Tax Relief Conditions

The IRD has expressed its view on the approach in relation to the tax issues arising from the COVID-19 Pandemic, which generally is in line with the Updated COVID-19 Tax Treaty Guidance and the COVID-19 Transfer Pricing Guidance released by the OECD.

TAX ISSUES	VIEWS OF THE HONG KONG INLAND REVENUE DEPARTMENT (“THE IRD”)
Tax Residence (Corporate / Individual)	Temporary stay due to restrictions on international travel will not itself alter the tax residence status of a corporation or an individual, i.e., corporation or individual would not be regarded as the tax resident of the host jurisdiction merely because of the additional days spent (by the staff of the corporation / individual) under COVID-19 situation. Tie-breaker rules under relevant article of Double Tax Agreements would be held, i.e., all relevant facts and circumstances will be taken into account.
Permanent Establishment (PE) Of Non-Resident	[Fixed place PE and Services PE] Exceptional and temporary change of the location where employees exercise their employment shall not create PE in Hong Kong for non-Hong Kong enterprises. [Agency PE] Temporary conclusion of contracts in the home of employees or agents because of the pandemic should not constitute PE for non-Hong Kong enterprises.
Income From Employment	The IRD does not intend to exclude the days of physical presence in Hong Kong for the purposes of counting days under 60-day rule. Additional days spent by foreign employees in Hong Kong under COVID-19 circumstances may not be counted for the purposes of the 183-day test under the application of DTA to give higher protection on potential individual tax liability.
Transfer Pricing	Flexible approach would be accepted for performing benchmarking study for controlled transactions; two examples given by the IRD are as follows: May be appropriate to have separate testing periods for the duration of the pandemic or to include loss-making comparable when performing a comparability analysis. A limited-risk entity could be accepted to have incurred losses if the losses are found to be incurred at arm’s length.

Please be reminded that the above captures general views of the IRD. The IRD will look into the facts of specific cases to determine if the above approaches apply.

See full version of the IRD’s announcement at: https://www.ird.gov.hk/eng/tax/tia_covid19.htm#companies

POINTS TO NOTE
It is welcomed that the IRD has explicitly expressed its view on following the overall approach of the guidance issued by the OECD to ease potential problems of corporations and individuals under COVID-19 situation. In general, the approaches adopted by the IRD could provide more tax relief to underlying parties merely because of additional days of presence in Hong Kong. However, given that taxpayers have to fulfill certain conditions before applying the above measures, we encourage taxpayers to obtain advices from tax professionals for further communications with the IRD on specific case background to ensure the application of the said approaches.
On the other hand, the IRD is yet to express its view on whether relief would be implemented in respect of application of tax residency certificate in Hong Kong. It is expected that the mode of operation of companies / individuals would have been affected due to restrictions of international travel. Whether the IRD provides relief on examining the location of activities carried on by the applicants would be a practical issue which the applicants should take into account when they submit the application. We may have to wait for further guidance of the IRD in this essential area of tax relief.
See our previous Newsletter on Singapore’s guidance to “relieve” the conditions for application of Tax Resident:
https://henrykwongtax.com/newsletter/international-tax/determination-of-pe-in-singapore-during-covid-19/