With the mainland’s economy on course for continued dynamic growth, a key priority for many Hong Kong-based businesses is to build a stronger presence there and expand their operations. That often involves the transfer of staff with the necessary expertise to provide direction, set up structures or pass on specific expertise.
In outlining the mission, most companies do a great job of explaining the scale of the opportunity for employees with the potential to be seconded. They highlight what the move could mean in career terms, how it will broaden perspectives, open new doors and promote personal growth.
But when it comes to arranging the practical details, things don’t always go according to plan. Examples abound of employers overlooking administrative essentials or taking quick-fire decisions without careful research. Such oversights can leave the employee facing unnecessary problems with work visas, contract status, income tax and lines of reporting.
“Nothing is black and white in this area so you have to feel your way through the process and have a customised solution for every different case,” says Andreas Lauffs, head of Baker & McKenzie’s employment law group for Hong Kong and China. “Problems do happen a lot, and it is always a bit of a struggle with aspects of foreign law, local law and the social insurance issues that can come into play. It is critical for the company to understand the implications of different tax, immigration, employment and corporate culture issues.”
The first question to ask, if planning to move someone to the mainland, is whether to keep them on a Hong Kong contract and second them, or make the individual an employee of the cross-border entity. This has a direct bearing on everything that follows.
Some employers take the view that they won’t send an employee on anything other than a mainland contract, presumably thinking that approach is more straightforward. And some authorities on the mainland won’t issue a work visa and permits unless the application is supported by local terms of employment.
However, in most places, the relevant bureaus recognise the concept of secondment, and non-mainland companies generally see where the advantage lies.
“We don’t recommend putting [the contract] under Chinese law,” Lauffs says. “The majority of employers lose their cases in Chinese courts and, for labour law purposes, ethnic Hong Kong people are treated as other expatriates.”
The common view is that Hong Kong law is usually more flexible, for instance in matters relating to grounds for termination. It is also seen as a bit more favourable to employers, and gives an opportunity to mitigate against permanent establishment, or mainland residency status, which has implications for income tax liability.
When using a Hong Kong contract, the employer needs to make it clear that an employee is being assigned to the mainland operation. For the period of secondment, the individual will be “controlled” by the local entity, which will bear certain costs, will not have authority to bind the employer of record, and will pay individual income tax on the mainland.
If taking this approach, it is important to make sure things are correctly worded and properly structured.
“You shouldn’t come up with a whole new [document] that looks and feels like a local mainland contract,” Lauffs says. “Try to keep it as simple as possible, just adding one page to the existing Hong Kong contract to say there is a secondment to China and giving the key details.”
Jennifer Van Dale, a Baker & McKenzie partner focusing on employment, compensation and benefits, notes that certain points should be explicit. For example, the wording in the addendum should make it clear that the employee agrees to the change in place of work and any resulting differences in, say, tax arrangements.
If the individual is going for more than 90 days, it makes sense to indicate the likely length of stay –– rather than leaving it open-ended –– to facilitate the visa process. To avoid misunderstandings, one clause should specify something like, “notwithstanding
the secondment to Shanghai, ABC HK remains the employer”. And, while there might be details dealing with housing, family, schooling, home return, tax equalisation and even a driver, the guiding principle is to record everything as a variation of the contract between the original “foreign” employer and the individual.
“In such cases, don’t call the Chinese company the employer,” Van Dale says. “The more someone is expected to integrate with the local office and be subject to local policy and culture, the more [the contract] needs to be balanced up to avoid the impression of being a de facto employee of the Chinese entity.”
Maintaining the distinction could make a big difference for everything from dispute resolution and governing law to tax planning and benefits. Even so, companies manage to cause problems for themselves with imprecise wording and simple misunderstandings.
For example, they may mistakenly print out a secondment contract on a Shanghai office letterhead, or state that a wholly-owned mainland subsidiary will be “your employer” for the next two years. Even big organisations regularly come up with contradictory documents, signed by people in different companies, thereby creating all kinds of confusion.
