Find Out All About Double Tax Relief Between Hong Kong and Mainland China
Hong Kong and Mainland China agree on a Comprehensive Arrangement to provide tax relief to income earners working across the border. There are many conditions income earners need to abide for double taxation relief in either Hong Kong or China.
One Employment, Two Tax Jurisdiction
A double tax treaty is a documentation that is agreed between two parties, in this case, two jurisdictions; Hong Kong and Mainland China. It is an arrangement made for the benefit and fluidity of cross border expertise, business operations as well as employment. When a Hong Kong resident works for a China permanent establishment, the income earned is taxable in both countries. But with a double taxation treaty (double tax treaties), such a person can apply for tax exemption or tax relief. As long as terms of taxation are followed accordingly, residing in Hong Kong, while working in China will be a breeze.
Permanent Establishment (PE)
There are three distinct features of a permanent establishment.
- As a place to conduct business activities.
- A permanent business place.
- The company operates a part of or the whole business in the site.
A Special Case of PE
There are exceptional cases for work carried out in a permanent establishment. If it takes more than six months to complete, profits obtained from such business is liable to tax in the opposite jurisdiction. If the work carried out is less than six months in a permanent establishment in the other jurisdiction, the profits obtained from such business arrangements are only taxed in their jurisdiction. The sectors involved in such a particular case are the service sector, including consultancy service and building, construction, assembly or installation sector. According to structure and time-frame, one may assume that a warehouse for storing and distributing goods is a permanent establishment. This is not the case. Facilities that are meant for preparatory or auxiliary purposes are not permanent establishments. A business agent that carries out business arrangements on behalf of the company from the other side is considered having a permanent establishment.
A Beneficial Owner
It is someone directly entitled to the benefits received such as a company, or a trust. If such a person conducts business through a PE on the other side, the rights and property paid are directly connected to the permanent establishment there. Hence, the investment income is treated as profits; thus, subject to tax under business profits. In this case, the tax rates in the Comprehensive Arrangement does not apply.
Types of Income
Incomes are taxed based on certain factors. Salaries that are taxable or exempt from tax under the Comprehensive Arrangements are earned from:
Immovable Property – This includes income earned from agriculture or forestry may be subjected to tax on the opposite side.
Shipping, Air & Land Transport – Businesses in this sector can get an exemption from tax on the opposite side, EXCEPT for businesses solely operating between the place in the opposite jurisdiction. Company in China can get an exemption from paying Enterprises Income Tax and Business Tax.
Investment – Investment income from either side of an investor is subject to tax by both parties. The Comprehensive Arrangement imposes a maximum limit tax to the investor from the opposite side.
Dividends – Dividends earned by a Hong Kong resident in China may be subject to tax in China and Hong Kong. The tax rate cannot be more than 5% of the gross dividend amount if a Hong Kong company owns more than 25% of the capital of the company in China and not more than 10% of the dividends.
Interests – Interests earned by a Hong Kong resident in China may be subject to tax in both China and Hong Kong. The tax cannot be more than 7% of the gross interest amount unless the recipient is any government bodies recognised by the authority. Then the tax would be exempt in China. Additionally, only interest obtains from businesses in Hong Kong need to pay tax.
Royalties – Royalties earned by a Hong Kong resident in China may be subject to tax in both China and Hong Kong. However, the tax cannot be more than 7% of the gross royalty amount unless the recipient is any government bodies recognised by the authority. Then the tax would be exempt in Mainland China. Plus, only royalties from businesses in Hong Kong need to pay tax.
Nevertheless, Mainland residents are required to comply with the tax rate stated within the Inland Revenue Ordinance. They are taxed at 17.5% of gross profits for corporations and 16% for persons. But under the Comprehensive Arrangement, Mainland residents only need to pay the prescribed tax rate under the Ordinance; 5.25% for corporations and 4.8% for individuals.
The following are two examples of reduced tax for your understanding.
A company in China receives $800,000.00 of royalties from Hong Kong in a year of assessment. The calculated profits are $600,000.00. The tax payable would be $105,000.00 [($600,000.00 X 17.5%)]. Under the Comprehensive Arrangement, the company is now required to pay tax of $56,000.00 [($800,000.00 X 7%)]. Hence, tax payable is now reduced to $56,000.00
A company in China receives $700,000.00 of royalties from Hong Kong in a year of assessment. The calculated profits are $300,000.00. The tax payable is $35,000.00 [($300,000.00 X 17.5)]. Under the Comprehensive Assesment, the company is required to pay tax of $49,000.00 [(700,000.00 X 7%)]. Thus, the tax payable remains at $35,000.00.
Business gains are split into three categories, namely;
- Gains from the alienation of property or transferring of property from one party to another,
- Gains from the movable property or the transport business and
- Gains from shares.
Alienation of Property – gains earned from this conduct on the non-resident side may be taxed on that side.
Movable property / From Transport Business – Gains of ships, aircraft or other transport vehicles from the alienation of shipping, air and other movable property should only be taxed on that side.
Shares – Gains from the alienation of shares in Hong Kong should be taxed in Hong Kong. The same applies to China.
Gains received from the alienation of other kinds of properties other than mentioned should be liable to tax on the side where the alienator is resident.
An individual may earn income via independent personal services including physicians, lawyers, engineers, architects, accountants, teachers, trainers, lecturers, and activities performed by an individual independently or dependent personal services meaning employed by an employer.
