|
In Brief
Recently, the Hong Kong Board of Review has handed down another decision on time-apportionment claim (Case No.D32/07), which is a commonly disputed area between the Inland Revenue Department (IRD) and taxpayers nowadays. The Board held that the Taxpayer had a Hong Kong employment with Company B which was a limited liability company incorporated overseas. The Board was of the view that, following the Goepfert Decision, the "totality of facts" test should be applied in reviewing time-apportionment claims, rather than merely adhering to the "three-factor test". The Board also conducted a detailed analysis of Company B's operations and considered it to be resident in Hong Kong.
Background
- The Taxpayer was an employee of Company B which was a limited liability company incorporated overseas. Company was registered as an overseas company in Hong Kong under the Companies Ordinance.
- The Employment Agreement was signed by a representative of Company B and it bore the address of Company B in Hong Kong. It was posted to the Taxpayer at his address in an overseas country.
- The Taxpayer's remuneration was paid to him in Hong Kong while he remained a member of overseas retirement and medical schemes.
Board of Review's positions
| Taxpayer's assertion |
Board of Review's position |
| The Employment contract was negotiated and concluded overseas |
- The Taxpayer was initially interviewed overseas. However, five or six interviews were held at Company B offices in Hong Kong which carried significant weight.
- It was the business division in Hong Kong that had the job opening and the Taxpayer interviewed with members of such division; thus, the decision to offer employment was made in Hong Kong.
- The Taxpayer reported to his various supervisors in Hong Kong who were responsible for his promotion.
- Although the letter of acceptance was signed by the Taxpayer outside Hong Kong, it was of "little significance or effect". The Board concluded that all substantive acts leading to the employment offer was taken in Hong Kong.
- The Taxpayer only stayed overseas because the Hong Kong work visa was pending for approval. The Board concluded that the issuance of a Hong Kong work visa was an event occurred in Hong Kong which triggered the commencement of the Taxpayer's employment.
|
| The management and control of Company B was located overseas. There were various committees located overseas which oversaw the operations of Company B. |
- Company B had no place of business in the country of incorporation.
- Out of 30 directors of Company B, 27 of them were resident in Hong Kong. Central management and control vested in its directors. Therefore, the central management and control of Company B was located in Hong Kong.
- Although the overseas committees were extensively involved in major business decisions of Company B, it did not "usurp" the central management and control of Company B but merely "influenced" its management and control.
- The registration form submitted to the Hong Kong Securities and Futures Commission (SFC) also indicated no other director or person had control over the business of Company B.
|
| The Taxpayer's remuneration was paid in Hong Kong but charged to an overseas entity |
The Taxpayer admitted that his remuneration was paid in Hong Kong. He was also provided with other benefits in Hong Kong, e.g. medical insurance coverage. |
PwC's commentary
The Taxpayer has made further appeal to the Court of First Instance and the decision is not available as of the date of this memo.
However, this case reveals the fact that both the IRD and the Board continue to apply the "totality of facts" approach in reviewing time-apportionment claims. The Board explicitly rejected applying the 3-factor approach in this case.
Nevertheless, even if the 3-factor approach is applied, the Taxpayer's appeal will still fail at the Board's level as the residency of his employment was held to be in Hong Kong. It is therefore essential to have sufficient evidence justifying the employing entry to have its central management and control outside Hong Kong, especially for those multinational corporations which have established global or regional "employment vehicles" to house its international assignees.
Employers should also review the documentation in relation to the entire process of secondment, for example, starting from the point of negotiation, to the arrangement of remuneration payments, to the application for Hong Kong work visas, etc. One should be mindful that while both the IRD and the Board tend to adopt the "totality of facts" approach, all documents in relation to an assignee (e.g. work visa application, SFC license application) should be carefully drafted to ensure the wordings support the assignees' non-Hong Kong employment for time-appointment claim purposes. It is worthwhile to spend time in planning before sending an assignee to Hong Kong. |
