Hong Kong Inland Revenue Department's latest FAQ: How is "dual city living" determined for tax residency?

Article: FinTax

Recently, the Hong Kong Special Administrative Region (Hong Kong) Inland Revenue Department updated its Frequently Asked Questions (FAQs), explaining how to determine the tax residency status of individuals who may be considered residents in both Mainland China and Hong Kong simultaneously, based on the Gabi rules under the “Arrangement for the Avoidance of Double Taxation and Prevention of Tax Evasion between Mainland China and Hong Kong” (the “Comprehensive Arrangement”).

As economic exchanges between the two regions become increasingly close, cross-border work and residence have become the norm. Many people live a “Hong Kong work, Mainland China life” lifestyle. When the standards for residents in both regions are met simultaneously, the application of the tax system and the Gabi rules play a crucial role.

Overview of Tax Arrangements between Mainland China and Hong Kong

Mainland China side: A Mainland tax resident individual is defined as an individual who has a domicile in China or, if without a domicile, has resided in China for a total of 183 days or more within a tax year. “Domicile” is defined as a habitual residence in China due to household registration, family, or economic interests. In practice, Mainland China considers habitual residence as the core standard, and retaining household registration in Mainland China is likely to be presumed as having an intention of habitual residence, thus being recognized as a Mainland tax resident.

Hong Kong side: A Hong Kong tax resident individual is defined as an individual who usually resides in Hong Kong, or who stays in Hong Kong for more than 180 days in the relevant tax year or more than 300 days over two consecutive tax years. Compared to Mainland China, Hong Kong’s recognition of tax residency focuses more on actual residence and economic ties rather than legal permanent residency or household registration status.

Given the objective differences in resident status determination and tax year calculation, cross-border workers may meet the criteria for residents in both regions simultaneously, leading to conflicts arising from dual residency. On August 21, 2006, Mainland China and Hong Kong officially signed the “Arrangement,” which aims to avoid double taxation and prevent tax evasion. Since then, both sides have signed multiple protocols to update the content, adapting to developments in international tax rules and promoting economic and investment exchanges between the two regions.

Tax Residency Determination Logic: Gabi Rules

To resolve conflicts in tax jurisdiction, the “Arrangement” introduces the Gabi (Tie-breaker) Rules. Widely used in international taxation, these rules are essential for resolving conflicts where an individual is considered a tax resident in multiple jurisdictions due to differences in legal standards.

Under the “Arrangement,” for individuals who meet the tax residency criteria in both Mainland China and Hong Kong, their tax status is determined in the following order:

1. Where they have a permanent home;
2. Where they have closer personal and economic ties;
3. Where they habitually reside;
4. By mutual agreement between the competent authorities of both sides to determine their residency.

It is important to note that these standards are arranged in order of priority, and the next standard is only used if the previous one cannot resolve the issue.

FAQ Update: How Gabi Rules Are Applied in Practical Scenarios

The significance of this FAQ update lies in using more realistic cases (Q17-Q21) to demonstrate how to determine personal tax residency in common scenarios such as “Talent Programs” and “Living in Two Cities” based on the Gabi rules.

For various situations, the Hong Kong Inland Revenue Department does not provide absolute answers on tax residency determination but lists factors that may be considered, including: Mainland China household registration; long-term residence, work, and study locations of core family members such as spouse and children; holdings of corporate shares; and the location of salary payments and social security contributions. These factors serve as strong evidence of “close economic ties.”

Therefore, having household registration in Mainland China or staying in Hong Kong for more than 180 days within a tax year are not decisive factors under the Gabi rules for determining residency. Under the “Arrangement,” an individual may still be regarded as a Hong Kong resident. This does not mean that “days of stay” and other core standards are unimportant; rather, the Gabi rules allow for a comprehensive assessment based on multiple factors.

Summary

Overall, the recent FAQ update by the Hong Kong Inland Revenue Department is not a major institutional change but a practical guide—aimed at high-frequency cross-border populations—to clarify the rules for determining tax residency. As tax supervision capabilities improve and tax information becomes more transparent, tax authorities in both regions will be able to more accurately assess the economic interests of individuals, leading to more precise cross-border tax management and a move toward more refined regulation.