Paying Individual Income Tax
Generally, businesses in Hong Kong are taxable in Hong Kong, and similarly, Mainland Chinese enterprises will face tax in China. But when a person is a resident from either Hong Kong or China, and earns income from the other side, paying tax can be tricky. The following are among the crucial conditions income earners need to know when paying tax or applying for the tax relief:
- When a Hong Kong resident receives income from an office based in Mainland China for more than 183 days, he or she will need to pay Individual Income Tax in China. The same principle applies if vice versa.
- If a Mainland China resident earns from Hong Kong-based office not more than 183 days, they do not have to pay Salaries Tax. Furthermore, if they provide service in Hong Kong for less than 60 days, they are exempted from paying Salaries Tax.
- Mainland residents employed in Hong Kong can exempt from Hong Kong’s Salaries Tax, even if they have exceeded 183 days of the assessment year. This happens when Mainland employers pay their salary.
- If China employs a Hong Kong resident, their income is subject to Individual Income Tax in China. But, if they do not stay in China for 183 days consecutively and non-Mainland employers pay salaries, they are not liable to Individual Income Tax in China.
- If Hong Kong residents provide services in China & Hong Kong; stays in China less than 183 days, he will have to pay tax base on the time he spent in China.
- On the other hand, when Hong Kong resident employees posted for service in Mainland exceeds 183 days, they have to pay Individual Income Tax in Mainland. Their earnings are also subject to Salaries Tax in Hong Kong. However, they may apply for a tax credit or tax relief for the income that paid tax in Mainland. The authority may require proof of Mainland tax payment.
- If Hong Kong residents render service for more than 60 days, their Salaries Tax will be calculated on a day-to-day basis while in Hong Kong. For any earnings during employment by Mainland or overseas employers that are less than 60 days, it is recognised as a visit, thus, exempted from Hong Kong’s Salaries Tax.
183 Days of Presence
The rule of 183 days of presence is calculated based on physical appearance in either Hong Kong or Mainland China. The first day of arrival is counted as the first day. The 183 days means consecutive within the year of assessment. However, the assessment year for China begins from 1 January to 31 December of a specific year and the assessment year for Hong Kong begins 1 April of a year to 31 March the following year.
Other than mention above, other fellow income earners are taxed differently based on their occupation. The following are the specific different taxations:
Taxation of Director’s Remuneration
A Hong Kong resident director may receive director’s fees in Mainland China company would be subject to Individual Income Tax in China. The same applies if it is reversed.
Taxation of Artistes and Sportspeople
If a Hong Kong artist or sportsperson offer services in China, their income is liable to Individual Income Tax in China. As for Mainland artist or sportsperson receiving income in Hong Kong, they are subject to Profits Tax in Hong Kong.
Taxation of Pensions
Pensions acquired in Mainland is subject to tax in the Mainland only. The same applies to Hong Kong.
Taxation of Government Service
Any income earned from government service on one side should be taxed on one side only. However, if it crosses the border, this principle is not applicable.
Taxation of Students
Students earning any payment or incomes are not subject to tax.
Hong Kong individual resident – Someone who is 18 years or above; or 18 years and below if both parents are deceased; subject to tax in Hong Kong; and is a permanent or temporary resident. Permanent refers to an individual of Hong Kong origin. Temporary is individual staying in Hong Kong more than 180 days in the related year of assessment or more than 300 days in 2 consecutive taxable years.
Mainland Tax Authorities resident verification
A Hong Kong Resident can apply for tax relief directly in the Mainland by providing identification evidence such as identity card, re-entry permit for individuals and Certificate of Incorporation and Certified Extract of Information on the Business Register. For more information, visit www.ird.gov.hk.
Inland Revenue Department (IRD) resident verification
When a Mainland resident claims for tax relief in Hong Kong, the IRD will confirm their resident status through their copy of passport or copy of the certification of incorporation in Mainland China. If in doubt, the department will issue a letter (I.R.1338A0 to refer the applicant to Mainland Tax authority to issue their resident status. Once eligible for proof by Mainland tax authority, they will successfully obtain tax relief in Hong Kong.
Tax Benefits & Liability
Under the Comprehensive Arrangement, it covers Individual Income Tax, Foreign Investment Enterprise Income Tax, Foreign Enterprises Income Tax and Business Tax for China. In Hong Kong, the arrangement comprises Salaries Tax and tax charged under personal assessment.
Applying for Benefits under the Arrangement
Hong Kong residents may apply for benefits in writing no later than two years after the end of that taxable year. They must provide necessary details such as the income related to the tax relief, the tax paid in China and the amount of tax credit claimed. They must also submit a copy of the Mainland assessment notice, and other proof of the tax paid and has no further adjustment are required. If the income claimed for tax relief applied is subject to any amendments, the applicant must write to the authority to make any adjustments on the amount.
For any income earned that is taxable in Hong Hong, a particular portion of income can be exempt from tax in the Mainland as a tax credit. The amount of tax credit cannot be more than the amount of tax payable concerning the portion of the income.
In a loss situation, any tax paid in Mainland in a particular year carried forward to the next year of assessment is no longer subject to a tax credit.
In a Hong Kong enterprises splits its profits 50:50, the portion of profits subject to Mainland tax cannot claim for a tax credit in Hong Kong. Only if Mainland occupies more than half of the total surplus, the tax paid in the Mainland is qualified for a tax credit.