Global mobility has allowed more and more companies to request their personnel to carry out work duties outside the companies’ home tax jurisdiction. In the past, most working arrangements abroad were rather permanent, nowadays jobs are also performed on an assignment/secondment basis or on a commuter basis or even as a combination of these latter two arrangements. These various working arrangements not only impacts and complicates the individual tax treatment of these employees/directors, but also has an impact on the corporate tax liabilities of the companies themselves, especially when these individuals operate at a managerial and/or executive level.
Individual Income Tax Issues
For example, an individual that is based in Hong Kong might perform duties for its Hong Kong’s subsidiary in Mainland China. The individual sometimes stays the whole week in Mainland China, some other weeks he might go up and down, and other weeks he only stays for 3 days in Mainland China. Issues that emerge in these situations are related to whether or not the individual will become a resident for Mainland China tax purposes, resulting into the reporting of worldwide-income taxes in Mainland China, and if not, whether the working arrangements causes double taxation on the individual’s income. The latter is often the case when foreign companies allow their Mainland China subsidiaries to withhold income tax on payments made to individuals that commute to Mainland China on a weekly basis.
Other individuals, for example, might be of an Australian nationality, are employed through a US Delaware company, are newly based in Hong Kong and provide services not only in Hong Kong, but also in Australia and in the US. Typically, these individuals want to benefit from exemption rules in Hong Kong, and at the same time not pay any taxes in the countries where they provide services.
It is recommended for global mobile individuals to closely monitor the number of days they spent in the various tax jurisdictions and record their travel schedules showing the date of arrival and departure from each jurisdiction and the purpose of their stay.
Corporate Income Tax Issues
Most domestic tax rules of jurisdictions and also most double taxation treaties state that the place of central management & control of a corporation is a relevant factor when determining the corporate income tax exposures of such corporation in a tax jurisdiction. For example, in case a director of a Hong Kong entity is based in the Netherlands and manages & controls the Hong Kong entity from out of the Netherlands, there is a large risk that the Hong Kong entity would be considered by the Dutch tax authorities as a Dutch tax resident for Dutch corporate income tax purposes and accordingly, its worldwide profits shall be subject to the Dutch corporate income tax under the local tax rules of the Netherlands. In addition, the Hong Kong tax authorities might want to enforce its Hong Kong profits tax rights on the Hong Kong entity, resulting into double taxation.
Moreover, a Hong Kong entity might for example have personnel based in Mainland China, allowing them to conclude sale and purchase transactions with their customers and suppliers. As a result, subject to conditions, these business functions may potentially result into so-called permanent establishment (“PE”). Such PE would be liable to corporate income tax in Mainland China and this shows that employees such Hong Kong entity can create unintended corporate income tax exposures for their Hong Kong employer in Mainland China.
In order to mitigate PE related corporate income tax exposures in a foreign tax jurisdiction, the directorship structure of a company as well as the roles & duties of personnel working for such company overseas must be well organised and executed.
When considering sending personnel abroad, do also take into consideration that such assignment may result into unintended foreign corporate and individual income tax exposures for the home-based corporation as the assigned employee respectively.If you have any questions regarding the above or other tax matters, please do not hesitate to contact us on +852 2804 0889 or by email firstname.lastname@example.org.
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