Hong Kong Inland Revenue Department's latest FAQ: How is tax status determined for "dual-city living"?

With increasingly close economic ties between the two places, cross-border work and living have become the norm, with many people leading a life of "working in Hong Kong and living on the mainland." When both places meet the residency criteria, the tax system is determined by the tax rules.

Author: FinTax

Recently, the Hong Kong Inland Revenue Department updated its Frequently Asked Questions (FAQs) to explain how to determine the tax residency status of individuals who may be considered residents of both the Mainland and Hong Kong, based on the plus-minimum rule of the Comprehensive Arrangement between the Mainland and Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes (the “Comprehensive Arrangement”).

With increasingly close economic ties between the two places, cross-border work and living have become the norm, with many people leading a life of "working in Hong Kong and living on the mainland." When both places meet the residency criteria, the tax system is determined by the tax rules.

Overview of Tax Arrangements between Mainland China and Hong Kong

Mainland China side:

A tax resident individual in mainland China is defined as an individual who has a domicile in China, or an individual who does not have a domicile in China but resides in China for a cumulative period of 183 days or more in a tax year. "Domicile" is defined as the place of habitual residence in China due to household registration, family ties, or economic interests. In practice, mainland China uses habitual residence as the core criterion, and retaining mainland household registration is likely to be presumed as an intention to habitually reside there, thus leading to recognition as a tax resident of mainland China.

Hong Kong side:

A Hong Kong tax resident is an individual who ordinarily resides in Hong Kong, or who has stayed in Hong Kong for more than 180 days in a relevant tax year or for more than 300 days in two consecutive tax years. Compared to mainland China, Hong Kong's determination of tax residents focuses more on actual residence and the degree of economic ties, rather than legal permanent residency or household registration status.

Given the objective existence of differences in tax systems, such as residency determination and tax year calculation, cross-border workers may simultaneously meet the residency standards of both places, facing tax conflicts arising from dual residency status. On August 21, 2006, the Mainland and Hong Kong formally signed the "Comprehensive Arrangement" to avoid double taxation and prevent tax evasion. Since then, both sides have signed several protocols to update the content, adapting to the development of international tax rules and promoting economic and investment exchanges between the two places.

Tax Status Determination Logic: Plus Rule

To address conflicts of tax jurisdiction, the Comprehensive Arrangement introduced the Tie-breaker Rule. The Tie-breaker Rule is widely used in the field of international taxation and is an important rule for resolving conflicts of dual tax residency status caused by differences in the laws of different tax jurisdictions.

Under the "Comprehensive Arrangement" and its supplemental rules, an individual who meets the tax residency criteria for both Mainland China and Hong Kong is determined in the following order:

1. On which side does the individual have a permanent residence?

2. Which party does it have closer personal and economic ties with?

3. Which side of the house do they habitually reside in?

4. The relevant authorities of both parties shall negotiate to determine which party's residents they belong to.

It should be noted that these standards are arranged in order of priority, and a later standard is only used when the previous standard cannot solve the problem.

FAQ Update: How Gabi's Rule is Applied to Real-World Scenarios

The significance of this FAQ update lies in using more realistic examples (Q17-Q21) to demonstrate how to determine an individual's tax residency based on the plus-minus rule in common scenarios such as "talent programs" and "dual-city living".

For various scenarios, the Hong Kong Inland Revenue Department does not provide absolute answers regarding the determination of tax residency. Instead, it lists factors that may be considered when determining residency, including: the individual's mainland household registration; the long-term residence, work, and study location of spouses, children, and other core family members; shareholdings in enterprises; and the location of salary payments and social security contributions. These factors constitute strong evidence of "close economic interests."

Therefore, individual factors such as having a household registration in mainland China or whether one has stayed in Hong Kong for more than 180 days in a tax year are not decisive factors in determining residency under the plus-minus rule. Under the "comprehensive arrangement," one may still be considered a Hong Kong resident. This does not mean that core criteria such as "number of days of stay" are unimportant, but rather that the plus-minus rule is used to determine residency by considering multiple factors.

Summarize

Overall, this FAQ update from the Hong Kong Inland Revenue Department is not a major institutional adjustment, but rather a vivid practical guide—further clarifying the rules for determining tax residency for frequent cross-border travelers. With improved tax oversight capabilities and increased transparency of tax information, tax authorities in both jurisdictions will be able to more accurately determine the focus of an individual's economic interests, and cross-border tax management is moving towards greater refinement.

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