Hong Kong - Time apportionment claim

It is common for multinational companies to second expatriate employees to Hong Kong. During their Hong Kong assignment period, these employees usually have regional responsibilities and are employed by a non-Hong Kong entity.
 
Under the current Hong Kong tax regime, if an individual can establish that a "non-Hong Kong employment" relationship exists between himself/herself and the employer, the portion of income attributable to his/her overseas days could be excluded in computing his/her Hong Kong salaries tax liability (i.e."time-apportionment claim").
 
The Inland Revenue Department ("IRD") will generally view a non-Hong Kong employment exists if the following three factors are present:

  • The contract of employment was negotiated and entered into, and is enforceable outside Hong Kong;
      
  • The employer is resident outside Hong Kong (which normally refers to the locality of its "central management and control"); and
       
  • The employee's remuneration is paid to him outside of Hong Kong.

 

However, the IRD also indicates that they reserve the right to look beyond the above three factors in appropriate cases.
 
We have spotted that the IRD is taking a more stringent approach in reviewing time-apportionment claims.  In some cases, they review the time-apportionment claims based on a "totality of facts" approach and disallow the claims even though the individuals meet the three criteria above.  A Board of Review Case (No. D59/03) upholds the IRD's approach.  This results in additional tax liabilities to the employees or their employer (if the employer bears their Hong Kong tax liabilities).
 
Another Board of Review Case (No. D60/06) indicates that the question on source of employment is highly fact-specific and any allegation that an employment is with a non-Hong Kong source has to be supported by sustainable facts in both from and substance.
 
As a result, it is imperative for companies to review the existing employment arrangements with their expatriate employees in order to withstand any potential challenge by the IRD, as well as establish proper "form" and "substance" of the offshore employment of their assignees based in Hong Kong.
 
We would be pleased to assist our clients in the following areas:

  • Design a tailor-made review work program in view of the current stance of the IRD;
     
  • Review the existing documentation as well as the completed work program;
     
  • Advise the potential exposures faced by the employer / employees in respect of the time-apportionment claims; and
      
  • Provide alternative solutions in order to minimize the potential exposures

Contact us

James Clemence
Partner
Tel: +[852] 2289 1818
Email

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