Due to the COVID-19 pandemic, governments have taken unprecedented measures such as implementing strict quarantine requirements and/or travel restrictions. As a result, senior executives who are used to travel frequently may now be forced to stay much longer in a host country than usually or even get stranded there. This situation may raise significant tax issues for both senior executives (e.g. change of their tax residence status) and their employers (e. g. causing the employers’ companies to become a tax resident in the host country or alternatively creating a so-called permanent establishment in there). Putting this in the context of Hong Kong, what would be the Hong Kong salaries tax impact of senior executives that come to Hong Kong for business trips in the midst of the pandemic?
The Hong Kong tax system is based on a territorial concept. Salaries tax is imposed on income arising in or derived from Hong Kong from an office or employment. Directorship is regarded as an office. Generally speaking, if you are a director of an overseas company, the director’s fees received should not be taxable in Hong Kong regardless of how many days you stay in Hong Kong.
On the other hand, if you are holding an employment with an overseas company, the source of your employment will generally be regarded as non-Hong Kong sourced. In this case, you will be assessed on the income attributable to the services you rendered in Hong Kong based on the number of days you are in Hong Kong (day-in-day-out basis) in a year of assessment. An exemption will be available if your visits to Hong Kong do not exceed a total of 60 days in that year of assessment. If there is a double tax treaty in place, the threshold can be extended to 183 days provided that certain other conditions are met. So what will happen to those senior executives that are forced to stay longer than 183 days in Hong Kong? Will they now become taxable in both their residence country and their host country Hong Kong?
For this particular issue, the Organisation for Economic Co-operation and Development (the “OECD”) made an Analysis of Tax Treaties and the Impact of the COVID-19 Crisis (the “Analysis”). Broadly speaking, the Analysis suggests that given the exceptional nature of situation caused by the pandemic, it is unlikely that the treaty residence position of an individual will be affected. In other words, if one has to stay longer in a host country due to COVID-19, the related adverse tax consequences should not be taken into account. Besides, in case of dual tax residency arisen as a result of staying longer in a host country due to COVID-19, the tie-breaker rule contained the double tax treaty should be applied in determining the tax residency.
Nonetheless, it is worth noting that the Analysis is only applicable where there is a double tax treaty in place. Besides, the Analysis is only a guidance and is not binding. The Hong Kong Inland Revenue Department (“IRD”) so far has not issued any formal guidelines to taxpayers explaining how it will interpret the Hong Kong tax laws in relation to issues arising from the impact of the pandemic. As such, visitors spending more than the above-mentioned threshold in Hong Kong may need to discuss the adverse tax consequences with the IRD and their own tax authorities on a case-by-case basis.
In view of the foregoing, people coming to Hong Kong for business trips should be mindful of their days of presence in Hong Kong and the potential tax implication thereof. We can assist in advising you the relevant Hong Kong tax implications as well as representing you in discussions with the IRD & the tax authorities of your home country, if necessary. Please visit our website www.hkwj-taxlaw.hk or contact us on + 852 2804 0889 for more information.