Favourable arrangement on PRC Individual income tax for Hong Kong and Macau tax residents in Mainland China

With the increasing number of Hong Kong and Macau residents exercising their employment duties in mainland China, double taxation due to the differing income sourcing rules being adopted by mainland China and Hong Kong /Macau has become an emerging issue, which has caught the attention of the State Administration of Taxation (SAT).

The State Administration of Taxation (SAT) issued Announcement [2012] No. 16 (Announcement 16) on 26 April 2012 to address the double taxation issues that are encountered by Hong Kong and Macau tax residents who exercise their employment duties in mainland China.  Announcement 16 is effective on 1 June 2012 and is applicable to employment income derived from this date.

According to Announcement 16, tax residents of Hong Kong and Macau would be eligible to apply for the favourable tax treatment if they are:

1.      Employed in Hong Kong or Macau and travel to mainland China to exercise  employment duties

2.      Employed in Hong Kong/Macau and mainland China concurrently and exercise employment duties in mainland China.

Under the above employment arrangement 1, the formula to determine PRC individual income tax ("IIT"):

IIT on total monthly income x (No. of days physically present in mainland China/total no. of days in the month)

Under the above employment arrangement 2, the formula to determine PRC individual income tax ("IIT"):

IIT on total monthly income x (No. of days physically present in mainland China/Total no. of days in the month) x (Income paid or borne by mainland China for the month/Total monthly income)

In the case that the Hong Kong and Macau residents frequently travels to / from mainland China within 1 day, it would be regarded as half day physically present.

Announcement 16 also governs the one-off income (e.g. bonus) received by Hong Kong and Macau residents in return for the performance period (which may cover several IIT assessment years). The Announcement addresses the corresponding IIT is based on one's physical presence in mainland China over the performance period and is calculated in accordance with the above formulas.

In addition, individuals who are eligible must also comply with the 'put-on-record' filing each time any of the favourable tax treatment is applied.  Whilst no further details was provided in Announcement 16 on the procedural rules with respect to the 'put-on-record' filing for adopting the favourable tax treatment, it is anticipated, when submitting the tax return, which adopts the favourable tax treatment, that the individual or the employer will need to enclose a declaration to state that the relevant conditions for applying the treatment have been met.