When setting up operations in Hong Kong, the Overseas Corporation must bear in mind its staffing requirements and how they are to be met. If it establishes a Branch, the Overseas Corporation has the choice of either seconding its own employees to Hong Kong, recruiting expatriate staff outside Hong Kong for re-settlement in Hong Kong or recruiting local staff. A Subsidiary would have much the same choices.
Where employees are brought into Hong Kong from overseas, regard must be had to the immigration law consequences. Further, in all cases, there will be tax and employment protection considerations involved.
9.1 Employment Visas
Foreigners working in Hong Kong (with or without pay) must apply to the Hong Kong Immigration Department for employment visas for their prospective employment in Hong Kong (however short or even on a temporary basis). Normally, a senior employee would not experience problems in obtaining a visa. Dependent relative visas may be applied for by spouses and for children below the age of 21.
All persons in Hong Kong must carry some form of identification at all times, normally either a passport or a Hong Kong identity card. Anyone who intends to stay in Hong Kong for whatever purposes for more than a period longer than the visa free period allowed (this visa free period differs for different travellers from different countries) must apply for a visa or entry permit from the Immigration Department before travelling to Hong Kong.
Persons visiting Hong Kong on short business trips may need to obtain a visa in some circumstances.
9.2 Salaries Tax
Salaries Tax is payable on income (including salaries, various allowances, commissions and fringe benefits) from any employment which is fundamentally sourced in Hong Kong, and from any office (such as a directorship of a Subsidiary) or pension fund located in Hong Kong.
Typically, the source of employment is the most difficult matter to determine. Relevant factors are where the contract was concluded and under which law it is governed, where the employer is resident and, to a much lesser degree, where and in what currency remuneration is paid.
The source of employment of an employee of a Subsidiary may well be viewed as being different from that of an employee of the Overseas Corporation working at a Branch. It is a question of fact on which specific advice should be sought. If the source is found to be outside Hong Kong, only income derived from services rendered in Hong Kong will be subject to Salaries Tax, determined on a time-apportionment basis). If the balance is not chargeable to any equivalent income tax in his home, or any other jurisdiction, then that portion of income would be tax-free. The structure of an employee’s employment should, therefore, be carefully planned at the outset for maximum tax-efficiency. If the Inland Revenue Department consider that, in substance, the source of any employment, however structured, is really in Hong Kong, then it may assess the employee on that basis.
If a person renders services in Hong Kong by visiting Hong Kong for no more than 60 days in any tax year, then usually no Salaries Tax is payable. If double tax becomes payable on any income, limited relief is available.
In these type of circumstances, separate employment contracts relating to the employee’s duties in and outside Hong Kong may be helpful.
- Fringe benefits
If fringe benefits are provided to an employee which could be converted into money by the employee, then those benefits are chargeable to Salaries Tax. Exceptions to this are holiday travel allowances and allowances for the transportation of personal effects. Tax is charged on rent-free accommodation, or where the employer reimburses rental expenses, generally on the basis that the benefit is worth 10% of the employee’s total income for the relevant period. If the employer incurs and meets the employee’s expenses directly, tax may not be payable on the value of the benefit, save educational benefits. Specific advice on the employee’s proposed remuneration package should be obtained.
Salaries Tax is charged either at progressive rates of up to 17% or at the maximum rate of 15% of income less any allowable expenses (not personal allowances), whichever results in a lower tax bill. There is a system of Provisional Salaries Tax similar to the one mentioned in paragraph 8.4 for Profits Tax.
- Employer’s duties
An employer is not obliged to withhold any of his employee’s tax except if the employee has given notice and intends to leave Hong Kong. An employer must file certain returns with the Inland Revenue Department and inform the Inland Revenue when an employee is due to leave Hong Kong.
9.3 Employment Protection
Employment contracts are treated as being terminable on one month’s notice or on payment of one month’s wages in lieu of notice, unless a different notice period (being not less than seven days) is agreed in writing. There are provisions in the legislation (which may be supplemented in the contract) enabling the contract to be terminated by the employer without notice (for example, summary dismissal for the employee’s fraud or dishonesty) or by the employee without notice (for example, in cases of disability).
- Terms and discrimination
Employees must be notified of the basic terms of their employment. There are special rules for the employment of women, young persons and children. The Sex Discrimination Ordinance, the Disability Discrimination Ordinance and Family Status Discrimination Ordinance prevent discrimination by an employer against any person on the ground of sex, disability or the family status of a person. An employer is also not allowed to prevent employees from belonging to or being active in trade unions (although unions are not widespread outside the industrial sector).
- Rest days, holidays and leave
There are special rules for the entitlement of employees to holidays and leave, including one rest day in every seven days and the statutory holidays. After the first year of employment, an employee is entitled to annual leave with pay, the length of which depends on the length of his service.
The legislation provides for employees to receive sickness allowance in certain circumstances, amounting broadly to two-thirds of their wages for up to a maximum of 120 days accumulated on the basis of length of service.
