Technological advances in the workplace and the pandemic have transformed the way we work. McKinsey recently conducted research that show that having the option to work remotely is a top three motivator for finding a new job. The rise of flexible work trends has created a generation of digital nomads.
What is a Digital Nomad?
A Digital Nomad is a person who performs their work or occupation entirely online without needing to have a fixed work location. They often travel whilst working.
Do Digital Nomads Pay Hong Kong Taxes?
There are 3 common scenarios that involve Digital Nomads and Hong Kong Taxes. This article will explain the tax implication of each scenario:
Scenario 1: You are a Digital Nomad that works remotely for a Hong Kong company.
Scenario 2: You are a Digital Nomad living in Hong Kong while working for a non-Hong Kong company
Scenario 3: You are a Digital Nomad and you own a Hong Kong company
Scenario 1: You are a Digital Nomad that works remotely for a Hong Kong company
Although Hong Kong is not a city well known for work life balance and work flexibility, many startups have introduced remote work to attract and retain talent. If you work for a Hong Kong company, but have been working remotely outside of Hong Kong, will you need to pay Hong Kong Salaries Tax on your income?
According to Section 8(1)(a) of the IRO, Hong Kong Salaries Tax is charged on income arising in or derived from Hong Kong. If you have spent significant time rendering services outside of Hong Kong, you can apply for partial or full exemption from Hong Kong Salaries Tax.
If you have spent 60 days or less in Hong Kong, your time spent in Hong Kong may be considered a visit. Any services rendered during a visit of 60 days or less in Hong Kong would be exempt from Hong Kong Salaries Tax.
However, it is important to note that this only applies if you are not “holding office” at the Hong Kong company. This usually means that you are a director of the company.
Scenario 2: You are a Digital Nomad living in Hong Kong while working for a non-Hong Kong company
If you are working remotely for a non-Hong Kong company, you will be taxed based on the time spent in Hong Kong, this is called the days-in-days-out basis. For the company to be considered a non-Hong Kong company, the company must not have any permanent establishments in Hong Kong.
It is important to note that you will still need to file a Hong Kong tax return. In the tax return, you need to report your full annual income, and then claim exemption based on the days-in-days-out basis.
Scenario 3: You are a Digital Nomad and you own a Hong Kong company
Many entrepreneurs take advantage of Hong Kong’s business friendly environment. The simple company registration process and tax regime in Hong Kong allow Hong Kong companies to be run from anywhere in the world.
If you are a digital nomad that has set up a company in Hong Kong, do you or your company need to pay taxes? Well, that depends. The Hong Kong IRD has issued a statement outlining the basic principles for determining whether a company’s profits are onshore or offshore. The IRD will look at all the combined factors and make their decision on a case-by-case basis. If a company’s profits are offshore, it means that those profits would not be taxed by Hong Kong.
How the IRD determines if your company’s profits are sourced from Hong Kong
To determine whether your company’s profits are sourced from Hong Kong, the Hong Kong IRD will examine the nature of the profits and transactions in the company. The following factors will be considered by the Hong Kong IRD.
Operations test:
The IRD will look at what operations and activities take place to produce the profits. Depending on where these operations and activities take place, the IRD will determine whether the profits are sourced from Hong Kong.
For example, if your company’s main profits are made from in person consulting services, then if the in person meetings took place in Hong Kong, the IRD will consider those profits to be sourced from Hong Kong.
Antecedent or Incidental activities:
Antecedent or incidental activities are activities that take place because of the company’s main operations. The IRD will consider these activities to be separate from the company’s main operations.
Place where decision is made:
One of the factors the IRD will consider is where day-to-day business decisions are made for the company.
Overseas operations:
Whether your company has a presence overseas will also be considered by the IRD. If your company does not have a presence anywhere else overseas, that does not automatically make your company onshore, but the lack of an overseas presence will be factored into the IRD decision.
Conclusion
With the rise in popularity for remote work and digital nomads, it is important for remote workers and digital nomads to understand cross border tax issues. Understanding their tax obligations will allow them to tax plan accordingly.
If you are have questions about your tax obligations, we would love to hear from you!
