BUSI 0018 Hong Kong Taxation

Tutorial Questions
Unit 3 Salaries Tax (1)
Answer 7
(a) Locality of employment
- CIR v George Andrew Goepfert
- DIPN 10
o Place where the employment contract is negotiated, concluded & enforceable
o Residence of the employer
o Place where the employees remuneration is paid least important
- Totality of facts

(b) Differences between the tax treatment of HK employment & non-HK employment

1.
2.
3.
4.
5.

6.

Taxation position of HK employment

Services were wholly performed in HK
o 100% assessable
Services were partly performed in HK, partly
o 100% assessable
outside HK
All services were performed outside HK (i.e. #
o 100% exempt
of days in HK is nil)
Services were performed in HK for 60 days or
o 100% exempt
less during visits in HK
o 100% assessable
Services were performed in HK for 60 days or
less, but the employees presence in HK did not
constitute visit in HK
Services were performed in HK for more than
o 100% assessable
60 days

Taxation position of non-HK employment

1. Services were wholly performed in HK
o 100% assessable
2. Services were partly performed in HK, partly
o Assessable on time basis (i.e.
outside HK
according to # of days the
taxpayer was present in HK)
3. Services were performed in HK for 60 days or
o 100% exempt
less during visits in HK
o Assessable on time basis (i.e.
4. Services were performed in HK for 60 days or
according to # of days the
less, but the employees presence in HK did not
taxpayer was present in HK)
constitute visit to HK

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Answer 8

How to distinguish contract of service & contract for service

Features
Applicable tax

Contract of service
employment
master-servant relationship
salaries tax

Contract for service

profession
independent contractor
profits tax

Relevant factors for distinguishing contract of service & contract for service
- Is the person who engaged himself to perform these services performing them as a
person in business on his own account? (Market Investigation v Minister of Social
Security UK case)
- Three tests
(1) Control test
(2) Integration test
(3) Economic reality test

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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. If the location or source of a persons office or
employment is in Hong Kong, any income arising from that office or employment is
chargeable to salaries tax except those specifically exempted. 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. Lees claims are addressed, the sources of his employment and office have to be
examined. For source of employment, the analysis is done based on the Goepfert principles:
(1)

the place where the contract of employment was negotiated, entered into and
enforceable;
- Although the contract was faxed to Canada for signature by Mr. Lee, the original
contract was subsequently signed and endorsed by both parties in HK when Mr.
Lee 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 is signed with the Hong Kong subsidiary, the
new employer is the HK 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 HK, the IRD
would regard the location which received the larger portion of the salary as the
source for the factor. In this case, it is Hong Kong.

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 which the office holds. 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 HK. The source of office income is non-HK and not taxable.
This is true regardless of whether Mr. Lee went back to Canada for the directors meetings or
not.

Mr. and Mrs. Lees claims

1.

Mr. Lee claimed that during the Y/A 2008/09, he should not be subject to salaries tax
since he did not work in HK for more than 60 days. Although he had stayed in Hong
Kong for only 45 days (15 February to 31 March 2009), 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.

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2.

For the year of assessment 2009/10, he fails in his claim that his income attributable
to services rendered in China and other countries should be exempt from tax. It is
because his employment is a Hong Kong-sourced employment and the "day-in-dayout" 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 HK. In the case of Mr. Lee, he returned from
Canada with his whole family and all his other family members are residing in HK.
In practice, the IRD would also look into his social ties and economic ties to ascertain
his intention of staying in HK as short term/temporary or permanent. However, given
his work and family bases being primarily in HK, 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 HK for only 1 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 only, he will still be subject to tax in HK on
the whole of his employment income on the basis that he stayed and worked in HK
for more than 60 days in the year.
Nevertheless, in respect of the income derived from services rendered in China, Mr.
Lee may rely on S.8(1A)(c) to exclude from the charge that portion of income which
has been chargeable to China tax and tax has been paid in China. The China tax
referred hereto must be the one of substantially the same nature as salaries tax in
Hong Kong.
For the Canadian tax paid, since the directors office income would not be brought
into charge under HK salaries tax, no tax relief is available.

3.

Mrs. Lee's employments with the Hong Kong Government and Cathay Pacific
Airways were both Hong Kong employments. Hence the claim that she was liable to
Hong Kong salaries tax to the extent of income derived from services rendered in
Hong Kong fails. However, as an air-hostess, her salaries tax positions for the years
of assessment concerned under Section 8(2)(j) are:
Year of assessment
2009/10
2010/11

No. of days present in HK

40 (fully exempt)
70 (fully liable)
110

The presence during 1.4.2009 - 31.8.2009 is not to be taken into account for the
purpose of Section 8(2)(j) because during this period she did not derive her income as
an air-hostess.
For the period from 1.5.2009 to 31.8.2009, she derived income from the HK
Government. Since this is a HK sourced employment, all her income will be taxable
under S.8(1)(a).

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