( a ) . In finding whether or non income from an employment is ‘arising in or derived from ‘ Hong Kong, one has to determine whether or non the employment itself is ‘sourced ‘ in Hong Kong. There is no regulation of pollex in this context, but the rules derived from Goepfert instance and DIPN No. 10 issued by IRD are by and large followed.
The undermentioned three factors are relevant in make up one’s minding the beginning of an employment:
The topographic point where the contract of employment is negotiated, entered into and enforceable ;
The topographic point of abode of the employer ;
The topographic point to where the employee ‘s wage is paid.
In instances where non all three factors are outside Hong Kong, the IRD would see the first two factors as more relevant than the 3rd particularly when the first two are abroad. However, if the employer is a Hong Kong occupant, the IRD is more inclined to see the employment as sourced in Hong Kong even though the contract is concluded outside Hong Kong and wage is paid outside Hong Kong.
The IRD militias the right to look beyond the three factors where in world the employment is a Hong Kong employment but use exists.
In the instance of Mr. Lee, the analysis of the instance harmonizing to the Goepfert ‘s rules is:
It does non advert that where Mr. Lee ‘s contracts of employment is negotiated, entered into and enforceable ;
The abode of Mr. Lee ‘s employer, ABC Ltd, is Hong Kong ;
The wage of Mr. Lee is paid in Hong Kong currency.
Mr. Lee has an employment which is sourced in Hong Kong, chiefly due to the Hong Kong abode of ABC Ltd.
As a gross revenues representative, Mr. Lee has his office in Hong Kong. Wages revenue enhancement should be charged on Mr. Lee in regard of his income arising in or derived from Hong Kong under s8 ( 1 ) ( a ) .
If it is treated as a individual employment contract, Mr. Lee ‘s basic salary plus committee of HK $ 1,000,000 will be apt to Hong Kong wages revenue enhancement under s8 ( 1 ) ( a ) .
Under s8 ( 1A ) ( B ) , the Hong Kong sourced employment income of Mr. Lee is exempted from wages revenue enhancement if he renders all his services outside Hong Kong during the twelvemonth of appraisal. He is chiefly responsible for marketing ABC Ltd ‘s concern in China but non all his services rendered outside Hong Kong, so that it can non be exempted. Furthermore, he is required to describe his work personally to his foreman at the Hong Kong office every Monday forenoon which is partially services rendered in Hong Kong. Therefore, s8 ( 1B ) ( 60-day freedom ) applies that Mr. Lee rendered services during visits to Hong Kong non transcending 60 yearss will be to the full exempted from wages revenue enhancement. There are 52 hebdomads in a twelvemonth. The numeration of Mr. Lee visit to Hong Kong is 104 yearss which exceed 60 yearss. Hence, s8 ( 1B ) does non use and it is still nonexempt.
Mr. Lee stayed in China over 183-day ( 365-104=261-day ) . The income derived from China is indictable to China Tax. To avoid dual revenue enhancement, s8 ( 1A ) ( degree Celsius ) exempts Hong Kong employment income derived by Mr. Lee from services rendered by him outside Hong Kong if he has paid revenue enhancement non-Hong Kong revenue enhancement for the income that the Commissioner accepts.
If it is treated as two separated employment contract, both contract 1 and 2 will be indictable under s8 ( 1 ) ( a ) . However, contract 2 can be excluded under s8 ( 1A ) ( B ) as his services rendered outside Hong Kong. Therefore, merely the income HK $ 500,000 of contract 1 will be indictable to wages revenue enhancement.
In finding whether CIR accepts two separate employment contract, it depends on whether the contract is signed for a occupation. As Mr. Lee signed both contracts is for a occupation which are detached half of income derived for each contract optionally, it may non be acceptable by the Commissioner.
( B ) . In set uping the wage bundle, the rules under s9 ( 1a ) ( four ) and s9 ( 2A ) should be observed. The undermentioned benefits should be structured in such a manner that they are provided by the employer straight. The contract of services should be signed between the employer and the service suppliers without any party playing as a surety to the contracts. The costs of supplying such benefits by the employer will be deducted from the wage consequently. Detailss of the structuring are shown below:
The level should either be rented by Mr. Lee ‘s employer which is ABC Ltd and provided rent free to Mr. Lee or Mr. Lee should subject his rental grosss to ABC Ltd for monthly reimbursement. By making so, the rental refund is non nonexempt and merely the rental value equal to 10 % of his wage is nonexempt.
