It is common for a non-Hong Kong company to second/transfer staff from their overseas main office or recruit local or overseas expatriate staff to work in their Subsidiary or Branch in Hong Kong. These non-Hong Kong Companies should be mindful of Hong Kong immigration and taxation requirements when considering these alternatives.
9.1. Employment Visas
Generally, any person other than those having the right of abode, right to land or unconditional stay in Hong Kong must obtain an employment visa for their prospective employment from the Hong Kong Immigration Department prior to arriving in Hong Kong if they wish to take up employment in Hong Kong. It is immaterial whether the employment period is short or on a temporary basis. Spouse and children of the applicant for employment visa may apply for dependant relative visas.
The Hong Kong Immigration Department will invariably request to see a contract of employment executed between the Hong Kong company and the expatriate staff so they are satisfied that the employment terms are no less favourable than those which would be extended to a local Hong Kong resident. The employment visa application would also require a local sponsor to guarantee the expatriate’s stay in Hong Kong.
Documentation and information that is required to be submitted include the sponsor’s constitutional documents as well as various specified forms (including forms that ascertain the sponsor’s financial standing, detail the job to be performed by applicant, detail the education, academic and professional qualifications and work experience).
9.2. Salaries Tax
Salaries Tax is payable on income (including wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowances derived from the employer or others53) arising in or derived from Hong Kong from any office or employment of profit and any pension (voluntary or is capable of being discontinued).54
- The source of income
Often, the most difficult matter to determine is the source of income. The relevant factors to consider include the place where the employment contract was negotiated and entered into and its governing law, the employer’s place of residence, and, to a lesser degree, where and in what currency remuneration is paid.
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, Therefore, the structure of an employee’s employment should, be carefully planned at the outset for maximum tax-efficiency. If the Inland Revenue Department considers 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 provides 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.55 If double tax becomes payable on any income, limited relief is available.
- Fringe benefits
Fringe Benefits provided to an employee which can be converted into money by the employee are chargeable as salaries tax.56 Chargeable income also includes the rental value of accommodation provided rent-free57 or subsidised58 by the employer or associated corporation. Specific advice on the employee’s proposed remuneration package should be obtained.
Net chargeable income (i.e. assessable income after deductions and allowances) is charged either at progressive rates of up to 17% or at the standard rate of 15% of net total income, whichever results in a lower tax bill. There is also 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
The Employment Ordinance (“EO”) and various other regulations contain employment protection provisions to protect employees.
- Termination of employment
Employment contracts are terminable upon the giving of 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.59 There are legislative provisions (which may be supplemented in the contract) specifying circumstances that enable contract to be terminated by the employer without notice (for example, if the employee is guilty of fraud or dishonesty) in relation to his employment or by the employee without notice or payment in lieu of notice (for example, if the employee is subject to ill-treatment by the employer). 60
- Anti-discrimination provisions and membership of trade unions
Special rules apply in relation to 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 grounds of sex, disability or the family status of a person. Further, an employer is not allowed to prevent employees from belonging to or being active in trade unions registered under the Trade Union Ordinance or prevent them from taking part in their activities (although unions are not widespread outside the industrial sector).61
- Rest days, holidays and leave
There are also special rules for the entitlement of employees to holidays and leave, including one rest day every seven days and 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.62
The EO provides that employees who have been employed under a continuous contract for a period of one month or more shall be entitled to receive sickness allowance in certain circumstances, at a rate of four-fifths of their wage for up to a maximum of 120 days accumulated on the basis of the length of service.63
- Long service and severance payments
An employee may be entitled to long service payment when he leaves his job. If an employee who is under a continuous contract for more than 5 years and retires at an age not less than 65 or dies, the employee shall be entitled to long service payment. In the event that the employee has died, the long service payment is payable to the employee’s relatives or personal representatives. The amount of the long service payment that the employee is entitled to depends on the length of service together with any mandatory provident fund scheme or occupational retirement scheme benefit.64
Severance payments are available to employees dismissed by the employer as a result of redundancy65 or being laid off.66 Employers are however, not permitted to dismiss employees with the intent to reduce or extinguish certain statutory benefits, rights or protection under the EO.
- Maternity leave
Women employed under continuous contracts for a period not less than 40 weeks are entitled to paid maternity leave67. The rate of maternity leave pay payable is calculated at four-fifths of their normal wages immediately prior to her taking maternity leave.
Maternity leave shall be an aggregate of 68:
- a continuous period of 10 weeks;
- a further period beginning after the date of expected confinement up to and including the actual date of confinement; and
- a further period, not exceeding 4 weeks, taken on the grounds of pregnancy-related illness or disability.
- Mandatory Provident Fund
In the interests of funding benefits for employee’s retirement, the Mandatory Provident Fund Schemes Ordinance (“MPFO”) requires employers to take practical steps to ensure that their employees become a member of a registered mandatory provident fund scheme.69 Both employers and employees must contribute to the fund, which is to be established in the form of trusts.
Compulsory contributions are required to be made by the employer to the employee’s fund at the rate of 5% (unless otherwise prescribed by other regulations) of the relevant employee’s income (i.e. all monetary remuneration except for housing allowance), subject to a maximum amount of HK$1,500 per month.
Apart from considering the method of establishing business operations in Hong Kong, consideration must be given to the obtaining of 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. Therefore, for the purposes of this brochure, only 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 these 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 for reviewing the terms of a proposed tenancy agreement and for advice in relation to pertinent commercial risks. A number of important commercial issues should be considered, 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 of one to two weeks prior to the commencement of the term.
There are no standard terms for commercial tenancies in Hong Kong and the length of a tenancy is simply a matter for negotiation. Options to renew will not always be offered by landlords and Hong Kong 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 typically 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 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.
Normally, residential tenancies are for a period of 2 years at a monthly rent fixed for the entire term. The tenant will bear the cost of rates, management fees and utility charges. 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 upon 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 non-Hong Kong company when setting up operations in Hong Kong, including making suitable banking and financial arrangements, insurance arrangements (such as taking out compulsory Employees’ Compensation Insurance, fire, burglary and public liability insurance) and (if appropriate), employee pension or provident fund arrangements.
12. HOW WE CAN HELP YOU?
If you are considering establishing business operations in Hong Kong, whether by way of a Subsidiary or a Branch as outlined above, or any other means, we can assist by:
- providing advice on all aspects of commercial, company, property, intellectual property, tax, employment, immigration, pensions, insurance, banking and financial services law;
- advising on the structure of the proposed business;
- advising on the formalities to be observed when establishing the business;
- preparing necessary documents including submissions for any approvals and authorisations required to be obtained by the business, and liaise with the relevant authorities on your behalf; and
- providing practical advice on ancillary matters that need to be considered when setting up a business.
If you would like further information about establishing business operations in Hong Kong, please feel free to contact us on (852) 2905 7888 or write to us at 12th Floor, Dominion Centre, 43-59 Queen’s Road East, Hong Kong (Fax No. (852) 2854 9596).
This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.
53 section 9(1) IRO
54 section 8(1) and section 8(2) IRO
55 section 8(1B) IRO
56 section 9(2A)(ii) IRO
57 section 9(1)(b) IRO
58 section 9(1)(c) IRO
59 section 6(2)(c) and 7(1A) EO
60 section 9 and 10 EO
61 section 21B(1) and (2) EO
62 section 41AA EO
63 section 33 and 35(2) EO
64 section 31V and 31Y EO
65 section 31B(1) EO
66 section 31E EO
67 section 12(1) and 14(2) EO
68 section 12(2) EO
69 section 7 MPFO