On 29 July 2021, the Inland Revenue Department (IRD) of Hong Kong issued guidance examining certain tax issues arising from the coronavirus (COVID-19) pandemic. 

IRD noted that their  approach in relation to the tax issues is generally in line with the Updated Guidance on Tax Treaties and the Impact of the COVID-19 Pandemic (the COVID-19 Tax Treaty Guidance) and Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic (the COVID-19 Transfer Pricing Guidance) released by the OECD in January 2021 and December 2020 respectively, to which further references may be made.

The following issues are related to corporate taxation:

Tax Residence of Companies

Restrictions on international travel due to the pandemic may give rise to a change in the locations where senior management hold their meetings or conduct the business of an enterprise and concerns have been raised about the effect of such change on the tax residence of a company. The IRD does not consider that such a temporary change during extraordinary time would in itself alter the tax residence status of a company. In assessing the company’s residence status, the IRD will take into account all relevant facts and circumstances.

If a company is considered to be a resident of Hong Kong and another jurisdiction simultaneously, the tie-breaker rules under the relevant tax treaty would need to be considered to determine the jurisdiction where a company is regarded as a resident for the purposes of the treaty. As stated in the COVID-19 Tax Treaty Guidance, a company’s place of residence determined by the tie-breaker rules under a tax treaty is unlikely to be affected by the fact that the individuals participating in the management and decision-making of the company cannot travel as a result of a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved.

Permanent Establishment

Whether a non-Hong Kong resident person has a PE in Hong Kong within the meaning of a tax treaty or Part 3 of Schedule 17G to the Inland Revenue Ordinance (IRO) (as the case may be) is a question of fact and degree. In determining the issue, the IRD will examine all the relevant facts and circumstances, including the international travel disruption caused by public health measures imposed by governments in response to COVID-19. Given the extraordinary nature of the COVID-19 pandemic, the IRD is prepared to adopt a flexible approach when determining the issue, having regard to the relevant principles in the COVID-19 Tax Treaty Guidance.

As explained in the said Guidance, the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 pandemic, such as working from home, should not create new PEs for the employers. Similarly, the temporary conclusion of contracts in the home of employees or agents because of the pandemic should not create PEs for enterprises, though a different approach may be appropriate if the employees or agents were habitually concluding contracts on behalf of the enterprises in their home jurisdictions before the pandemic.

It is important to note that the above views are relevant only to circumstances arising during the COVID-19 pandemic when public health measures are in effect. Where an individual continues to work from home after the cessation of the public health measures, further examination of the facts and circumstances would be required to determine whether a PE exists.

Transfer Pricing

The IRD will generally follow the COVID-19 Transfer Pricing Guidance which maintains that the arm’s length principle remains the applicable standard for the purpose of evaluating the transfer pricing of controlled transactions in the face of the pandemic, though due regard must be given as to how the outcomes of the economically significant risks controlled by the parties to the transactions have been affected by the pandemic.

In view of the effect of the COVID-19 pandemic on the economic conditions, it may be appropriate to have separate testing periods for the duration of the pandemic or to include loss-making comparables when performing a comparability analysis. A limited-risk entity could be accepted to have incurred losses if the losses are found to be incurred at arm’s length. The receipt of government assistance may also affect the price of a controlled transaction.   The IRD will uphold existing advance pricing arrangements (APAs), unless a condition leading to the revocation, cancellation or revision of the APA has occurred. Where material changes in economic conditions lead to the breach of the critical assumptions, taxpayers should notify the IRD not later than one month after the breach occurs.