FAQ : Double Taxation Relief

Foreword – "the Comprehensive Arrangement" has become effective The Mainland and Hong Kong signed the "Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income"("the Comprehensive Arrangement") on 21 August 2006. The Comprehensive Arrangement has become effective on 8 December 2006. The part relating to Hong Kong tax in the Comprehensive Arrangement applies to income derived in any year of assessment commencing on or after 1 April 2007, while the part relating to Mainland tax applies to income derived in any taxable year commencing on or after 1 January 2007.
1.	What are the differences between the Comprehensive Arrangement and the one signed between the two parties in 1998 ("the Limited Arrangement")?[Answer]
2.	Will the Limited Arrangement continue to have effect after the Comprehensive Arrangement has become effective?[Answer]
3.	According to the Comprehensive Arrangement, under what circumstances will a Hong Kong resident working on the Mainland be exempted from paying the Mainland tax or be allowed a tax credit against the tax paid?[Answer]
4.	How is the number of days of "presence" on the Mainland or in Hong Kong counted?[Answer]
5.	What is meant by a Hong Kong resident individual under the Comprehensive Arrangement?[Answer]
6.	Is the holder of a Hong Kong Permanent Identity Card necessarily a Hong Kong resident?[Answer]
7.	What is meant by "ordinarily resides in Hong Kong"?[Answer]
8.	On the definition of Hong Kong resident individual, how is the number of days in the condition "stays for more than 180/300 days" calculated, i.e. continuous or in the aggregate?[Answer]
9.	In comparison with the Limited Arrangement, what are the differences in respect of the definition of Hong Kong resident individual?[Answer]
10.	If an individual is at the same time both a resident of Hong Kong and of the Mainland under the definition set out in the Comprehensive Arrangement, how will the problem of dual residence status be resolved?[Answer]
11.	What are the differences in the scope of "employment income" according to the Comprehensive Arrangement?[Answer]
12.	Which 12 months does the phrase "any 12-month period commencing or ending in the taxable period concerned" refer to?[Answer]
13.	Please illustrate with an example the phrase "present in the other side for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned".[Answer]
14.	In calculating tax liabilities, how will the number of days a Hong Kong resident was present on the Mainland be counted?[Answer]
15.	If a Mainland resident derives income from employment in Hong Kong, but he does not satisfy all the 3 conditions for exemption and his presence (e.g. his remuneration is paid by a Hong Kong employer) and he visits Hong Kong for not more than 60 days during the year of assessment, would he be exempt from Hong Kong salaries tax?[Answer]
16.	Are director fees treated in the same way as income from employment?[Answer]
17.	How does a Hong Kong resident apply for treatment under the Comprehensive Arrangement?[Answer]
18.	Why the IRD requests the applicant to produce a referral letter from the Mainland tax authority before he can apply for a certificate of resident status?[Answer]
19.	For a partnership, how can it be regarded as "constituted under the laws of Hong Kong"?[Answer]
20.	If a taxpayer still has any questions on the Comprehensive Arrangement, any means for enquires?[Answer]

Questions and Answers

1.

Q:

What are the differences between the Comprehensive Arrangement and the one signed between the two parties in 1998 ("the Limited Arrangement")?

	A:	The Limited Arrangement contains only 7 articles, covering income in respect of permanent establishment and its profits, business income derived from shipping, air and land transport, as well as income from personal services. The Comprehensive Arrangement has broadened the coverage of income by adding income from immovable property, associated enterprises, dividends, interest, royalties, capital gains, pensions and government services, etc. At the same time, provisions commonly found in comprehensive avoidance of double taxation agreement have been included, such as articles on non-discrimination and exchange of information.

2.

Q:

Will the Limited Arrangement continue to have effect after the Comprehensive Arrangement has become effective?

	A:	The Limited Arrangement still applies in Hong Kong to income derived in any year of assessment commencing on or after 1 April 1998 up to the year of assessment commencing on 1 April 2006; whereas on the Mainland to income derived during the period 1 July 1998 to 31 December 2006.

3.

Q:

According to the Comprehensive Arrangement, under what circumstances will a Hong Kong resident working on the Mainland be exempted from paying the Mainland tax or be allowed a tax credit against the tax paid?

	A:	Under the Comprehensive Arrangement, the remuneration that a Hong Kong resident working on the Mainland received may be exempted from taxation on the Mainland if he satisfies all of the following 3 conditions. These 3 conditions are:
		-	He was present on the Mainland for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable year concerned;
		-	The remuneration is not paid by his Mainland employer or its representative;
		-	The remuneration is not borne by a permanent establishment set up by the employer on the Mainland.
		If any one of the above conditions is not satisfied, the remuneration will be subject to taxation on the Mainland. If the remuneration is also subject to taxation in Hong Kong, a tax credit will be allowed for the tax paid on the Mainland under the Comprehensive Arrangement, or the income on which tax has been levied on the Mainland will be exempted from taxation in accordance with s.8(1A)(c) of the Inland Revenue Ordinance. But please note that the directors' fees and other similar sums derived by a Hong Kong resident in his capacity as a member of the board of directors of a Mainland company are subject to taxation on the Mainland. Such directors' fees, etc. are not subject to taxation in Hong Kong.

