Taxation Arrangement between the Mainland China and Hong Kong (to avoid double taxation)

V. Taxation Arrangement between the Mainland China and Hong Kong (to avoid double taxation)

Information in this part aims to highlight some tax issues affecting Hong Kong residents who are employed both in Hong Kong and in the Mainland.

Double Taxation Agreements entered into between Hong Kong and the Mainland China

On 11 February 1998, Hong Kong and the Mainland China signed the "Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income" (“Limited Arrangement” ) to allocate the right to tax between the two jurisdictions on a reasonable basis to avoid double taxation of income.

On 21 August 2006, both parties have signed a more comprehensive arrangement titled "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" (“Comprehensive Arrangement”) superseding the Limited Arrangement. 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.

Over the years, Hong Kong and the Mainland China have signed various protocols to the Comprehensive Arrangement in order to broaden the scope of tax benefits and give effect to international standards on tax avoidance. 

Tax liabilities in Hong Kong 

For Salaries Tax liability of a Hong Kong resident who provides services both in the Mainland and in Hong Kong, please refer to here.  

Tax liabilities in Mainland China 

If a Hong Kong resident under his/her employment renders services on the Mainland only (i.e. services are not rendered whilst in Hong Kong), all the income from that employment (including capacity as a director) will be regarded as attributable to services rendered on the Mainland. Such income is wholly chargeable to Mainland tax, irrespective of whether it is paid by a Mainland enterprise or an overseas employer (including a Hong Kong employer) UNLESS that person satisfies the all three conditions as follows:

1. the Hong Kong resident is present in the Mainland for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned;
2. the income is paid by, or on behalf of, an employer who is not a resident of the Mainland; and
3. the income is not borne by a permanent establishment or a fixed base, which the employer has in the Mainland.

If the remuneration is also subject to taxation in Hong Kong, a tax credit will be allowed for the tax paid in the Mainland under the Comprehensive Arrangement.

If a Hong Kong resident under an employment renders services both in the Mainland and in Hong Kong, his/her Mainland tax liabilities will be determined as follows:

1. Aggregated periods of stay in the Mainland not exceeding 183 days

   Income paid or borne by the Mainland entity will be chargeable to Mainland Individual Income Tax. Tax will be calculated on the chargeable income and then apportioned on time basis. Income paid by an overseas employer (including a Hong Kong employer) is not chargeable.

2. Aggregated periods of stay in the Mainland exceeding 183 days

   The total income received from the Mainland entity and the overseas employer (including Hong Kong employer) will be chargeable to Mainland Individual Income Tax. Tax will be calculated on the total income and then apportioned on time basis.

Days of “presence” is counted using the “days of physical presence” method. For example, the day when one is in one side, the day of arrival or departure will be counted as one day. For example, if a person arrives in the Mainland on 1 November and departs on 2 November, he is present in the Mainland for 2 days.