Question

Mr Wong is a Hong Kong resident. He has significant shareholdings in two companies, Company A and Company B, which he has sold recently and realized substantial profits from the sale.

Company A is a company incorporated in China, but whose main business is in property investment in Hong Kong. The major assets of Company A are a few office buildings in Hong Kong which are let out for rental purposes. Mr Wong holds 30% of the shares of Company A, the remaining 70% of shares are owned by Mr Wong’s friends in China.


Company B is also a company incorporated in China, whose main business is in the exporting of goods from China to other Asian countries. Company B’s office is basically located in China. The company was incorporated three years ago and Mr Wong has 20% of the shares in Company B since its formation.


Mr Wong works for Smart Consultants Limited ("SCL") in Hong Kong, which provides consultancy services to its clients on construction related projects. SCL’s clients cover a range of Asian cities, including China. Mr Wong has to travel to China about 120 days per year to meet with a business partner in China, which is a company based in China. Mr Wong’s compensation is paid by SCL, but in recognition of the amount of time he spent in China, an agreement has been reached with the business partner in China that 20% of his remuneration would be reimbursed to SCL by the business partner.


Required:
In accordance with the Arrangement between the Mainland of China and the Hong Kong SAR for the Avoidance of Double Taxation and Prevention of Fiscal Evasion:


(a) Discuss whether the taxing rights on the income from the sale of shares in Company A and Company B belong to Hong Kong or China. Your answer should include brief mentioning of how the income would be taxed on that side after the taxing right is determined. (14 marks)


(b) Evaluate Mr Wong’s income in respect of his employment with SCL and advise whether he would be subject to individual income tax in mainland China. (8 marks)

Answer 1

According to the Arrangement between the Mainland of China and the Hong Kong SAR for the Avoidance of Double Taxation and Prevention of Fiscal Evasion, the taxing rights on the income from the sale of shares in Company A and Company B will be determined based on the location of the companies' main businesses. In the case of Company A, the income would be subject to taxation in Hong Kong. In the case of Company B, the income would be subject to taxation in China. Mr Wong's income from his employment with SCL would be subject to taxation in Hong Kong.

Step-by-step explanation:

(a) Taxing rights on income from the sale of shares:

According to the Arrangement between the Mainland of China and the Hong Kong SAR for the Avoidance of Double Taxation and Prevention of Fiscal Evasion, the taxing rights on the income from the sale of shares in Company A and Company B will be determined based on the location of the companies' main businesses.

In the case of Company A, which is incorporated in China but has its main business in property investment in Hong Kong, the taxing rights on the income from the sale of shares would belong to Hong Kong. This means that the income would be subject to taxation in Hong Kong.

In the case of Company B, which is incorporated in China and has its main business in exporting goods from China, the taxing rights on the income from the sale of shares would belong to China. This means that the income would be subject to taxation in China.

(b) Mr Wong's income from employment with SCL:

Based on the information provided, Mr Wong's income from his employment with SCL would not be subject to individual income tax in mainland China. Although Mr Wong spends a significant amount of time in China for business purposes, his compensation is paid by SCL, a Hong Kong company. Therefore, his income would be subject to taxation in Hong Kong.