“One scenario we see very often is the company intending to do a secondment to avoid mainland employment law, but the HR person in China unintentionally gives the person a mainland
pro-forma contract to get their visa,” Van Dale says. “From a legal perspective, they are then an employee of the entity in China.”
In every case, another key factor concerns the payment of salaries. There are decisions about paying in Hong Kong or the mainland, who pays, who gets reimbursed, and what the impact will be for tax. The usual recommendation to employers is to keep seconded employees on the Hong Kong payroll, while making it clear they are subject to individual income tax on the mainland.
However, technical issues can arise. Mainland companies have a legal obligation to deduct tax from salaries and remit that each month to tax authorities. Mainland tax returns are monthly. For this reason, Hong Kong-based employers should take special care to understand the mechanism. In the event of a problem with payment, the authorities can go to the mainland entity to claim back taxes and impose penalties, even if the whole salary for the individual in question has been paid in Hong Kong.
Brendan Kelly, head of Baker & McKenzie’s tax practice in Shanghai, says an impression persists among Hong Kong companies and employees that they can “play around” with their employment contracts and somehow avoid paying higher mainland salaries tax. A typical idea is to have part of the salary paid in Hong Kong and a smaller portion paid in China in the hope of dodging tax.
“That is just straight tax evasion,” Kelly says. “It has become less common but we still get a lot of these questions, and clients have problems because a potential hire will quite regularly say their last employer did that. Basically, we have to explain that if you assume you can maintain two contracts, it makes it very difficult to do tax planning.”
He says an employee can have a Hong Kong employment contract and work full-time on the mainland, but then has to pay tax. In terms of efficient planning, the most important step is to manage the secondment or permanent establishment side of things and to accept the need to comply with mainland law.
Essentially, individual income tax on the mainland is straightforward. There are dual contract arrangements, and for people who carry regional responsibilities, the principle of time apportionment applies if they can show two genuine positions, one within and one outside the mainland. If someone spends less than 60 days in Hong Kong, they can expect to be exempt from Hong Kong salaries tax. To qualify for time apportionment on the mainland, the individual must leave the country for one period of at least 30 days or a total of 90 days in each calendar year. Combining this with two genuine positions, there is an agreed formula to apportion time, correlate it to salaries or income tax and corporate deductions of such costs, and calculate tax accordingly.
“It should be a fairly regular and manageable situation,” Kelly says. “In other places, there may be some fancy things you can do, but on the tax side, there are just not many tax planning opportunities. The issue is driven by how much time someone spends in each jurisdiction, and you shouldn’t have to pay full tax in both Hong Kong and China.”
Regarding social insurance benefits and contributions towards them, Lauffs says there are no hard and fast rules. This is because cities and provinces tend to have their own variation on the basic theme, leading to different rates of contribution depending
The basic position is that the mainland has five types of social insurance – pension, medical, unemployment, occupational injury and maternity – plus a housing fund, towards which employers and employees contribute a predefined percentage of salary. In most cases, the rules are not applicable for third country “foreigners”, but they may apply to ethnic Chinese with a Hong Kong travel document.
Companies planning to transfer staff to the mainland should pay close attention to the following:
- whether individuals are seconded under a Hong Kong contract or given a mainland contract. This has implications for issues related to “permanent establishment”, tax status, and possibly having to deal with cases under mainland law
- the wording used in documents, so that it is precise and not unnecessarily complicated
- a clear statement that the person moving agrees to the change in workplace and other circumstances
- an indication of the expected length of any secondment to make it easier to obtain a work visa and other permits
- understanding of obligations to pay IIT (individual income tax) on the mainland and how the principle of time apportionment can apply
- recognition of the rules for social insurance contributions relevant to the mainland city or province involved
- specific lines of reporting within the organisation to avoid misunderstanding