- Long service and severance payments
An employee may be eligible for a long service payment when he leaves his job. The amount of the long service payment is based upon the age of the employee, the length of service and the amount of the employee’s wages. Generally, the older the employee, the longer the service and the higher the wages, the greater the entitlement (subject to a cap). Similar benefits are available to employees if they are made redundant, are laid off, reach 65 or die in service and would have been entitled to a long service payment. Employers are not allowed to dismiss employees with the intent to reduce or extinguish certain statutory benefits, rights or protection under the Employment Ordinance.
- Maternity leave
Women employed under continuous contracts are entitled to maternity leave and leave pay. Leave pay is four-fifths of their normal wages and leave amounts to at least 10 weeks plus additional leave in certain circumstances, including illness as a result of the pregnancy. Continuity of employment is not broken by maternity leave and the employee may return to her job after the leave has been taken. The employer cannot generally terminate the employment in the period from when he becomes aware of the pregnancy until the employee’s due date of return to work.
- Mandatory Provident Fund
In March 1998, the Hong Kong Government passed a law for the establishment of a mandatory provident fund for all employees in Hong Kong. Both employers and employees must contribute to the fund, which is to be established in the form of trusts. The employers will be mandatorily required to contribute 5% of the relevant income (i.e. all monetary remuneration except for housing allowance) of each employee to the fund, subject to a maximum amount of HK$1,000 per month.
The government has established the Mandatory Provident Fund Authority and the employers and employees will be required to make their first contributions from 1st December 2000.
Apart from considering the mode of operations in Hong Kong, there is a need to consider obtaining commercial premises from which the business operations can be carried out. In addition, if staff are to be relocated from overseas, some thought must be given to the provision of housing to staff members and their families.
In all likelihood, purchasing either commercial or residential premises will not be a first option as Hong Kong property values are notoriously high and the property market can be volatile. Accordingly, for the purposes of this brochure, only those issues relating to the renting of premises will be addressed.
10.1 Commercial Premises
The terms and conditions of commercial tenancy agreements can vary greatly and market forces will dictate how negotiable the terms are.
As a general comment, market conditions usually favour Hong Kong landlords and usually landlords will only allow fairly cosmetic amendments to their “standard” documentation. Some larger commercial landlords reject changes altogether.
Nevertheless, professional assistance should always be sought in reviewing the terms of a proposed tenancy agreement and advising of the commercial risks. A number of important commercial issues should be borne in mind, including:
Rent is often quoted as a dollar figure per square foot per month. It is important to determine whether the figure quoted includes such additional charges as management fees, air-conditioning charges, rates and utility charges. Usually the figure quoted for rent will exclude these extra charges and which the tenant is required to pay in addition to rent. In the current rental market it is possible to negotiate rent-free periods for decoration.
There is no standard term for commercial tenancies in Hong Kong and the length of a tenancy will simply be a matter of negotiation. Options to renew will not always be offered by landlords and legislation does not provide for security of tenure in the case of commercial premises.
- Security Deposit
A security deposit will almost always be required and invariably it will be an amount equivalent to two or three months’ rent, management fees and other fees, such as air-conditioning charges. The security deposit will be refunded at the expiration of the term, but without interest, subject to forfeiture or deduction for breaches of the terms of the tenancy agreement. Hong Kong landlords are normally reluctant to accept bank guarantees in lieu of cash deposits.
- Alienation Rights
Commercial tenancy agreements will seldom include unrestricted right for the tenant to alienate the tenancy. More often than not there will be no right to assign, sublet or otherwise part with possession of the premises, although it may be possible to negotiate the right to share the premises with an associated company.
10.2 Staff Housing
Unlike in some countries where residential tenancy agreements are in a standard form endorsed by the local Law Society or real estate institute, Hong Kong has no standard form residential tenancy agreement. Accordingly, residential tenancies vary in terms just as widely as commercial tenancies.
In general, residential tenancies will be for a period of 2 years at a monthly rent fixed for the entire term. The tenant will be responsible for the payment of rates and management fees and charges such as for utilities. Some landlords will grant the tenant a “break right” allowing the tenant to terminate the tenancy after, say, the first 12 months of the term on the giving of 2 months’ notice. Options to renew are rarely included. However, the tenant will have some degree of security of tenure by virtue of the Landlord and Tenant (Consolidation) Ordinance. This Ordinance provides a mechanism for renewing a tenancy at the expiration of the term of the agreement at the then “prevailing market rent”, unless the landlord can show one of the statutory grounds on which to terminate the tenancy. As with commercial tenancies, a security deposit is almost always required.
11. Ancillary Matters
There are numerous other matters which need to be taken into consideration by the Overseas Corporation when setting up operations in Hong Kong, including making suitable banking and financial arrangements and insurance arrangements (including taking out compulsory Employees’ Compensation Insurance and fire, burglary and public liability insurance) and (if appropriate) pension or provident fund arrangements for employees.