When working from home means working abroad (HK)

Tax and pensions implications of working temporarily abroad

Salaries tax in Hong Kong

The taxation of employment income for employees temporarily working abroad will depend on whether their employment is considered “Hong Kong employment” or “non-Hong Kong employment”.   

In determining this question, the Inland Revenue Department will consider various factors, such as where the employment contract is negotiated, concluded and enforceable; where the central management and control of the employer is; and where the employee’s remuneration is paid. If “Hong Kong” is the answer to one or more of these questions, the employment is highly likely to be Hong Kong employment.

Employees with Hong Kong employment will generally remain subject to salaries tax in Hong Kong if they temporarily work outside of Hong Kong for part of the tax year.  However, if they work outside of Hong Kong for the full tax year, then no salaries tax in Hong Kong will be levied.

Employees with non-Hong Kong employment who temporarily work outside of Hong Kong will not be subject to salaries tax in Hong Kong for that period (whereas they generally would be for the days they carry out work in Hong Kong).

It should be remembered that liability for salaries tax in Hong Kong falls on the employee, rather than the employer.

Income tax may be payable in host country if certain conditions are satisfied

The starting point is that the host country may have taxing rights over the employment income that the employee earns while physically working in that country.  However, if there is a double taxation treaty (DTT) between Hong Kong and the host country, the employee will be subject to income tax of the host country only if certain conditions are satisfied.

Hong Kong has a DTT with 65 countries/ jurisdictions including its top trading partners – the UK, Japan and France. Hong Kong has also entered into a tax memorandum for the avoidance of double taxation with mainland China, which contains the essential provisions of a DTT.

The DTTs Hong Kong has entered into typically grant taxing rights on employment income to a host country when an employee is present in that host country for 183 days in any 12-month period.  In practice, this means that a short stay abroad in many locations is not going to result in the employee becoming liable for income tax in the host country.

It should be noted that employees who have already spent other periods in the host country in the same 12-month period (e.g. visiting family) may reach the 183-day threshold sooner than you think.  Also, there are conditions other than the physical period of stay which may grant the taxing right of employment income to a host country (e.g. if the remuneration is borne by a permanent establishment of that host county), so the relevant DTT must be checked carefully.

If the employee does become subject to tax in the host country, the same income may still be subject to tax in Hong Kong. In that situation, double tax relief will be available in accordance with the provisions of the DTT.

Pensions implications

Hong Kong does not have a comprehensive social security system like in other countries, but it does have something akin to a statutory pension. Most employers and employees in Hong Kong are required to make contributions to a mandatory provident fund (MPF) which is a regulated privately-managed retirement fund.

Where mandatory contributions are being made to an MPF, arrangement for the employee to work abroad will not affect the contributing obligations of the employer or the employee.  If the employer and employee are exempt from making MPF contributions (for example, where the employee is an expatriate employed in Hong Kong on a work visa for not more than 13 months), working abroad will not affect the exemption.

Risk of creating a permanent establishment is low but should be considered

In some situations, there will be a risk that the employee’s activities or presence in the host country will create a permanent establishment for the employer in that country.  This may be the case if, for example, the employee has a sales or business development role and is habitually exercising an authority to conclude contracts in the name of the employer while in the host country.

If a permanent establishment is created, the profits attributable to that establishment would be subject to corporate tax in that country.  Assuming the working-from-home arrangement is only short term, it would be difficult for the tax authorities to argue that a permanent establishment had been created.  The longer the arrangement continues, however, the greater the risk – particularly if the employee routinely negotiates the terms of contracts with customers which are simply “rubber-stamped” by Hong Kong.

Immigration implications of working temporarily abroad

From an immigration perspective, an employer should take into account whether an employee has the right to work in the relevant jurisdiction when considering whether to allow him/her to work remotely from there.

As an employment visa or similar is generally not required for short business visits, depending on the employee’s activities, it may be possible to characterise the employee’s stay as a business visit. The activities of the employee as a business visitor should, however, be limited to those typically undertaken during business trips (e.g. meetings and training). Restricting an employee’s activities in this way is unlikely to be practical for many employers and their employees, however, and, in general, the longer an employee carries out work in a country, the more difficult it will be to characterise their stay as a business visit. In some countries, work itself is prohibited even if the activities are restricted to those typically undertaken as a business visitor.

Employers may also need to consider any immigration issues that could arise on the employee’s return to Hong Kong. For instance, if the employee has any interest in applying for the right of abode in Hong Kong in the future, he/she should consider whether their absence from Hong Kong may affect their eligibility to do so. Generally, as part of the application process, periods of continuous absence for more than 6 months need to be declared and assessed by the Immigration Department.

Employment law and data privacy implications of working temporarily abroad

Employment law considerations

While it is possible to have a remote working arrangement from a Hong Kong employment law perspective, the employer would need to be cautious as to whether local employment laws and regulations would also apply. These may include minimum wage restrictions, paid annual holidays, statutory maternity/paternity entitlements and rights on termination.

Employers in Hong Kong are subject to both statutory and common law duties in respect of the health and safety of their employees, including a duty to provide and maintain a reasonably safe workplace. Failure to comply with such obligations may expose employers to potential claims. If an employee suffers a personal injury by accident which “arises out of and in the course of employment” (whether he/she is performing his/her duties in Hong Kong or abroad), the employer may be liable to compensate the employee. Employers should also ensure that they comply with any local health and safety requirements.

Transferring data outside of Hong Kong

There are currently no restrictions on the transfer of personal data outside of Hong Kong, as the cross-border transfer restrictions set out in section 33 of the Personal Data (Privacy) Ordinance (“PDPO”) were held back and have not yet come into force. Nevertheless, non-binding best practice guidance published by the Privacy Commissioner encourages compliance with the cross-border transfer restrictions in section 33 of the PDPO, which prohibits the transfer of personal data to a place outside Hong Kong unless at least one condition from a list of conditions is met. One such condition is that “the individual has consented in writing to the transfer”.

Therefore, if it is anticipated that personal data will be transferred outside of Hong Kong, the employer should obtain the data subject’s express, informed and voluntary consent before transferring such data. Employers should also consider the local data privacy laws and check if there are any restrictions on processing and storing personal data that need to be complied with there.

Practical considerations

• Only accept a remote working request for a country/jurisdiction outside of Hong Kong if the employee’s role can be performed effectively and lawfully abroad.

• Consider only approving requests for a short, time-limited duration where the employee’s expected return date is clearly documented.

• Seek local expert’s advice on any tax, immigration, employment, data privacy and health and safety obligations.

• If the employee will be carrying out data processing, check if his/her duties can be performed abroad without contravening data privacy laws in both the host country and Hong Kong.

• Review insurance policies to ensure that the current insurance coverage is sufficient to cover employees who are working abroad.

• Agree and record the terms of any temporary overseas working arrangement in writing to clarify the following:

• The employee will be liable for any additional income taxes which may be charged, and the employee will be responsible for any personal tax declarations in this regard.

• The employment contract remains governed by Hong Kong law.

• The employee is still working solely for the Hong Kong entity.

• If applicable, restrict the employee from carrying out any regulated activities whilst he/she is working abroad.

• The employee takes responsibility for ensuring they have the necessary technology and equipment in place to enable them to work effectively.

If you require any further advice on this subject, please reach out to your usual Lewis Silkin contact.