THE HONG KONG POLYTECHNIC UNIVERSITY

AF3210 HONG KONG TAX FRAMEWORK

Tutorial 3 – Salaries Tax (1)

Answer 7

Salaries tax is charged on income from office, employment and pension arising in or derived
from Hong Kong, that is, on income sourced in Hong Kong (section 8(l)). The phrase
"arising in or derived from Hong Kong" is not defined in the IRO and is to be interpreted
according to case law and Board of Review decisions.

Source of income from employment

Following the decision in CIR v George Andrew Goepfert (2 HKTC 210), the IRD revised
DIPN No. 10 in December 1987 and stated that in determining the source of employment,
only three factors are to be considered in the great majority of the cases, namely:
(1) the place where the contract of employment was negotiated, entered into and
enforceable;
(2) the place of residence of the employer (for this purpose the company is regarded as
being resident where it is managed and controlled), and
(3) the place where the employee's remuneration is paid (in case where the remuneration
is partly paid outside Hong Kong and partly in Hong Kong, then the place where the
greater amount is paid will be the place of payment).

In cases where the "place" mentioned in the three factors are all outside Hong Kong, the
employment is located outside Hong Kong. Otherwise, the employment is located in Hong
Kong.

For cases where not all three factors indicate a Hong Kong or non-Hong Kong employment,
judgement has to be made on their own merits, but in general, the IRD will regard the
"residence of employer" and "contract of employment" as outweighing the "place of payment
of remuneration".

On the other hand, there can be exceptional cases where all the three conditions for non-Hong
Kong employment are satisfied but the employment is in reality sourced in Hong Kong. It is
therefore sometimes necessary to look beyond those three factors to consider whether the
circumstances actually indicate a Hong Kong employment.

DIPN No. 10 was further revised in June 2007. Although the IRD noted that it would look
into the totality of facts, these three factors would remain to be the most important
consideration.

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Taxability of income from employment
It is important to identify the source of employment before the appropriate rules can be
applied to ascertain the assessable income. Where the source of employment income is
considered fundamentally in Hong Kong, all employment income for services is taxable
under the basic charge of section 8(l)(a) unless:

(1) All duties are rendered outside Hong Kong → income is fully exempt (this exemption
does not apply to Government employees, seafarers and aircrew) (section 8(1A)(b)).

In determining whether or not all duties are rendered outside Hong Kong, services
rendered in Hong Kong during visits not exceeding a total of 60 days in the basis
period will not be taken into account (section 8(1B)).

(2) Part of the services are rendered overseas and income so derived has been subject to
overseas tax of substantially the same nature as Hong Kong salaries tax → income
from overseas services are excluded (section 8(1A)(c)).

Where the source of employment income is considered fundamentally outside Hong Kong,
only remuneration (including leave pay attributable to Hong Kong services) for services
performed in Hong Kong is taxable (section 8(1A)(a)). The following points must be noted:

(1) If an individual visits Hong Kong for not more than 60 days in the basis period, no
account shall be taken of services rendered in Hong Kong (section 8(1B)).

(2) The employment income is apportioned according to number of days present in Hong
Kong (including attributable leave days).

Mr. Tan’s case

According to the principles in Goepfert case and DIPN No. 10, Mr. Tan’s new employment
has its source outside Hong Kong because:
(1) the employment contract is entered into outside Hong Kong in the United States;
(2) his employer is Gateway Corporation, which is a company resident in the United
States; and
(3) his remuneration is paid to him outside Hong Kong in Singapore.

Although he performed some of his work in Hong Kong, his location here is a matter of
convenience. His job duties are to oversee and supervise the operations of Gateway
Corporation’s various affiliated companies in the Far East region, including Hong Kong. He
reported directly to Gateway Corporation in respect of the operating performance of these
affiliates in the region. It appears that Hong Kong is not his base of work.