The auto should be owned or hired by ABC Ltd and provided to Mr. Lee free of charge.
The history rendered by the public-service corporation company should be registered in the name of ABC Ltd that will pay the public-service corporation disbursals.
Recognition cards are sometimes provided by employers to employees under agreements where disbursals charged utilizing the card are billed to and paid for the employer. Where such a card is used for private intents by Mr. Lee, the Department considers that the benefit obtained is indictable to Salaries Tax. This is because in ordinary use the holder of the card ( i.e. Mr. Lee ) has a liability to pay for the goods or services received which is efficaciously discharged by ABC Ltd when the card is used.
( degree Celsius ) ( 1 ) . In order to obtain more expense tax write-off, taxpayers sometimes use a ‘service company ‘ in which the mechanism of s9A is described briefly below:
Integrating a ‘service company ‘ which is Lee Ltd ( owned by the taxpayer, Mr. Lee )
Using the ‘service company ‘ to subscribe a work contract with the employer. Mr. Lee uses Lee Ltd to subscribe a contract with ABC Ltd.
Service company provides the taxpayer ‘s personal service to the employer. Lee Ltd provides Mr. Lee ‘s services as a gross revenues representative to ABC Ltd.
Employer paying the ‘service company ‘ per contract. ABC Ltd pays Lee Ltd per contract.
‘Service company ‘ using the taxpayer, paying little sum of salary but with a host of employment benefits ( transporting revenue enhancement advantages ) . Lee Ltd employs Mr. Lee at a sensible wage to supply the agreed gross revenues services.
Net income of the ‘service company ‘ , Lee Ltd, ( fees received from ABC Ltd less salary and cost of supplying employment benefits to Mr. Lee ) is apt to net incomes revenue enhancement.
Taxpayer ‘s wages revenue enhancement liability is reduced due to the proviso of employment benefit.
( degree Celsius ) ( 2 ) . S9A is used by the IRD to dispute the usage of a service company to mask an employment relationship where the wage for services rendered by a individual under employment-like conditions is paid non as salary to that individual, but as a consultancy fee to an employee controlled service company. The IRD has issued DIPN 25 to explicate the application of s9A.
The range of the commissariats is narrowed by taking out instances that satisfies specified standards related to indexs of an employment. If all these indexs are non present in a service understanding, so that contract is non a contract of office or employment.
S9A shall non use where all the cardinal indexs of an employment relationship do non be:
Neither the understanding nor any project for services provides for any wage such as one-year leave, ill leave, pension entitlements or similar benefits ;
The RI ( i.e. Mr. Lee ) , whenever required to transport out any services personally for the RP ( i.e. employer ) , carries out the same or similar services for other individuals ;
The services provided by the RI are non capable to any control or supervising normally exercised by an employer by any individual other than “ the corporation or legal guardian ” to whom wage is paid.
Wage is non paid or credited sporadically and calculated on a footing normally used to cipher wage under a contract of employment ;
The RP has no employment type of right to disregard the RI.
The RI is non held out to the populace to be an officer or employee of the RP.
In this instance, tHHHHHJDKSJFLSEIUPOIIUKFFGFGhe employment relationship exists between Mr. Lee and ABC Ltd. Thus, s9A does non use.
Therefore, under s9A ( 4 ) , the CIR will see the application by mention to the trials established in revenue enhancement instance – control trial, integrating trial and economic trial ( DIPN 25 ) .
Control: Although Mr. Lee signed contract with Lee Ltd, he is commanded by ABC Ltd.
Integration: Mr. Lee is a gross revenues representative of ABC Ltd but non Lee Ltd.
Economic: Mr. Lee does non put on the line in ABC Ltd fundamentally. However, if ABC Ltd ‘s finance does non command good, Mr. Lee ‘s income may be influenced.
S9A ( 4 ) does non use. Hence, it is a contract of service and is besides an employment. The income received will be assessable under wages revenue enhancement but non net incomes revenue enhancement
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