4.

Q:

How is the number of days of "presence" on the Mainland or in Hong Kong counted?

	A:	According to international practice, the day when one is on the Mainland (or in Hong Kong as appropriate), and the day of arrival or departure, irrespective of the time and the purpose of the stay, will be counted as one day.

5.

Q:

What is meant by a Hong Kong resident individual under the Comprehensive Arrangement?

	A:	Article 4(1)(2) of the Comprehensive Arrangement states that a Hong Kong resident individual means an individual who ordinarily resides in Hong Kong, or an individual who stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment (one of which is the relevant year of assessment).

6.

Q:

Is the holder of a Hong Kong Permanent Identity Card necessarily a Hong Kong resident?

	A:	Not necessarily. One has to consider whether the individual "ordinarily resides in Hong Kong".

7.

Q:

What is meant by "ordinarily resides in Hong Kong"?

	A:	Generally, an individual "ordinarily resides" in Hong Kong if he has a permanent home in Hong Kong where he or his family lives. Other factors taken into consideration include: the number of days he stays in Hong Kong, whether he has a permanent residence in Hong Kong, whether he has property overseas for residence and whether he resides mainly in Hong Kong or overseas.

8.

Q:

On the definition of Hong Kong resident individual, how is the number of days in the condition "stays for more than 180/300 days" calculated, i.e. continuous or in the aggregate?

	A:	Calculations based on the continuous or the aggregate are valid. A person who stays in Hong Kong for a period or periods amounting to more than 180 days during the relevant year of assessment, or for a period or periods amounting to more than 300 days in two consecutive years of assessment (one of which is the year of claim), will be regarded as a Hong Kong resident.

9.

Q:

In comparison with the Limited Arrangement, what are the differences in respect of the definition of Hong Kong resident individual?

	A:	Under the Comprehensive Arrangement, the requirement of having tax liabilities in Hong Kong and the attainment of the age of 18 have been abolished. In this way, more people who reside or stay in Hong Kong shall be regarded as Hong Kong resident individuals and enjoy the tax incentives under the Comprehensive Arrangement.

10.

Q:

If an individual is at the same time both a resident of Hong Kong and of the Mainland under the definition set out in the Comprehensive Arrangement, how will the problem of dual residence status be resolved?

	A:	In order to solve the problem of an individual being a resident of both sides at the same time, the Comprehensive Arrangement has adopted the criteria set out in the model text of OECD. The person will be ascribed as a resident of one side in accordance with such factors as: which side he has a permanent home, which side he has a more close economic relationship, which side he customarily resides in, and by mutual agreement of the competent authorities of the two sides.

11.

Q:

What are the differences in the scope of "employment income" according to the Comprehensive Arrangement?

	A:	The requirements on taxation of "employment income" are stipulated in Article 14 of the Comprehensive Arrangement. The differences in the provisions between Article 14 of the Comprehensive Arrangement and Clause 2, Article 3 of the Limited Arrangement are as follows- The exemption provision for "present not exceeding 183 days" is changed from "in the calendar year concerned" as stated in the Limited Arrangement to "any 12-month period commencing or ending in the taxable period concerned" as adopted in the OECD model text. The taxable period of the Mainland is counted on the basis of a calendar year, i.e. from 1 January to 31 December, whereas the taxable period of Hong Kong (i.e. year of assessment) refers to a period commencing on 1 April and ending on 31 March of the next year. In the Comprehensive Arrangement, the term "fixed base" as mentioned under the third tax exemption condition in Clause 2(3), Article 3 of the Limited Arrangement has been removed. Since the "permanent establishment" has provided for such meaning, no further incorporation is required.

12.

Q:

Which 12 months does the phrase "any 12-month period commencing or ending in the taxable period concerned" refer to?

	A:	The phrase "any 12-month period commencing or ending in the taxable period concerned" connotes two concepts, namely, that the number of days of presence may straddle over 2 years and that a floating calculation may be adopted. In fact, the 12 months in question may commence or end on any day in the taxable year concerned. Take Hong Kong as an example: the year of assessment 2007/08 refers to the period from 1 April 2007 to 31 March 2008. Any 12-month period commencing or ending in the year of assessment 2007/08 means any period lasting for 12 months provided that the commencement or closing day of such period falls within the period between 1 April 2007 and 31 March 2008. In other words, such period may start as early as 2 April 2006 (the closing day will be 1 April 2007) or it may start on 31 March 2008 at the latest (the closing day will be 30 March 2009). As an interim arrangement, both Sides agreed not to count the days before the Comprehensive Arrangement becomes applicable. In other words, Hong Kong would only consider whether the Mainland resident concerned was present in Hong Kong for over 183 days in any 12-month period from 1 April 2007 to 30 March 2009; the Mainland would consider whether the Hong Kong resident concerned was present on the Mainland for over 183 days in any 12-month period from 1 January 2007 to 30 December 2008.