On the basis that the employment is non-Hong Kong sourced, income will only be taxable if
it is attributable to services performed in Hong Kong and the number of days spent in visit by
Mr. Tan in Hong Kong exceeds 60 days in a year of assessment. With regard to the nature of
services done by Mr Tan in Hong Kong and the foreign bases of his work and family, the stay
of Mr. Tan in Hong Kong may be regarded as “visit”. If the total number of days he stays in
Hong Kong in an assessment year does not exceed 60 days (with both entry and exit days
counted as in Hong Kong), the full amount of income from the employment will be exempt.
If the total number of days he stays in Hong Kong exceeds 60 days, salaries tax will be

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calculated based on the days he spent in Hong Kong (either entry and exit day is counted) and
the total number of days in the year. Paid annual leave days attributable to the services done
in Hong Kong have to be computed.

The year of assessment in which the employment commenced is 2021/22.

Total no. of days in the year: 321 [365 – 30 (April) – 14 (May)]

Total no. of days in Hong Kong for the purposes of 60 days rule (both entry and exit days
being counted as in Hong Kong):

Arrived in HK Departed from HK No. of days in HK

18 May 2021 5 Jun 2021 19
24 Jun 2021 1 Aug 2021 39
30 Sep 2021 1 Nov 2021 33
30 Nov 2021 30 Dec 2021 31
13 Jan 2022 15 Mar 2022 62
184

As Mr. Tan was in Hong Kong for more than 60 days during the year of assessment 2021/22,
he is not eligible for exemption under section 8(1A)(b) and 8(1B), and his income will be
assessed on time-apportionment basis. In computing the assessable income under time
apportionment, the entry day and the exit day will be counted as one day in practice. Since
there are 5 trips to Hong Kong during the year, 5 days will be deducted for assessment
purposes. The number of business days taxable in Hong Kong is 184 – 5 = 179 days.

Leave pay attributable to his services in Hong Kong is also taxable, which is computed as
follows:
179 days
15 days x ----------------------
(321 – 15) days

= 8.8 days

Mr. Tan’s assessable income for the year of assessment 2021/22 is:

(179 + 8.8) days in HK

Total income x ---------------------------------
321 days for the year

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Answer 8

Whether Rosanna’s income is subject to salaries tax or profits tax depends on whether she
provides services under a contract of service as an employee, or under a contract for service
as an independent contractor. The question is “Is the person who has engaged himself to
perform these services performing them as a person in business on his account?”. See Fall v
Hitchen.

The factors to consider include control test, economic reality test, integration test, mutuality
of obligation test and any other relevant considerations. However, no single test is
conclusive. One should apply the totality of facts and get the balance.

Applying these principles, the findings are:

- She is required to perform service to the club and can take outside work only if she is not
required to work for the club.
- Although she has her own piano for practice, she uses the piano provided by the club to
perform her services.
- She does not hire her own helpers.
- She is paid a fixed monthly fee. There is no financial risk, except that arising in the event
of termination of her engagement.
- She has very limited degree of responsibility for investment and management. All she
has invested in are her piano at home and her skills.
- She has no opportunity of profiting from sound management in the performance of her
task.
- She is obliged to provide services for 20 hours per week, and the club is obliged to
provide work and pay her a monthly remuneration.
- She does not hold a business registration, although this factor may not be significant.

Weighing all the above facts together, it is very likely that Rosanna is having a contract of
service and her income will be chargeable to salaries tax.

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Answer 9

Section 8(1)(a) imposes a charge to salaries tax on income arising in or derived from Hong
Kong from any office or employment of profit. If the location or source of a person’s office
or employment is in Hong Kong, any income arising from that office or employment is
chargeable to salaries tax except those specifically exempt. If the source of a taxpayer's
income from employment is outside Hong Kong, he is chargeable to salaries tax only on
income derived by him from services rendered in Hong Kong (section 8(1A)(a)).

Before Mr. Lee’s claims are addressed, the sources of his employment and office have to be
examined. For the source of employment, DIPN No. 10 states that the IRD will take into
account all the relevant facts, with particular emphasis on the following factors:

(1) the place where the contract of employment was negotiated, entered into and
enforceable;
- Mr. Lee signed the employment contract when he arrived here. It should be
regarded that the place where the contract was entered into is Hong Kong.

(2) the place of residence of the employer;

- Since a separate employment contract was signed with the Hong Kong subsidiary,
the new employer is the Hong Kong subsidiary, not the Canadian company.

(3) the place where the employee's remuneration is paid.

