To ensure effective communication on taxation matters, the Inland Revenue Department (IRD) holds annual meetings with the Hong Kong Institute of Certified Public Accountants (the Institute). The 2024 meeting addressed key topics affecting global mobility tax, highlighting evolving challenges and opportunities. In this newsletter, we discuss the following topics and share our insights:
Claw-back of share awards
In Hong Kong, share awards are subject to tax upon vesting i.e. the individual has obtained legal ownership and economic benefits of the shares free from any conditions. However, it is not uncommon that companies may claw back the vested shares under exceptional circumstances such as material restatement of the company’s financials or the employee ceases employment and joins a competitor.
The IRD responded that when the clawback condition occurred and on the assumption that tax avoidance scheme was not involved, it could be accepted that the share benefits previously chargeable were subject to a contingency of the occurrence of the clawback condition which in turn had a bearing upon the actual amount of income which should be brought to charge. Accordingly, the employer could file a revised employer’s return to rectify the past reporting with a statement explaining the situation giving rise to the correction. The employee could request to revise the corresponding assessment via late objection route. Ideally, the objection should be filed within a reasonable timeframe, say within one month of the clawback incident.
Dividends or bonus shares received by the taxpayer, which were not subject to repayment to the employer upon clawback, would still be taxable depending on the facts and circumstances.
Time apportionment claim
In the Board of Review case D18/22 regarding a dual-employment arrangement, the Board proposed that the income attributable to Hong Kong services under section 8(1A)(a) of the Inland Revenue Ordinance for a taxpayer with separate and distinct non-Hong Kong and Hong Kong employment contracts should not follow the traditional day-in-day-out (DIDO) formula. The Board found significant overlap between the taxpayer’s two employment contracts, leading to adjustments in the DIDO method to reflect the taxpayer’s contributions to the non-Hong Kong employment while in Hong Kong.
The IRD clarified that while section 8(1A)(a) extends the basic charge to income derived from services rendered in Hong Kong for non-Hong Kong employment, there is no specific provision for apportioning this income. The IRD typically uses time apportionment to compute taxable income, ensuring fairness based on each case’s facts.
Notwithstanding the above, the IRD will generally continue to adopt the DIDO method unless justified otherwise by the case’s facts. They also accept a refined DIDO approach based on recent Court of Appeal decisions e.g. Commissioner of Inland Revenue v Lo Wa Ming Patrick [2022] 2 HKLRD 1162, which includes adjustments for leave and rest days.
In cases with similar fact patterns, the IRD will examine the employment contracts to determine if a strong case for single employment exists, which may eliminate the need for adjustments. If dual employment is claimed, the IRD will assess whether there are truly two separate employments and review the terms to ascertain the appropriate apportionment basis. With an increasing trend of dual employment among cross-border travelers, further guidance from the IRD would be beneficial for managing permanent establishment risks and exemption claims. Ultimately, the apportionment basis will depend on the specific facts and circumstances of each case.
Definition of ordinary resident in Hong Kong
Determining whether an individual is a Hong Kong resident for foreign tax credit (FTC) claims and certificate of resident (CoR) applications involves two criteria defined in the Comprehensive Double Taxation Agreements (CDTAs): (a) ordinarily residing in Hong Kong or (b) meeting the 180/300-day physical presence test[1]. The IRD has indicated that all relevant facts, including physical presence, will be considered in assessing ordinary residence.
However, some tax practitioners have reported that assessors often prioritize the number of days spent in Hong Kong over other factors, such as family ties and substantial personal, economic, and social connections. Consequently, individuals who do not meet the 180/300-day requirement may be denied a CoR or FTC claims, despite evidence supporting their ordinary residence.
The IRD maintains that both the ordinary residence test and the 180/300-day test are alternative methods for determining residency. An individual may still be considered a Hong Kong resident if they meet the ordinary residence criteria, even if they do not satisfy the physical presence test. The IRD emphasizes that determining residency is a matter of fact and degree, requiring a thorough examination of all relevant factors, including family location and social ties.
Ultimately, the IRD asserts that there has been no change in practice regarding residency determination. Assessors must conduct an objective analysis of each case’s facts to ensure fair treatment, as failing to do so could prevent taxpayers from accessing benefits under Hong Kong’s CDTAs and undermine efforts to encourage residents to explore opportunities in the Greater Bay Area.
[1] The individual resides in Hong Kong for more than 180 days during the year of assessment concerned or for more than 300 days in 2 consecutive years of assessment, one of which is the year of assessment concerned.
Tax reporting requirements for non-employees
The IRD clarified the filing requirements for payments to non-employees in Hong Kong. Form IR56M is for reporting payments to local non-employees, while Form IR623P is for non-resident individuals providing services in Hong Kong, excluding entertainers and sportsmen. If a non-resident is employed, the employer must use Form IR56B/E/F/G instead.
The terms “local person” and “non-resident” are not explicitly defined in the IRO; rather, an individual’s status is determined by whether they have a home or habitual abode in Hong Kong. Holding a Hong Kong Identity Card (HKID) does not definitively establish local status.
Clarification was provided on whether Form IR56M is needed when a non-Hong Kong company pays a local person who is not required to render services in Hong Kong. It was confirmed that Form IR56M is not required if the local person performs no services in Hong Kong.
Concerns were raised about the difficulty in determining a recipient’s place of abode, which affects the applicable form to be used. It was suggested that checking for an HKID could simplify this process, but it was noted that this alone does not conclusively determine local status. Therefore, payors must carefully assess residency status to file the correct form.
Navigating the complexities of tax regulations in Global Mobility can be quite challenging. Key issues such as the claw-back of share awards, time apportionment claims under dual employments, residency definitions in Hong Kong, and payments made to non-employees underscore the intricacies involved. Clients must recognize that inadequate planning or falling into common pitfalls can lead to significant increases in tax liabilities and exposure to penalties.
Given these complexities, it is essential for both individuals and companies to seek professional advice to ensure compliance and optimize their tax positions. Expert guidance can help mitigate risks and effectively navigate the evolving landscape of tax obligations.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
James Clemence
Asia Pacific CEO
Bruce Lee
Partner, Hong Kong SAR Territory Leader
Adam Chiu
Partner
Steven Lim
Partner
Simply follow our Vialto Alerts page on LinkedIn and posts will be displayed on your feed. To ensure you don’t miss one, once you’re on our LinkedIn page, click on the bell icon under the banner image to manage your notifications.
Further information on Vialto Partners can be found here: www.vialtopartners.com
Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.
© 2025 Vialto Partners. All rights reserved.