The taxation of director’s fee for a company incorporated offshore is a delicate issue, and it is vital to know under what jurisdiction directors are subject to tax.
In a recent published case (Case No. D21/13), the Hong Kong Board of Review had to decide whether fees earned by a director of a company incorporated offshore but listed in Hong Kong were subject to salaries tax in Hong Kong.
The case deals with an investment holding company, which has operating subsidiaries based in PRC, but has its primary stock exchange in Hong Kong. The Company was incorporated as an exempted company outside Hong Kong. It was listed in Hong Kong and registered as an overseas company. Its main business was located in Hong Kong whereas its head office was in mainland China.
The taxpayer held his office as an independent non-executive director in the Company and received a director’s fee of HK$120,000 for each of the two years of assessment. This fee was sourced outside Hong Kong and therefore should not be subject to salaries tax.
Both parties agreed that the source of director’s fees depends on the residence of the company. The main dispute was focused on the issue whether the Company was resident in Hong Kong.
The director supported that he was not subject to Hong Kong tax salaries tax for the following reasons:
- The registered office of the Company was located overseas;
- The head office was located in mainland China;
- The Company did not have any business in Hong Kong;
- Most of the Company’s directors reside in mainland China;
- The Company is operated in mainland China; and
- The board meetings are most often conducted by teleconference.
On the other hand, the Board’s argument that the Company is resident in Hong Kong is based on the following contentions:
- The place of company’s residence is determined based on where the real business is carried on;
- The Company was listed in Hong Kong and
- The Company employed staff in Hong Kong and had its bank accounts in Hong Kong.
Consequently, the Company was considered a resident in Hong Kong and the taxpayer was subject to Hong Kong salaries tax.
In Hong Kong, the source of director’s fees paid by a company has most often been determined according to the location of the company’s central management where the controls are exercised. In the past, the place where the board meetings of a company were held was a key factor in determining the location of the central management and control of the company. Nowadays, a board meeting is usually conducted through electronic modes from various locations, which makes it more difficult to determine the place of the board of meeting. Therefore, the location of board meeting has become less meaningful.
There is no one unique factor which can determine the residency of a company; it depends of a range of different various factors, such as:
- The company’s main business activities;
- The place of incorporation;
- The place of the bank account;
- The place of the staff;
- The location of the book keeping;
- The location of assets.
Finally, companies incorporated outside Hong Kong with shares listed in Hong Kong should be alert to the potential salaries tax consequences regarding director’s fees and the residence of the company.
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