- Although the monthly salary was paid partly in Canada and partly in Hong Kong,
the IRD may regard the location where the larger amount is paid as the relevant
place of payment. In this case, it is Hong Kong. However, it should also be noted
that “remuneration” is not restricted to the monthly salary but includes all
perquisites and benefits in kind which are included in the definition of income.

On the basis of the above analysis, the source of the employment of Mr. Lee should be in
Hong Kong.

As regards the directorship, the source of an office depends on the location of the central
management and control of the company. In this case, the directorship was attached with the
Canadian company. It was indicated in the question that the directors’ meetings were held in
Canada. Therefore, the central management and control of the company was not in Hong
Kong. The source of office income is outside Hong Kong and not taxable.

Mr. and Mrs. Lee’s claims

1. Mr. Lee claimed that during the Y/A 2019/20, he should not be subject to salaries tax
since he did not work in Hong Kong for more than 60 days. Although he had stayed
in Hong Kong for 46 days only (15 February to 31 March 2020), the stay was the
beginning of a long period of residence in Hong Kong and is neither short nor
temporary. It therefore does not come within the ordinary meaning of the word
“visit” and cannot be ignored. Hence, his claim for exemption under section 8(1A)(b)
and 8(1B) fails.

2. For the year of assessment 2020/21, his claim that his income attributable to services
rendered in the Mainland and other countries should be exempt from tax fails because
his employment is a Hong Kong-sourced employment and the “day-in-day-out”

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 apportionment of income is not applicable. With respect to the 60-days rule, it will
only be applicable if the taxpayer is regarded as paying a “visit” when he stays in
Hong Kong.

In the case of Mr. Lee, he returned from Canada with his whole family. In practice,
the IRD would also look into his social ties and economic ties to ascertain his
intention of staying in Hong Kong as short term/temporary or permanent. However,
given his work and family bases being primarily in Hong Kong, it would be expected
that the IRD would not regard him as a visitor for the purpose of the 60-days rule. On
this basis, even if he stays in Hong Kong for only one day performing services here,
he will be subject to salaries tax on the whole of his income from employment. On
the contrary, even if the IRD is convinced that he is a visitor, he will still be subject to
tax in Hong Kong on the whole of his employment income on the basis that he stayed
and worked in Hong Kong for more than 60 days in the year.

Regarding the overseas tax paid, Mr. Lee should note that no deduction of tax paid
from the assessable income is allowed under the Ordinance. However, he may claim
a tax credit under section 50 pursuant to the double taxation arrangement concluded
between Hong Kong and the Mainland of China to set-off the China tax paid against
the Hong Kong tax payable. The exclusion of income under section 8(1A)(c) does
not apply effective from the year of assessment 2018/19.

For the Canadian tax paid, since the director’s office income would not be brought
into charge under Hong Kong salaries tax, there is no issue of double taxation and no
tax relief is available.

3. Mrs. Lee's employment with the Hong Kong SAR Government is a Hong Kong
employment. All her income will be fully taxable under section 8(1)(a). The
exemption under section 8(1A)(b) does not apply to Government employees. Hence,
the claim that she was liable to Hong Kong salaries tax to the extent of the income
derived from services rendered in Hong Kong fails. However, if she has paid tax in
Taiwan in respect of her services rendered there, she may rely on section 8(1A)(c) to
exclude that part of the income which has already been subject to tax in Taiwan to
avoid double taxation. (Note: Hong Kong has not concluded any double taxation
arrangement with Taiwan and therefore section 8(1A)(c) continues to apply.)

As an air-hostess, her salaries tax position will be governed by section 8(2)(j).

Income will be fully exempt if she was present in Hong Kong for not more than 60
days in that year of assessment and 120 days in 2 consecutive years of assessment.

Mrs. Lee was present in Hong Kong for 119 days in two consecutive years of
assessment (2020/21 and 2021/22). For the year of assessment 2020/21, she was
present in Hong Kong for not more than 60 days; hence, both conditions are met and
she would be exempt from salaries tax for that year.

For the year of assessment 2021/22, Mrs. Lee was present in Hong Kong for more
than 60 days, and therefore she could not be exempt from tax. She was employed by
Evergreen Airways, a company resident in Taiwan. It is likely that she may be
regarded as having a non-Hong Kong sourced employment, and her income will be
chargeable to salaries tax under section 8(1A)(a) on time-apportionment basis.

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