Salaries Tax - Chargeable income
Section 8(1) of the
Inland Revenue Ordinance imposes the basic charge : to
tax all the income from employment or
pension which are arising in or derived from Hong Kong.
In deciding the
charge concerning employment, it is necessary to establish the place where the employment (that is
the source of the income) is located.
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The general rule of
how to determine the source is laid down in the
court case CIR v. George Andrew
Goefert: the chief factors to be
considered are: (1) whether the employment contract was made in Hong Kong
(2) whether the employer has a residence in Hong Kong, and (3)
whether the employee's remuneration was paid in Hong Kong.
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Click
here for my summary of CIR v George Andrew
Goefert
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If the employment is
established as a Hong Kong employment, the whole income from the employment,
even though part of it is for services outside Hong Kong,
is taxable.
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In addition to the basic charge, an
extension of charge is imposed by
Section 8(1A) of Inland Revenue Ordinance
to assess all the income in respect of the services rendered in Hong
Kong.
This charge, frequently called "time-apportionment," is used for
taxing non-Hong Kong
employments.
The time-apportionment is usually done by multiplying the total income from the
employment by a fraction:
number of days in Hong Kong / number of days of employment period in the year of
assessment.
The
"number of days in Hong Kong" includes "the leave periods
outside Hong Kong attributable to Hong Kong services." Normally, all the days in Hong
Kong, irrespective of whether they are related to services or not, are counted. But in
special cases, for example an employee resides in Hong Kong and he frequently leaves Hong
Kong to work at a Shengzhen factory at
9:00 a.m. and then return to Hong Kong on the same day at 7:00 p.m. => in such circumstances, his stay
in Hong Kong on that day was purely for residential purpose => he can claim to have
that day
in Hong Kong to be completely excluded from the "number
of days in Hong Kong" for the time apportionment. But in general, part
of a day in Hong Kong (e.g. the day of arrival in or the day of departure from Hong
Kong) is counted as half day (that is 0.5). Press here for an illustration
showing how to do time apportionment of income for foreign employments.
For
an employment covering the whole year of assessment, the "number of days in
employment period in the year of assessment" is normally 365.
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Caution: If IRD suspects that the three
factors of Goefert case are artificial measures to avoid tax, then it will
look behind the three factors to find out the true source of employment. An
example of a suspicious case is that the overseas employer has a permanent
establishment in Hong Kong and the taxpayer has been working with this
permanent establishment for several years and the taxpayer still claims the
source of employment outside Hong Kong. To find out the true source of
employment --- whether the taxpayer is employed by the overseas employer or
the local establishment, the IRD may ask the Immigration Department to supply
all the documents (particularly the company's declarations and all
employment agreements) in relation to the taxpayer's application for working
visa in Hong Kong.
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Click here to read
IRD's query: Where
a taxpayer claims time-apportionment on the ground of foreign employment
However, if an
employee (other than a government servant), irrespective of whether he is under a Hong Kong
employment or not, performs all his services outside Hong Kong, he will be
exempt from
Salaries Tax. Press here for more.
Furthermore, if a person visits Hong Kong for not more than 60
days during the year of assessment, he will be exempt from Salaries Tax. In
counting the days of visit, all days in Hong Kong are counted, irrespective
of whether they are in relation to services or not and part of a day is
counted as one whole day --- see CIR v So Chak-kwong Jack 2 HKTC 174.
Click
here for more about the
60-day visit rule.
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From case law, the location of a
director office depends on the management and control of the
company. In practice, the director office of a company incorporated
in Hong Kong is treated as locating in Hong Kong unless the contrary
is proved. Read Board of Review Case D123/02 |
Section 8(1A)(c) relief is to exempt the income attributable to services
outside Hong Kong if non-Hong Kong income tax (e.g. mainland China's
Individual Income Tax) has been paid on that income. So, you had better keep
all your overseas tax bills to support your claim.
Click here to read IRD's usual query: Where a taxpayer
claims exemption on the grounds of payment of foreign income tax.
Besides, according to the Double Taxation
Agreement signed with mainland China, a taxpayer who is a Hong Kong resident
and has paid mainland China's Individual Income Tax on an income also taxed
in Hong Kong, he can apply for a tax credit to set off his Hong Kong's
salaries tax. Furthermore, a Hong Kong resident works in China for not less
than 183 days in China may apply for full exemption of the China's tax.
Click here for more.
People working across the border:
please read
tax tip: Working in China
Read my
tax guide on:
Basis Period
What are taxable emoluments
Tax analysis programs
