Written by: FinTax

Recently, the Hong Kong Special Administrative Region ("Hong Kong") Inland Revenue Department updated its Frequently Asked Questions (FAQs) to clarify how to determine the tax residency status of individuals who may be considered residents in both Mainland China and Hong Kong, according to the tie-breaker rules under the "Comprehensive Arrangement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion" ("Comprehensive Arrangement").

As economic exchanges between the two regions become increasingly close, cross-border work and living in both places have become the norm, with many people living a life of "working in Hong Kong and living in Mainland China." When individuals meet the residency criteria of both places, the application of the tax system and the tie-breaker rules play a crucial role.

Overview of Tax Arrangements between Mainland China and Hong Kong

Mainland Aspect:

A tax resident individual in Mainland China is defined as a person who has a domicile in China or, without a domicile, has resided in China for a cumulative total of 183 days or more within a tax year. Here, "domicile" is defined as a place where a person habitually resides in China due to household registration, family, or economic interests. In practice, Mainland China uses habitual residence as the core standard, and retaining a Mainland household registration is likely to be presumed as an intention to habitually reside, thus being recognized as a tax resident in Mainland China.

Hong Kong Aspect:

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

Given the objective existence of differences in tax residency identification and tax year calculations, cross-border workers may simultaneously meet the residency standards of both places, facing tax conflicts arising from dual residency. On August 21, 2006, Mainland China and Hong Kong officially signed the "Comprehensive Arrangement" to avoid double taxation and prevent fiscal evasion. Since then, both sides have signed multiple protocols to update the content to adapt to the development of international tax rules and promote economic and investment exchanges between the two regions.

Tax Residency Determination Logic: Tie-breaker Rule

To resolve conflicts of tax jurisdiction, the "Comprehensive Arrangement" introduced the tie-breaker rule, which is widely used in the international tax field and is an important rule for resolving conflicts of dual tax residency status due to differences in the laws of various tax jurisdictions.

According to the tie-breaker rule under the "Comprehensive Arrangement," for individuals who meet the tax residency standards of both Mainland China and Hong Kong, their tax residency status is determined in the following order:

1. Where they have a permanent home;
2. With which party they have a closer personal and economic relationship;
3. Where they habitually reside;
4. Determined by negotiation between the competent authorities of both parties.

It is important to note that these standards are arranged in order of priority, and only when the previous standard cannot resolve the issue will the subsequent standard be used.

FAQ Update: How the Tie-breaker Rule Applies to Real Scenarios

The significant meaning of this FAQ update lies in the use of more realistic cases (Q17-Q21) to demonstrate how to determine an individual's tax residency status based on the tie-breaker rule in common scenarios such as "talent programs" and "dual city living."

For various scenarios, the Hong Kong Inland Revenue Department did not provide absolute answers regarding tax residency identification but listed factors that may be considered when determining residency status, including: the individual's Mainland household registration; the long-term living, working, and studying locations of core family members such as spouses and children; ownership of business equity; and the location of salary payments and social security contributions. These factors are strong evidence of a "close economic interest relationship."

Thus, having a household registration in Mainland China or whether an individual stayed in Hong Kong for more than 180 days in a tax year are not decisive factors for determining residency status under the tie-breaker rule. Under the "Comprehensive Arrangement," they may still be considered a Hong Kong resident. This does not mean that core standards such as "length of stay" are unimportant; rather, the tie-breaker rule allows for a comprehensive assessment of multiple factors.

Conclusion

Overall, the recent FAQ update from the Hong Kong Inland Revenue Department is not a significant institutional adjustment but rather a vivid practical guide—further clarifying the rules for determining tax residency status for high-frequency cross-border individuals. With the enhancement of tax regulatory capabilities and increased transparency of tax-related information, the determination of individuals' economic interests by tax authorities in both regions will become more precise, and cross-border tax management is moving towards a more refined direction.

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