Employees are subject to salaries tax on their employment income and self-employed persons are subject to profits tax on their business income. Since the expenses claimed under Profits Tax are more and easier than those under Salaries Tax, to reduce the tax, the employee will sign a service company contract with the employer. employment relationship.
To determine whether an employment relationship exists, the IRD considers the following three points:
• Economic and financial factors
Whether the employee is financially able to run the business independently.
• Job control factors
Does the employer have control over the employee, such as working hours, holiday arrangements, responsibilities, where/how to work, etc…
• Company Organizational Factors
Whether the employee is part of the employer’s company
Section 9A of the Inland Revenue Ordinance is designed to deal with the tax avoidance arrangement mentioned above. If the Inland Revenue Department finds that the employment relationship does exist, the employee’s income will be subject to salaries tax.
According to the Inland Revenue Ordinance, all administrative expenses and expenses incurred by a taxpayer in carrying on a business to generate taxable profits for any period are deductible. Taxpayers often set up a limited company and hire him as a director to help manage the company’s business, to get the director’s remuneration paid by the company. As his employer, the company will report his remuneration for the year of assessment to the Inland Revenue Department. Of course, he must report this remuneration in salaries tax, because he can claim the relevant tax amount under salaries tax, which can greatly reduce his overall tax. The company can save profits tax by deducting the remuneration paid to him.
In some cases, the company employs directors or their relatives who will pay remuneration higher than the market value. The Inland Revenue Department is aware of these situations and will question whether the lump sum remuneration payment is earning the company’s assessable profits. The Inland Revenue Department will ask the company to provide the personal information of the directors or their relatives, payroll records, payroll amounts, employee contracts, detailed work records, etc. The Inland Revenue Department will study the nature, turnover, and scale of the company’s business… The amount of remuneration should be compared with the required qualifications and duties. Otherwise, the Inland Revenue Department will adjust the amount of remuneration and even not approve deductions.
It should be mentioned here that the tax regulations stipulate that the salary paid to the spouse of a sole proprietor or partnership business partner is not deductible.
The above information is for reference only. If in doubt, we welcome your tax inquiries.