Time basis assessment

Q: What are the three factors used to determine the source of employment?

The three tests are: (1) where the contract was negotiated and signed; (2) the residence of the employer ; and (3) where the payment of remuneration is made.

Q: How do you count the days of arrival and departure under the 'Day in, Day out' rule?

Any fraction of a day spent in Hong Kong counts as one full day in the numerator of the Time Basis formula.

Q: What is the 60-day visitor exemption?

Income from services rendered in Hong Kong is exempt from Salaries Tax if the individual's visits to Hong Kong do not exceed a total of 60 days in a year of assessment.

Q: How does the IRD distinguish a 'visit' from being 'stationed' in Hong Kong?

A visit implies the person is not based in HK; if an individual is stationed in HK (e.g., has a home, family, or permanent office here), they cannot claim the 60-day exemption.

Q: Why can't Director's Fees use the Time Basis Assessment?

Director's Fees are derived from an office , not employment; fees from a Hong Kong resident company are 100% taxable regardless of where the director physically spent their time.

Professional Level – Taxation · HKICPA QP (Hong Kong CPA) · 6 min read

Welcome to Time Basis Assessment!

Hello there! Today we are diving into one of the most practical and "student-favorite" topics in Hong Kong Salaries Tax: Time Basis Assessment. Don't worry if tax sounds intimidating—think of this chapter as a set of rules to decide how much of a "discount" someone gets on their tax bill when they work both in Hong Kong and abroad. By the end of this, you’ll be able to calculate exactly what portion of a globe-trotter's salary Hong Kong is allowed to tax.

1. The Golden Rule: HK Employment vs. Non-HK Employment

Before we can even talk about "Time Basis," we have to ask a very important question: Where is the source of the employment? This is a prerequisite concept you must master first.

Hong Kong Employment: If your job is rooted in Hong Kong, you are taxed on all your income, no matter where you physically performed the work (unless you pay tax elsewhere on that income and claim an exemption). Time basis does NOT apply here.

Non-Hong Kong Employment: If your job is rooted outside of Hong Kong (e.g., you are sent here by a US company for a project), you are only taxed on the services you actually perform within Hong Kong. This is where Time Basis Assessment comes to the rescue!

How do we know if it's Non-HK Employment?

The IRD looks at three main factors (often called the "Source Tests"):
1. The Contract: Where was the employment contract negotiated, signed, and where is it enforceable?
2. The Employer: Is the employer a resident of Hong Kong or based elsewhere?
3. The Pay: Where is the employee’s salary actually paid to them?

Key Takeaway: Time Basis Assessment is only available to individuals with Non-Hong Kong Employment. If the employment is HK-sourced, you can't use this formula!

2. The "Time Basis" Formula

If a student qualifies for Non-HK employment, the Inland Revenue Department (IRD) uses a simple pro-rata formula to calculate the taxable income.

The Formula:
$ \text{Taxable Income} = \text{Total Income} \times \frac{\text{Number of Days spent in Hong Kong}}{\text{Total Number of Days in the Year}} $

Example:
Sarah works for a UK company (Non-HK employment). She earned \$1,000,000 this year. She spent 100 days in Hong Kong for work and 265 days elsewhere.
\n$ \text{Taxable Income} = \$1,000,000 \times \frac{100}{365} = \$273,973 $

\n\n

Did you know?

The "Total Days in the Year" is usually 365, but don't forget to use 366 if it's a leap year! Small details like this can make a difference in your QP exam.

\n\n

3. How to Count "Days in Hong Kong"

Counting days sounds easy, right? But the IRD has a specific way of doing it. They use the "Day in, Day out" rule.

\n\n

The Rule: Any part of a day spent in Hong Kong counts as one full day.
\n• If you arrive in HK on Saturday night and leave on Sunday morning, that counts as 2 days in Hong Kong (Saturday is 1, Sunday is 1).
\n• This is why we often say "A fraction of a day counts as a full day."

\n\n

Quick Review:
\n• Arrive Monday 11:00 PM
\n• Stay Tuesday
\n• Leave Wednesday 2:00 AM
\nTotal Days = 3 (Mon, Tue, Wed)

\n\n

Key Takeaway: When counting days for the numerator of your fraction, always count the day of arrival and the day of departure as full days.

\n\n

4. The 60-Day Rule (The "Visitor" Exemption)

There is a very special rule that can make someone's Hong Kong tax bill zero, even if they worked here! This is known as the Exemption for Visits not exceeding 60 days.

