Member Article

It is quite common in Hong Kong for employers to arrange an employee's employment by using dual contracts to take advantage of the tax position. Under Hong Kong law, only income derived from Hong Kong is taxable and earnings under a foreign employment contract with non-Hong Kong entity in respect of duties carried out outside Hong Kong are not taxable. However, the benefits under this arrangement may reduce following a recent UK guideline. On 28 April 2005, the Inland Revenue in the UK issued a revised guidance note regarding dual contract arrangements. Under UK’s income tax law, in case of earnings from an employment with duties performed in and outside the UK, the full amount of general earnings in the UK are taxed whereas overseas earnings are taxed on the remittance basis for a foreign domiciled employee. In order to take advantage of the different tax treatment in relation to non-UK duties carried out by such employee, the employer would enter into separate employment contracts with the employee. There is an employment contract with the UK employer in respect of duties carried out in the UK and another employment contract entered into with a non-UK resident entity in respect of duties carried out outside the UK. The recently issued guidance note makes it clear that the Inland Revenue intends to fully investigate the facts and circumstances of a dual contract situation and to consider whether there is in fact a single employment contract. If the only difference between the duties performed in and outside the UK is geographical difference, it will be viewed as a single employment. To establish a dual contract situation, there has to be material difference in terms of functions of the duties performed. Dual contracts are not likely to work if there are not two distinguishable jobs. And if the benefits of the employee’s work are borne by the same UK employer, the Inland Revenue will also treat this as a single employment. Therefore, if the Inland Revenue regards that there is in fact a single employment, the full amount of general earnings are taxed and there is no lower tax obligation for overseas earnings. Based on UK’s new guidance note, it is possible that Hong Kong’s Inland Revenue Department might establish a similar position here in Hong Kong. This would have a significant impact on the present dual contract arrangement.