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China-Hong Kong: Income tax arrangement, possible tax exemptions for teachers and researchers

China-Hong Kong: Income tax arrangement

The income tax arrangement between China and Hong Kong incorporates provisions for teachers and researchers.

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The measures are contained in Protocol V of the “Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income” (signed in Beijing on 19 July 2019).

China’s State Taxation Administration on 31 December 2019 issued guidance (Announcement 51, known in English as the “Announcement on the Enforcement of Protocol V.”) For China, the relevant provisions under Protocol V will apply for income earned in the tax years beginning on or after 1 January 2020.


Overview

In order to promote exchanges of education and scientific research between China and Hong Kong and the development of the “Greater Bay Area,” Protocol V incorporates provisions for teachers and researchers so that eligible individuals will be entitled to a tax exemption for up to three years.

  • Eligible individuals
    • Employed by a university, college, school or government-accredited educational or research institution in Hong Kong
    • Residents of Hong Kong who are primarily engaged in teaching or researching at academic institutions based in mainland China, or individuals who were Hong Kong residents immediately before relocating to mainland China.
  • Tax-exempt income
    • Income earned from teaching or research for the benefit of public interest, rather than for personal gain paid by (or on behalf of) a Hong Kong employer, and the income is subject to tax in Hong Kong
  • Tax exemption period
    • For a period of three years beginning 1 January 2020 or the date of arrival in mainland China (after 1 January 2020) for purposes of teaching or research—for  example, if a Hong Kong resident employed by a university in Hong Kong is engaged in teaching at a mainland academic institution from 1 July 2019, and the eligibility conditions are met, the income paid by the Hong Kong university and taxed in Hong Kong is entitled to the tax-exemption treatment in mainland China for three years from 1 January 2020.


KPMG observation

The provisions set out under Protocol V reflect a determination to promote educational and scientific exchanges between the mainland and Hong Kong, and to vigorously develop the science and culture of the Greater Bay Area of Guangdong, Hong Kong, and Macao.

It is worth noting that China has income tax agreements or treaties with over 100 countries and regions, among which these treaties with more than 80 countries and regions include provisions for teachers and researchers; however, the relevant tax exemption conditions and periods vary. For example, the United States-China income tax treaty grants eligible individuals a cumulative tax-exemption period of up to three years. The tax-exemption period will be suspended if the eligible individual leaves China before the end of the three-year period, and the period will resume if the eligible individual returns to China for teaching or research activities. On the other hand, the Germany-China income tax treaty grants the eligible individual a tax-exempt period of two years on income earned outside China in respect of teaching or research activities, and it further provides that when the individual stays in China for more than two years, the relevant income will be taxed from the date of arrival in China.

Therefore, under the arrangement with Hong Kong, employers and academic staff intending to enjoy the tax-exempt treatment need to consider whether they would meet the eligibility criteria, including but not limited to:

  • Whether the employer is a recognised educational or research institution by the government
  • Tax residency status of the individual
  • Whether the activities performed by the individual meet the tax-exemption conditions
  • Whether the relevant income is paid in accordance with the tax-exemption conditions

The State Tax Administration in October 2019 also issued Announcement 31 (known in English as the “Treatment of Non-Resident Taxpayers Benefiting from Double Taxation Agreements”). Announcement 35 stated that the relevant documentation related to income tax agreement applications would be retained by the taxpayers (instead of being submission to the tax authorities). Announcement 35 simplified the reporting requirements for taxpayers or withholding agents.

Discussions between KPMG tax professionals and various local tax authorities indicate that the tax authorities in some regions still have certain information reporting requirements to provide guidance to local taxpayers in respect of the understanding and application of arrangement. Therefore, withholding agents and individuals who wish to apply the tax-exemption treatments need to clarify the documentation and reporting requirements with the local tax authorities.
 

For more information, contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com

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