Hong Kong Tax Alert. Inland Revenue Department (IRD) outlines its views on certain Salaries Tax and treaty-related issues relating to individuals

Transcription

1 Hong Kong Tax Alert 15 January Issue No. 4 Inland Revenue Department (IRD) outlines its views on certain Salaries Tax and treaty-related issues relating to individuals Issues discussed in the 2017 annual meeting between the IRD and the Hong Kong Institute of Certified Public Accountants (HKICPA) included: i. How to count the 183-day rule for employment income under a comprehensive avoidance of double taxation agreement (CDTA) in the year of change of tax residency of an individual; ii. iii. iv. How to apply the 183-day rule to stock option gains, share awards and performance bonus under a non-hong Kong employment in the context of a CDTA; Conditions for qualifying as a Hong Kong resident individual under a CDTA; and Whether the source or locality of an employment would be affected merely by way of employers or employees observing local laws and regulations Clients who have any questions on the views expressed by the IRD in the meeting, or would like to consider in more detail how the IRD s views may impact on their talent relocation program, should seek professional tax advice.

2 How to count the 183-day rule for employment income under CDTA in the year of change of tax residency of an individual A resident individual of a jurisdiction with which Hong Kong has concluded a CDTA will typically only be chargeable to Salaries Tax in Hong Kong in respect of their employment income (derived from a non-hong Kong employer) if they exercise their employment in Hong Kong for a period or periods exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned. Taking the France-Hong Kong CDTA as an example, the HKICPA sought the IRD s clarification on how the 183 days were to be counted when such an individual changed their status from being a non-hong Kong resident to a Hong Kong resident during a year of assessment. Example A French tax resident individual has a non-hong Kong employment with a French employer and had not worked in Hong Kong before 1 April For the period from 1 April 2015 to 31 December 2015, the individual travelled to Hong Kong to perform employment services from time to time (his physical presence in Hong Kong during the aforesaid period being 120 days). During this period, the individual remained a tax resident of France as his family, permanent home and center of vital interests remained in France. Starting from 1 January 2016, the individual was seconded by his French employer to work in Hong Kong on a long-term assignment and his family moved to Hong Kong with him (his physical presence in Hong Kong for the first 3 months of 2016 being 65 days). For the purposes of the France-Hong Kong CDTA, the individual was regarded as a Hong Kong resident starting from 1 January The situation is depicted in the following diagram: The year of assessment concerned was 2015/16 and the issue was how to count the 183 days commencing or ending in the taxable period from 1 April 2015 to 31 March If the physical presence of the individual for the period from 1 April 2015 to December 2015 of 120 days (when he was a French resident) was added to his physical presence in Hong Kong for the period from 1 January 2016 to 31 March 2016 of 65 days (when he was a Hong Kong resident), his total physical presence in Hong Kong for the 12-month period ended 31 March 2016 would exceed 183 days. As such, whilst being a French resident, the individual would be liable to tax in Hong Kong in respect of his exercising employment in Hong Kong during the first aforesaid period of 120 days. In reply, the IRD confirmed that, following the OECD commentary on this point, in such a situation the second aforesaid period of 65 days when the individual was a Hong Kong resident would not be counted for the purposes of the 183-day rule. As such, under the France- Hong Kong CDTA, the individual in the example would not be liable to tax in Hong Kong in respect of his exercising of an employment in Hong Kong of 120 days during the period from 1 April 2015 to 31 December 2015, when he was a French resident. The IRD further noted that for the period from 1 January 2016 to 31 March 2016, the days-in-and-days-out of Hong Kong of the individual under his non-hong Kong employment would be taken into account in calculating his tax liabilities in Hong Kong under section 8(1A) and 8(1B) of the Inland Revenue Ordinance (IRO). No physical presence in Hong Kong Travelled to Hong Kong to perform employment services from time to time 120 days in Hong Kong Seconded to work in Hong Kong on a long-term assignment 65 days in Hong Kong 1 April January March 2016 French resident Hong Kong resident 2

