Tax rules on Hong Kong and non-Hong Kong source income

Q1. We wish to seek for your advice for the following:
1) If the holding company (which is located outside Hong Kong) charges the Hong Kong Subsidiaries (SUB-A & SUB-B) a management fee, are there any withholding tax & others tax incurred / to pay in Hong Kong by the holding company or SUB-B/SUB-A?
2) As the operation of SUB-A & SUB-B’s were carried out outside Hong Kong, will any Hong Kong profit tax liabilities incur ?

1) SUB-B is providing agency services outside Hong Kong

1.1. Hong Kong tax rules do not impose withholding tax on payments to non-residents in connection with service charge. The management fee is only deductible if the provision of management services is incurred for the production of Hong Kong source income. See section 16 of the Inland Revenue Ordinance.  Where the activities from which the profits arise take place outside Hong Kong, the profits are sourced from outside Hong Kong.

1.2. However, if the management services are provided by employees in Hong Kong, then the recipient of the management fee will be liable to HK profits tax.  Whether the provision of management services attracts Hong Kong tax liabilities is independent of the fact that Sub-B is earning non-Hong Kong source profits. The key point is that one looks to see what the taxpayer has done to earn the profit in question and where he has done it. See Commissioner of Inland Revenue v. Hang Seng Bank Ltd. [1991]

1.3. You should note whether the management is an arm's length amount. The management fee can be challenged by the Inland Revenue Department if the amount is not comparable with the management fee that would have been charged between independent parties under Part 8AA of the IRO (Transfer pricing rules), which came into operation as from 1st April 2018.

2) SUB-A is selling properties located in China

If Sub-A's activities for the sale of PRC property are performed outside Hong Kong, SUB-A is earning non-HK source profits and not liable to HK tax. The management fee is deductible from or charged to taxable income or profits, without any HK tax implications. Note that if the management services are provided in HK, the recipient who delivers the services is liable to Hong Kong tax.

Q2. The director of a Hong Kong company works in the mainland of China for almost 365 days in a year. He gets paid in Hong Kong. Since he is performing duty outside Hong Kong, will he be exempted from salaries tax in Hong Kong?

In general, the HK tax rule looks at whether the employee has entered into employment contract with the HK Company. If yes, the employee is liable to HK salaries tax irrespective of where he works and where he receives the payment. The employee could be exempted from salaries tax under the following two situations: (i) he has suffered and paid income tax outside Hong Kong. Section 8(1A) (c) of the Inland Revenue Ordinance (the IRO) refers; and (ii) he works outside Hong Kong for the whole of the fiscal year, except that he visits Hong Kong for less than 60 days in the tax year. See section 8(1A) (b) of the IRO.

The director is a holder of office. The Hong Kong tax rule makes a difference between director’s fee and salary income. The director is liable to Hong Kong salaries tax even if he stays outside Hong Kong for the whole of the fiscal year. This is so irrespective of where he works. Note that the Arrangement for the Avoidance of Double Taxation between Hong Kong and China provides that the director will be exempted from PRC income tax if he is a Hong Kong resident and he stays in China for less than 183 days in the tax year.

Q3. Given the same set of facts as above, what if the director holds the office with a BVI
company that is incorporated outside Hong Kong?

In this case, the director of the BVI Company will not be liable to Hong Kong salaries tax, with the exception that he performs his duty in Hong Kong for more than 60 days in the fiscal year. See section 8(1A)(a) of the Hong Kong Inland Revenue Ordinance. Note that where the director works in China for most part of the year, he is liable to PRC individual income tax.