.

Taxation of Resident with Dual Employment

Once the residence status of an individual is determined, paragraph 1 of Article 14 provides that salaries, wages and other similar remuneration derived by a resident of one Side in respect of an employment shall be taxable only in that Side unless the employment is exercised in the other Side. If the employment is exercised in the other Side, such remuneration as is derived therefrom may be taxed in that other Side. However, remuneration derived by a resident of one Side in respect of an employment exercised in the other Side will be exempt from tax in that other Side if all the following three conditions are satisfied :-

(i) the recipient is present in the other Side for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned;

(ii) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other Side;

(iii) the remuneration is not borne by a permanent establishment which the employer has in the other Side.

"Any 12-month period commencing or ending in the taxable period concerned" denotes two concepts, namely, that the number of days of presence may straddle over 2 years, i.e. the days of presence can be calculated continuously or in the aggregate irrespective of the year; and that a floating calculation method may be adopted. The 12-month period can commence or end at any day within the taxable period concerned i.e. from 1 April to 31 March of the next year.

If a Mainland resident is not present in Hong Kong for more than 183 days in any 12-month period in the taxable period, he has met the "present for not exceeding 183 days" exemption condition for the relevant year of assessment. However, if the Mainland resident is present in Hong Kong for more than 183 days in any 12-month period in the taxable period, remuneration derived by him in respect of the employment exercised in Hong Kong is chargeable to Hong Kong salaries tax for the year of assessment.

Hong Kong Resident Working in the Mainland

If a resident of Hong Kong provides services both in the Mainland and in Hong Kong, the tax treatment in both Sides is as follows :-

(a) Tax liabilities in Hong Kong

  • the income derived from his Hong Kong employment will be wholly assessable irrespective of whether it has been paid by the Hong Kong employer or a Mainland establishment. However, if the Hong Kong resident has paid individual income tax in respect of the income attributable to services rendered by him in the Mainland, he may apply for tax exemption for that part of the income under section 8(1A)(c) of the Ordinance, or for a tax credit under paragraph 2 of Article 21 of the Arrangement.

  • the income derived from his non-Hong Kong employment will be assessed according to the number of days in Hong Kong irrespective of whether it has been paid by an overseas employer or a Mainland establishment, provided that his visit(s) to Hong Kong exceed 60 days and during which he renders services.

(b) Tax liabilities in Mainland

  • If, under his employment, a Hong Kong resident renders services in the Mainland only (i.e. services are not rendered whilst in Hong Kong), all his income from that employment will be regarded as attributable to services rendered in the Mainland. Such income is wholly chargeable to Mainland tax, irrespective of whether it is paid by a Mainland establishment or an overseas employer (including a Hong Kong employer) unless he satisfies the 3 conditions mentioned in (i) to (iii) above.

  • If, under his employment, a Hong Kong resident renders services both in the Mainland and in Hong Kong, and his aggregated periods of stay in the Mainland do not exceed 183 days, income paid or borne by the Mainland establishment will be chargeable to individual income tax. Tax will be calculated on the chargeable income and then apportioned on time basis. Income paid by an overseas employer (including a Hong Kong employer) is not chargeable.

  • If, under his employment, a Hong Kong resident renders services both in the Mainland and in Hong Kong, and his aggregated periods of stay in the Mainland exceed 183 days, the total income received from the Mainland establishment and the overseas employer (including Hong Kong employer) will be chargeable to individual income tax. Tax will be calculated on the total income and then apportioned on time basis.

Counting of Number of Days

For tax computation purposes, the aggregated periods of stay in a year of assessment is the aggregate of the days in each period of stay where the number of days is counted under the rule of the "days of physical presence" minus one day.

The Mainland and Hong Kong are geographically so close to each other that a taxpayer may travel between the Mainland and Hong Kong on a particular day and provides services in both Sides. As such, it is not appropriate to apply the rule of the "days of physical presence" minus one day. However, serious double taxation could occur if both Sides apply the rule of "days of physical presence". To address such cases, the State Administration of Taxation and the Hong Kong Inland Revenue Department have reached consensus. If a taxpayer travels between the Mainland and Hong Kong on a particular day and provides services in both Sides, he would be counted as present in the Mainland for half a day and in Hong Kong for half a day. However, if he only provides services either in the Mainland or Hong Kong on that day, he would be counted as having been present for one day in the Mainland or Hong Kong, as the case may be.

If you have any queries regarding any employment matters in Hong Kong or mainland China, experienced lawyers in our Employment Practice will be happy to assist you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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