3 Application of the 183-day rule to stock option gains and share awards with a vesting period and performance bonus Using the Mainland China-Hong Kong CDTA as an example, the HKICPA sought the IRD s view on how to apply the 183-day rule under a CDTA to employment income taking the form of performance bonus and deferred compensation (e.g., stock options or share awards) which may have a vesting period of longer than 1 year. Example On 31 March 2012, a Mainland tax resident individual was granted stock options by his Mainland employer with a 3- year vesting period (i.e., the options vested on 31 March 2015). He exercised the stock options 1 year later on 31 March All remuneration of the individual including deferred compensation was paid by the employer and was not borne by any permanent establishment of the employer in Hong Kong. The IRD stated that 183-day rule for any 12-month period commencing or ending in a year of assessment would first be applied to determine whether Hong Kong had the taxing right to the employment income of the individual. In this case, despite vesting or accruing earlier on 31 March 2015, the taxability of the stock option gains was statutorily deferred under the IRO until the stock options were exercised on 31 March 2016, i.e., in the year of assessment 2015/16. As such, the 183-day rule would apply to the year of assessment 2015/16 in accordance with the current IRD s practice as stated in its Practice Notes No. 38. Where Hong Kong had the taxing right to the stock option gains under the 183-day rule, given that the individual had a non-hong Kong employment, his days-in-and-days-out of Hong Kong during the entire 3- year vesting period would be adopted for the apportionment of his income chargeable to tax in Hong Kong for the year of assessment 2015/16 under sections 8(1A) and 8(1B) of the IRO. Any services rendered after the vesting period should generally not be relevant in considering the apportionment of the stock option gains under Salaries Tax in Hong Kong. As regards employee benefits in the form of share awards, such benefits, unlike stock option gains, both accrued and were chargeable to tax under the IRO in the year of assessment in which vesting took place. As such, the IRD would apply the 183-day rule to the year of assessment in which vesting took place in determining whether Hong Kong had the taxing right to any share awards under the Mainland China-Hong Kong CDTA. Furthermore, generally speaking, only the days-in-and-days-out of Hong Kong of the individual for the year of assessment in which vesting took place, not the entire vesting period, would be adopted for any income apportionment under sections 8(1A) and (1B) of the IRO. Similarly, the IRD would also apply the 183-day rule to the year of assessment in which performance bonus accrued when determining whether Hong Kong had the taxing right to the bonus; likewise, only the days-in-and-days-out of Hong Kong of the individual for the year of assessment in which the bonus accrued would be adopted for any income apportionment under sections 8(1A) and (1B) of the IRO. Nonetheless, the IRD added that where the facts of a case warranted, the IRD would consider excluding (a) a portion of the share awards referable to a vesting period prior to the transfer of an employee to Hong Kong under an inbound employment; or (b) a portion of the bonus clearly attributable to the rendering of services outside Hong Kong in a year other than the year of accrual and reflecting the legal effect of the contractual terms of the employment and the employer s practice of making performance bonus. Separately, the IRD noted that the taxing right to directors fees (including stock options granted to an individual in the capacity as director) of a jurisdiction under a CDTA is typically not governed by the 183-day rule, but by the place of residence of the company which pays the directors fees. As such where the company which pays the directors fees to a Mainland resident individual is a Hong Kong resident company, the directors fees received by the individual would be fully chargeable to tax in Hong Kong under the Mainland China-Hong Kong CDTA. The IRD added that in an unlikely scenario where the company which paid the directors fees changed its residence during a relevant period, the IRD may consider taxing only part of the directors fees in Hong Kong by way of some form of apportionment. Conditions for qualifying as a Hong Kong resident individual under CDTAs Under most CDTAs that Hong Kong has concluded, an individual is defined as a resident of Hong Kong if they satisfy either one of the following two conditions: 1. ordinarily resides in Hong Kong; or 2. stays in Hong Kong for more than 180 days during a year of assessment or more than 300 days in two consecutive years of assessment one of which is the relevant year of assessment. The fact that the satisfaction of either one of the above two specified conditions will suffice is illustrated by a question raised by the HKICPA during the meeting. The question was whether an individual who ordinarily resided in Hong Kong up to 31 March 2017 and then emigrated overseas would be issued a Hong Kong certificate of residence (CoR) by the IRD for the calendar year The IRD was of a view that whether an individual ordinarily resided in Hong Kong was a question of fact. In determining the issue, the IRD would make reference to case law and consider a number of factors (e.g., whether the individual habitually and normally resided in Hong Kong with some degree of continuity, the nature, duration and reasons for their absence from Hong Kong, where their family members live, their social and economic ties etc.) For the individual concerned, given that he emigrated overseas on 1 April 2017, his place of residence would likely be changed from Hong Kong to the place to which he emigrated. As such, under the above first condition, the individual could not be regarded as an ordinary resident of Hong Kong for calendar year 2017 because he would not have habitually and normally resided inside Hong Kong after 1 April

4 Nonetheless, the IRD noted that the individual would still be regarded as a Hong Kong resident and be issued a CoR for 2017 provided that he satisfied the above second condition. Conceivably, the second condition could be satisfied by the individual by virtue of his physical presence in Hong Kong exceeding 300 days in aggregate for the two years of assessment 2016/17 and 2017/18. This would be the case given that the individual may have substantial physical presence in Hong Kong exceeding 300 days for the period from 1 April 2016 to 31 March 2017, i.e., the previous year of assessment before he emigrated on 1 April 2017 (the relevant year of assessment in this case being 2017/18). The IRD added that in cases where an application for a CoR was rejected on the grounds that the individual concerned was not considered an ordinary resident of Hong Kong (i.e., for failing the above first condition), such an individual could lodge a fresh application again at a later stage when they satisfied the above second condition. Whether the locality of an employment would be affected merely by employers or employees observing local laws and regulations The IRD stated that, in determining the locality of an employment for Salaries Tax purposes, the IRD would take into account all the relevant facts, with particular emphasis on three factors, namely: (a) where the contract of employment was negotiated and entered into, and is enforceable; (b) where the employer is resident; and (c) where the remuneration is paid. As regards enforceability of an employment contract, the IRD clarified that where an employee was engaged under a Hong Kong employment, compliance with overseas laws and regulations by the employer or the employee while the employee performed services overseas did not change a Hong Kong employment to a non-hong Kong employment, only the latter type of employment being eligible for income apportionment on a days-in-and-daysout basis in Hong Kong under the IRO. Conversely, compliance with the Hong Kong laws and regulations alone by an employer or employee (such as complying with the labor laws and observing statutory holidays in Hong Kong) would not turn a non-hong Kong employment into a Hong Kong employment. 4

5 Hong Kong office Agnes Chan, Managing Partner, Hong Kong & Macau 22/F, CITIC Tower, 1 Tim Mei Avenue, Central, Hong Kong Tel: / Fax: Principal tax contact, Ernst & Young Tax Services Limited Tracy Ho tracy.ho@hk.ey.com People Advisory Services contacts Ami Cheung ami-km.cheung@hk.ey.com Robin Choi robin.choi@hk.ey.com Jeff Tang jeff.tk.tang@hk.ey.com Paul Wen paul.wen@hk.ey.com Tyrone Chan tyrone.chan@hk.ey.com Christina Li christina.li@hk.ey.com Winnie Walker winnie.walker@hk.ey.com Alex Wong alex-ck.wong@hk.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Services Limited. All Rights Reserved. APAC No ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/china Follow us on WeChat Scan the QR code and stay up to date with the latest EY news.