In our September 2022 Issue of Newsletter, we will discuss Hong Kong Tax Update on COVID-19 and two recent prosecuted tax evasion cases published by the Inland Revenue Department (“IRD”).
1. Certificate of Resident Status (CoR) for Individuals and Special Arrangement under COVID-19
Individuals who are temporarily living abroad during COVID-19 is not likely to lose its Hong Kong Tax Residency Status
In general, an individual is regarded as a Hong Kong Tax Resident and eligible for the Hong Kong CoR status if he / she:
- is ordinarily resided in Hong Kong (“Ordinary Resident Test”); OR
- stayed in Hong Kong for more than 180 days during the relevant year of assessment or for more than 300 days in two consecutive years of assessment (one of which was the relevant year of assessment) (“Number of Day Test”).
In practice, the IRD takes a strict approach in applying the “Ordinary Resident Test”. As such, it is important to fulfill the “Number of Day Test”.
However, with the outbreak of Covid-19, individuals who are used to stay most of the time in Hong Kong may not fulfill the Number of Day Requirement (i.e. 180 / 300-day rule) due to travel restrictions. In this regard, the OECD has issued updated guidance regarding the impacts of the COVID-19 on tax treaties application in January 2021. The IRD has already expressed its agreement to follow OECD Guidance in principle.
Applying the OECD Guidance, provided that the Hong Kong individuals stayed most of their days in Hong Kong before the pandemic, the fact that they could not fulfill the 180/300-day rule should not by itself impact his status as a resident of Hong Kong. The IRD may also consider the duration and reasons of absence from Hong Kong, the location of family members as well as social and economic ties in determining whether a CoR could be granted to the individual for Year 2020 and possibly Years 2021 and 2022.
Points to note
Many foreigners consider that when they qualify for the above requirements of Hong Kong Tax Residents, they can escape from their foreign tax liabilities. However, in reality it is not the case and more has to be done.
An individual can be a tax resident of more than one tax jurisdictions at the same time. Under the Double Taxation Agreement, when an individual qualifies as tax residents in both tax jurisdictions, Tie-Breaker rule will be applied to determine the “real” tax residency of the individual. Below is the general guidance of Tie-Breaker Rule.
Physical presence number of days is only one of the factors in determining the Tax Residency.
Other relevant factors and circumstances to be considered include, but not limited to, the jurisdiction where:
- permanent home available;
- personal and economic relations closer (the so-called Center of Vital Interest);
- habitually abode; and