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TAX
NEWS Individual Income Tax Issues for Hong Kong Residents
Working in Hong Kong and China
Under "The Arrangement between the Mainland
of China and the Hong Kong Special Administrative Region for
the Avoidance of Double Taxation on Income" ("the
Arrangement"), a Hong Kong resident who exercises employment
both in Hong Kong and the Mainland can be exempt from IIT in
the Mainland if all the following three conditions are satisfied:
1) The Hong Kong resident
stays in the Mainland for a period or periods not exceeding
in the aggregate 183 days in the calendar year concerned, 2)
the income is paid by, or on behalf of, an employer who is not
a resident of the Mainland and 3) the income
is not borne by a permanent establishment or a fixed base which
the employer has in the Mainland.
In December last year, the Hong Kong Inland
Revenue Department issued guidelines to clarify several issues
concerning Hong Kong residents exercising employment both in
Hong Kong and the Mainland. They include the principle for counting
the "period of stay" in the Mainland. According to
the guidelines, a 2-tier test should be adopted in counting
the "period of stay".
1) The period of stay in determining
the taxing right
The first test is to calculate the "period
of stay" for the purpose of determining which jurisdiction
has the right to tax.
Under the Arrangement, one of the conditions
for IIT exemption is that a Hong Kong resident must not stay
in the Mainland for a period exceeding 183 days in a calendar
year. In deciding whether the "period of stay" exceeds
183 days, the determination of the number of days of presence
is critical. In this regard, a "day" includes any
day on which a Hong Kong resident is physically present in the
Mainland. This test is also referred to as the "N Day rule".
Suppose a Hong Kong resident is employed by
a Hong Kong company but works full time in a factory in the
Mainland and earns HK$21,000 a month. The resident travels into
the Mainland on Monday and comes back to Hong Kong on Friday
every week and does not have any duty in Hong Kong.
Since the 183-day threshold is exceeded no
IIT exemption is available and the whole amount of salary of
HK$21,000 is subject to IIT because it is entirely PRC sourced.
The whole amount of salary of HK$21,000 is exempt from Hong
Kong Salaries Tax because no duty is performed in Hong Kong.
2) The period of stay in calculating
tax liabilities
If a Hong Kong resident has stayed in the Mainland
for more than 183 days in a calendar year under the "days
of presence" rule, he or she is liable to IIT. In this
regard, the second test is to determine the "period of
stay" for the purpose of calculating the IIT liabilities
in the Mainland. This second test is referred to as the "N-1
Day rule".
Suppose a Hong Kong resident is employed by
a Hong Kong company but performs duties both in Hong Kong and
the Mainland. The resisdent travels into the Mainland on Monday
and comes back to Hong Kong on Friday every week and then works
in Hong Kong every Saturday. The resident's monthly salary is
HK$21,000 and the amount of IIT due on HK$21,000 is HK$3,000.
Days of presence using Ħ°N-1 day ruleĦħ is: Number
of days of presence in the Mainland each week:
5 ¨C1 days = 4 days
Number of days of presence in the Mainland
in the month:
4 days per week x 4 weeks = 16 days
Since the 183-day threshold is exceeded no
IIT exemption is available and the whole amount of salary of
HK$21,000 is subject to IIT, and then apportion on time basis
because the Hong Kong resident has duties both in Hong Kong
and the Mainland.
The IIT payable is calculated as follows:
HK$3,000 x 16/ 30 = HK$1,600
The whole amount of salary of HK$21,000 is
subject to Hong Kong Salaries Tax but the Hong Kong resident
is eligible to claim an exclusion of salary on which IIT is
paid.
The amount of salary subject to Hong Kong Salaries
Tax is effectively calculated as follows:
HK$21,000 x ( 1 - 16/ 30 )
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