13.

Q:

Please illustrate with an example the phrase "present in the other side for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable period concerned".

	A:	Take the case of the year of assessment 2008/09 in Hong Kong as an example: the period that counts is from 2 April 2007 to 30 March 2010. Only if the Mainland resident concerned is present in Hong Kong for not more than 183 days in any 12 months within this period of time will he satisfy the condition of "present not exceeding 183 days" for tax exemption. Take the case of the taxable year of 2008 on the Mainland as an example: the period that counts is from 2 January 2007 to 30 December 2009. Only if the Hong Kong resident concerned is present on the Mainland for not more than 183 days in any 12 months within this period of time will he satisfy the condition of "present not exceeding 183 days" for tax exemption.

14.

Q:

In calculating tax liabilities, how will the number of days a Hong Kong resident was present on the Mainland be counted?

	A:	For the purpose of tax computation, the number of days of presence for each period will be counted under the rule of the "days of presence minus one". For example, if the date of arrival is 2 January and the date of departure is 5 January, the number of days to be counted should be three instead of four, which is the number of days of presence. Then the number for each period will be added up to arrive at the total number of days of presence for the relevant year of assessment. Since a lot of people work across the border, the State Administration of Taxation and the Hong Kong Inland Revenue Department have reached a consensus that if a taxpayer provides services on both sides on the same day, it will be counted as present on the Mainland for half a day. If he travels between the Mainland and Hong Kong on a particular day and only provides services on the Mainland, it will be counted as present on the Mainland for one day.

15.

Q:

If a Mainland resident derives income from employment in Hong Kong, but he does not satisfy all the 3 conditions for exemption and his presence (e.g. his remuneration is paid by a Hong Kong employer) and he visits Hong Kong for not more than 60 days during the year of assessment, would he be exempt from Hong Kong salaries tax?

	A:	Hong Kong adopts the principle of "preferential treatment". That is where the Comprehensive Arrangement and the Inland Revenue Ordinance contain different provisions relating to the same matter, preference will be given to those provisions which are most beneficial to the taxpayers. In the above situation, although the Mainland resident does not satisfy the exemption conditions under the Comprehensive Arrangement, he will still be exempt from tax under the Inland Revenue Ordinance for visiting Hong Kong for not more than 60 days during the year of assessment.

16.

Q:

Are director fees treated in the same way as income from employment?

	A:	Directors' fees and income from employment are not treated the same. Article 15 provides that directors' fees and other similar payments derived by a resident of One Side in his capacity as a member of the board of directors of a company which is a resident of the Other Side may be taxed in that Other Side. In other words, directors' fees received by a resident of either Side in his capacity as a director of a company may be taxed in the Side of which the company is a resident, irrespective of the period of his stay in either Side or the place where the services are actually rendered. Therefore, directors' fees derived by a Hong Kong resident in his capacity as a director of a Mainland company will all be subject to the individual income tax in the Mainland. Likewise, directors' fees derived by a Mainland resident in his capacity as a director of a Hong Kong company will all be subject to salaries tax in Hong Kong.

17.

Q:

How does a Hong Kong resident apply for treatment under the Comprehensive Arrangement?

	A:	A Hong Kong resident can apply for relief under the Comprehensive Arrangement directly on the Mainland by producing documentary evidence such as Identity Card, Re-entry Permit, Certificate of Incorporation, Certified Extract of Information on the Business Register etc. Where the Mainland tax authorities cannot ascertain that the person is a resident of Hong Kong from available information, the Mainland tax authorities (at the provincial (city) level or higher) will issue a referral letter entitled 《關 於 請 香 港 特 別 行 政 區 稅 務 主 管 當局 出 具 居 民 証 明 的 函》to the person concerned for applying a "Certificate of Hong Kong Resident Status" from the Hong Kong Inland Revenue Department ("IRD").

18.

Q:

Why the IRD requests the applicant to produce a referral letter from the Mainland tax authority before he can apply for a certificate of resident status?

	A:	Under normal circumstances, the Mainland would accept the Identity Card, Re-entry Permit, Certificate of Incorporation, and certified extract of the Business Registration particulars issued by Hong Kong as evidence in determining the resident status of a Hong Kong resident. Only when the Mainland tax authority is not able to ascertain the resident status would it issue a referral letter to the applicant for obtaining a certificate of resident status from the IRD. This referral arrangement improves work efficiency and ensures that a taxpayer makes an application only where there is a real need for it.

19.

Q:

For a partnership, how can it be regarded as "constituted under the laws of Hong Kong"?

	A:	If the partnership agreement is signed in Hong Kong or the verbal agreement is concluded in Hong Kong, the partnership can be regarded as "constituted under the laws of Hong Kong".

20.

Q:

If a taxpayer still has any questions on the Comprehensive Arrangement, any means for enquires?

	A:	The taxpayer can always refer to the full text of the Comprehensive Arrangement and the Departmental Interpretation and Practice Note on the Comprehensive Arrangement already uploaded on IRD's homepage. If he still has any questions, he may call our hotline 187 8088.