\n\n

The Criteria:
\nIf an individual (regardless of whether their employment is HK or Non-HK sourced) renders services in Hong Kong during "visits" that do not exceed 60 days in a year of assessment, their income from those services is exempt from Salaries Tax.

\n\n

Wait, what counts as a "Visit"?

This is where students often get tripped up. A "visit" means the person is not based here. If you are stationed in Hong Kong (e.g., you have a home here, your family is here, and your office is here), you are not "visiting," even if you stay for only 30 days. You must be a visitor from an external perspective.

\n\n

The "60-Day" Trap (Common Mistake):

Don't confuse the 60-day rule with the Time Basis formula.
\n• 60 days or less: Total exemption (Pay \$0 tax) if it's a "visit."
• 61 days or more: You lose the exemption. If you have Non-HK employment, you go back to the Time Basis formula ($ \frac{\text{Days in HK}}{365} $).

Memory Aid: Think of the "60-day rule" as a "Free Pass." If you're under the limit, you're free! If you're over, you have to pay for the time you spent here.

5. Step-by-Step Approach for Exam Questions

When you see a Salaries Tax question involving travel, follow these steps to avoid confusion:

Step 1: Determine the Source of Employment.
Is it HK or Non-HK? Use the 3 tests (Contract, Employer, Payment).
• If HK Employment: Generally full tax (unless 60-day rule applies for "visits" with NO services rendered, which is rare, or 100% foreign tax exclusion).
• If Non-HK Employment: Go to Step 2.

Step 2: Check the 60-day Rule.
Count the days in HK. Were they "visits"?
• If Total Days ≤ 60: Full exemption! Taxable income = 0.
• If Total Days > 60: Move to Step 3.

Step 3: Apply Time Basis Formula.
Total Income $\times$ (Days in HK / Total Days in Year). Remember to count fractions of days as full days!

6. Summary and Final Tips

Summary Table for your brain:
1. Non-HK Employment + > 60 days in HK: Use Time Basis ($ \frac{\text{Days in HK}}{365} $).
2. Non-HK Employment + ≤ 60 days in HK: Full Exemption (Tax = \$0).
\n3. HK Employment + > 60 days in HK: Full Tax (No Time Basis).
\n4. HK Employment + ≤ 60 days in HK (Visits): Full Exemption (Tax = \$0).

Don't Forget:

• Director's Fees: Time basis never applies to Director's Fees of a HK company. If the company is in HK, the Director's Fee is 100% taxable, even if the director never steps foot in Hong Kong!
• Leave Pay: When calculating total income for the formula, usually we include the full salary, but if someone has a specific period of leave, the IRD has specific treatments. For basic QP questions, just use the total annual income.

Encouraging Note: This chapter is all about logic. Once you determine the "Source" and "Count the Days," the rest is just simple math. Keep practicing the day-counting exercises, and you'll master this in no time!

Quick check

Can you answer these now?

Open each question to check the key ideas from this chapter.

Which type of employment source is eligible for Time Basis Assessment?

Time Basis Assessment is only available to individuals with Non-Hong Kong sourced employment.

What are the three factors used to determine the source of employment?

The three tests are: (1) where the contract was negotiated and signed; (2) the residence of the employer; and (3) where the payment of remuneration is made.

What is the standard formula for Time Basis Assessment?

$ \text{Taxable Income} = \text{Total Income} \times \frac{\text{Number of Days spent in Hong Kong}}{\text{Total Number of Days in the Year}} $

How does a leap year affect the Time Basis calculation?

In a leap year, the denominator of the Time Basis fraction must be 366 days instead of 365.

How do you count the days of arrival and departure under the 'Day in, Day out' rule?

Any fraction of a day spent in Hong Kong counts as one full day in the numerator of the Time Basis formula.

What is the 60-day visitor exemption?

Income from services rendered in Hong Kong is exempt from Salaries Tax if the individual's visits to Hong Kong do not exceed a total of 60 days in a year of assessment.

How does the IRD distinguish a 'visit' from being 'stationed' in Hong Kong?

A visit implies the person is not based in HK; if an individual is stationed in HK (e.g., has a home, family, or permanent office here), they cannot claim the 60-day exemption.

Why can't Director's Fees use the Time Basis Assessment?

Director's Fees are derived from an office, not employment; fees from a Hong Kong resident company are 100% taxable regardless of where the director physically spent their time.

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