The Hong Kong Inland Revenue Department has updated its FAQs on the 2006 income tax arrangement with Mainland China, clarifying how individual dual residency is resolved. OECD-based tie-breaker rules consider permanent home, personal and economic ties, habitual abode, and mutual agreement of tax authorities.
The Hong Kong Inland Revenue Department has released updated and new FAQs on the 2006 income tax arrangement with Mainland China, including revisions related to the determination of individual residence.
Updated questions
Question 1: According to the Comprehensive Arrangement, under what circumstances will a Hong Kong resident working in the Mainland be exempted from paying the Mainland tax or be allowed a tax credit against the tax paid? (Updated)
Under the Comprehensive Arrangement, the remuneration that a Hong Kong resident working in the Mainland received may be exempted from taxation in the Mainland if he satisfies all of the following 3 conditions. These 3 conditions are:
He is present in the Mainland for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable year concerned;
The remuneration is paid by, or on behalf of, an employer who is not a Mainland resident;
The remuneration is not borne by a permanent establishment which the employer has in the Mainland.
If any one of the above conditions is not satisfied, the remuneration will be subject to taxation in the Mainland. If the remuneration is also subject to taxation in Hong Kong, a tax credit will be allowed for the tax paid in the Mainland under the Comprehensive Arrangement.
But please note that the directors’ fees and other similar sums derived by a Hong Kong resident in his capacity as a member of the board of directors of a Mainland company are subject to taxation in the Mainland. Such directors’ fees, etc. are not subject to taxation in Hong Kong.
Question 8: If an individual is at the same time both a resident of Hong Kong and of the Mainland under the definition set out in the Comprehensive Arrangement, how will the issue of dual residence status be resolved? (Updated)
In order to resolve the issue of an individual being a resident of both sides at the same time, the Comprehensive Arrangement has adopted the criteria set out in the model text of the Organisation for Economic Co-operation and Development (OECD). The person will be ascribed as a resident of one side in accordance with, in order of priority, the following criteria (the tie-breaker rules): which side he has a permanent home; which side he has a closer personal and economic relationship; which side he has an habitual abode; and by mutual agreement of the competent authorities of the two sides. Detailed interpretation on the tie-breaker rules can be referenced to the Circular of the Interpretation of the Provisions of the Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Protocol Thereof (Guoshuifa 2010 No. 75). The interpretation on the tie-breaker rules under the Circular applies to the Comprehensive Arrangement. Please click here to access Guoshuifa 2010 No. 75 (available in Chinese only) at the website of the State Taxation Administration.
New questions
17. Mr A holds a domiciliary registration in the Mainland. He successfully applied to work in Hong Kong through a talent admission scheme and is employed by a Hong Kong company. He owns or rents property in Hong Kong. His spouse and children have come to Hong Kong to live with him, and his children are studying in Hong Kong. Mr A spends most of his time living in Hong Kong and occasionally returns to the Mainland to visit his relatives or travel. Mr A stays in Hong Kong for more than 180 days during a year of assessment. Mr A is at the same time both a resident of Hong Kong and of the Mainland under the definition set out in the Comprehensive Arrangement. How should Mr A’s residence status be determined?
Mr A’s residence status shall be determined by the tie-breaker rules provided under the Comprehensive Arrangement. When applying the tie-breaker rules to resolve the issue of Mr A’s dual residence status, consideration has to be given to whether Mr A’s residence in Hong Kong is of permanent nature and whether he has a permanent home in the Mainland. Generally speaking, if Mr A’s residence in Hong Kong is of permanent nature and he does not have a permanent home in the Mainland, he will be ascribed as a Hong Kong resident under the Comprehensive Arrangement. Alternatively, if Mr A has a permanent home in the Mainland and his residence in Hong Kong is not of permanent nature, he will be ascribed as a Mainland resident under the Comprehensive Arrangement.
18. Further to Question 17, if Mr A has permanent homes in both Hong Kong and the Mainland, how should his residence status be determined?
If Mr A has permanent homes in both Hong Kong and the Mainland, one has to comprehensively consider his personal and economic relationship with both sides and compare which side he has closer relationship with. If Mr A has closer personal and economic relationship with Hong Kong, he will be ascribed as a Hong Kong resident under the Comprehensive Arrangement. Alternatively, if Mr A has closer personal and economic relationship with the Mainland, he will be ascribed as a Mainland resident under the Comprehensive Arrangement.
19. Mr B holds a domiciliary registration in the Mainland. His situation is similar to that of Mr A as mentioned in Question 17, but due to his Hong Kong employer having business in the Mainland, Mr B is required to frequently work in the Mainland. Mr B stays in Hong Kong for more than 180 days during a year of assessment and spends most weekends in Hong Kong. In this situation, will there be any differences in applying the tie-breaker rules to resolve the issue of dual residence status?
Mr B is at the same time both a resident of Hong Kong and of the Mainland. In the context of applying the tie-breaker rules, Mr B’s frequent stay in the Mainland due to work or other reasons increases the likelihood that he has a permanent home in the Mainland. Mr B is more likely to have closer personal and economic relationship with the Mainland than with Hong Kong. Therefore, it is more probable that Mr B will be ascribed as a Mainland resident under the Comprehensive Arrangement.
20. Mr C holds a domiciliary registration in the Mainland. He successfully applied to work in Hong Kong through a talent admission scheme and is employed by a Hong Kong company. He owns or rents property in Hong Kong. Mr C works in Hong Kong from Monday to Friday and returns to the Mainland on weekends. His spouse and children still live in the Mainland, and his children attend school in the Mainland. Mr C stays in Hong Kong for more than 180 days during a year of assessment. Mr C is at the same time both a resident of Hong Kong and of the Mainland under the definition set out in the Comprehensive Arrangement. How should Mr C’s residence status be determined?
When applying the tie-breaker rules to resolve the issue of Mr C’s dual residence status, having considered that Mr C previously worked and lived in the Mainland, and his spouse and children remain in the Mainland after he is employed by a Hong Kong company, Mr C likely has a permanent home in the Mainland. However, whether Mr C’s residence in Hong Kong is of permanent nature needs further assessment based on his actual facts and circumstances. If Mr C’s residence in Hong Kong is not of permanent nature, he will be ascribed as a Mainland resident under the Comprehensive Arrangement.
21. Further to Question 20, if Mr C has permanent homes in both Hong Kong and the Mainland, how should Mr C’s residence status be determined?
If Mr C has permanent homes in both Hong Kong and the Mainland, one has to comprehensively consider his personal and economic relationship with both sides and compare which side he has closer relationship with. Please refer to Question 18 above for details.
