Hong Kong - Factors to be considered in determining the source of director fees

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A recently published Board of Review (Board) case held that director fees derived by a taxpayer from an overseas incorporated company listed in Hong Kong arose in or derived from Hong Kong, and therefore was subject to Hong Kong salaries tax. In determining the residence of the company and therefore the source of the director fees, the Board considered the extent to which the company was connected to Hong Kong, and a wide variety of factors including the company’s main activities, its place of listing, whether it had to file returns to the Company Registrar and the Inland Revenue Department (IRD) in Hong Kong, and whether it employed any staff or maintained any bank accounts in Hong Kong, etc.

The case illustrates that the place of board meetings may not be very useful in determining a company’s residence in the modern business environment. In particular, for an investment holding company that carries out little active business and/or management activities, more weight may be put on the company’s nature of corporate activities and its reason for existence in determining its residence.

Investment holding companies incorporated outside Hong Kong, that list or plan to list their shares in Hong Kong, need to be mindful of the potential salaries tax implications in respect of fees paid to their directors as the company may be considered resident in Hong Kong and therefore, subject to reporting obligations on such fees, and the directors may be subject to Hong Kong salaries tax on the director fees received.