Section 9(1)(b) of the IRO defined income from employment to include the Rental Value of place of residence provided rent-free by the employer or its related company.
The question here is that, when a foreign employee is given a place of residence by the client during his / her business trip in Hong Kong, would the employee be subject to additional Hong Kong Salaries Tax liabilities due to the accommodation provided by the client assuming that the client is unrelated to the employer.
In the 2020 Annual Meeting between the IRD and HKICPA, the IRD has pointed out that a number of factors have to be considered in order to determine which company is the actual provider of the accommodation. It is difficult to draw a conclusion without having the case details.
In our opinion, one of the key factors would be whether the accommodation costs would be recharged by the third-party client to the employer of the foreign employee. In such case, the IRD may consider that the actual provider of the recommendation is the employer and thus the chance of charging Rental Value would be much higher.
Points to note
Housing benefits have always been an effective tax planning for the employers to save the Hong Kong Salaries Tax liabilities of their employees. Certainly directors of the corporation can also enjoy this benefit by residing in the director’s quarters provided by the corporation.
Tax saving opportunity arises as the amount of taxable income (commonly referred to as Rental Value) of the employee could be significantly less than the amount of deductible expenses incurred by the Company. Rental Value is generally calculated as 4/8/10% of the employment income which could be significantly less than the actual rental expenses paid on the place of residence.
Having said that, the IRD has been applying strict approach in examining whether the employers have applied proper internal control in housing benefit policy. Fixed amount of housing allowance without checking the actual rental expenses borne by the employee would not benefit from the Rental Value Policy.
Employers are suggested to prepare a proper written housing benefit policy, proper rental payment claim form for circulation to their staff. The HR Department should also collate the tenancy agreements and rental receipts from their employees regularly.
Last but not least, many directors and shareholders who lived in the place of residence provided by their own company are unaware of their personal Hong Kong Salaries Tax liabilities. As the IRD is actively carrying out field audit and investigation on private companies and individuals in year 2021, taxpayers should not take the chance of tax evasion and should adopt remedial action immediately if necessary.
