Question

Case: D13/06

The Taxpayer is a pioneer of nuclear medicine in Hong Kong. From 1980 to 1983, the Taxpayer was in private practice as a doctor. From about 1983 to 1989, he helped in the establishment of nuclear medicine services in a number of Hong Kong government hospitals. Sometime in 1989, the Taxpayer began to work in Country A as an Associate Professor at the Department of Radiology of the University B. Subsequently, he became the Chief of Nuclear Medicine Division and a Clinical Professor of Radiology at University B.

Dr H was a student of the Taxpayer back in about 1988. In around 1994, Dr H became the Chief of the Nuclear Medicine Division of the Department of Radiology and Radiotherapy (‘the Department’) of a Hong Kong private hospital (‘the Hospital’). In the later half of 1998, the Hospital wanted to expand its Nuclear Medicine Division with the purchase of a Cyclotron and a Positron Emission Tomography (‘PET’) scanner. Those were the latest medical technology. Dr H then approached the Taxpayer and persuaded him to come back from the Country A to work at the Department.

The contractual arrangement between the Hospital, Dr H and the Taxpayer may be seen to be somewhat unusual. The contractual arrangement was established via two companies, SA and

W. SA was a private company incorporated in Hong Kong on 28 July 1994. At all material times, Dr H and his wife were the only shareholders and directors of SA. W was a shelf company (incorporated in Hong Kong) acquired by the Taxpayer and it was activated on the 1 December 1998. On that day, the Taxpayer’s two brothers-in-law became shareholders and directors of W. They did so as the Taxpayer’s nominees. It is undisputed that the Taxpayer was at all material times the only beneficial owner and in control of W.

By a contract dated 27 October 1998 and signed on 2 December 1998 between SA and W (‘Contract C’), W agreed to procure the Taxpayer to work at the Department for five years from 1 December 1998 to 30 November 2003. Under Contract C, W was entitled to a monthly remuneration of not less than HK$220,000 and bonuses if certain gross receipt targets were met. By a contract dated 10 November 1998 between SA and the Hospital (‘Contract D’), SA agreed to assign Dr H and the Taxpayer to work at the Department for a five year period which mirrored that of Contract C. Under Contract D, SA was entitled to a remuneration of HK$440,000 per month and bonuses when certain gross receipt targets were met.

By an employment contract dated 1 December 1998 (‘Contract E’), the Taxpayer was employed by W to provide managerial and consultative services for a term of 10 years commencing on 1 December 1998. Under Contract E, W would pay the Taxpayer an annual salary of not less than HK$456,000 plus various allowances and benefits.

Under s 9A(1), the IRD believed that the relevant person was the hospital and the relevant agreement was Contract D. The IRD referred to s 9A when determining the taxability of the remuneration derived by W for the provision of taxpayer’s services to the hospital:

s 9A(3)(a): whether the agreement provided for various kinds of leave, allowances, pension entitlements, accommodation, etc. In respect of this section, both the IRD and the Taxpayer agree that s 9A(3)(a) has been satisfied

s 9A(3)(b): whether the tax authority is satisfied that the Taxpayer carried out the same or similar services for others during the term of Contract D

s 9A(3)(c): whether the tax authority is satisfied that the Taxpayer was subject to control or supervision commonly exercised by employer

s 9A(3)(d): whether the tax authority is satisfied that the Taxpayer was paid periodically and on a basis commonly used in employment contracts

s 9A(3)(e): whether the tax authority is satisfied that the Hospital had a right to cause the Taxpayer’s services to cease to be carried out in a manner, or for a reason, commonly provided for in relation to the dismissal of an employee under a contract of employment

s 9A(3)(f): whether the tax authority is satisfied that the Taxpayer held out to the public as an officer or employee of the Hospital

s 9A(4): whether the tax authority is satisfied that the Taxpayer was not in substance an employee of the Hospital

Question 1

Who was the relevant individual?

Question 2

To whom the remuneration for the Taxpayer’s services was paid?

Question 3

Besides s 9A(3)(a), all of s 9A(3)(b) to (f) have not been satisfied. Has s 9A(4) been satisfied?

Answer 1

The relevant part of section 9A provides as follows:

(1)   Where a person (“relevant person”) … has entered into an agreement, whether before, on or after the appointed day, under which any remuneration for any services carried out under the agreement … by an individual (“relevant individual”) for the relevant person or any other person is paid or credited on or after that day to –

(a)     a corporation controlled by –

1. the relevant individual;

1. an associate or associates of the relevant individual; or

1. the relevant individual together with an associate or associates of the relevant individual; …

then, subject to subsections (3) and (4), for the purposes of this Ordinance –

1. the relevant individual shall be treated as having an employment of profit with the relevant person …

(3)   Paragraphs (i), (ii) and (iii) of subsection (1) shall not apply where …

1. if the agreement referred to in that subsection or any related undertaking (and whether or not the agreement refers to that undertaking) requires any of the services referred to in that subsection to be carried out personally by the relevant individual, the relevant individual carries out the same or similar services –

1. for persons other than any person for whom those first-mentioned services are carried out under that agreement; and

1. during the term of that agreement or undertaking, as the case may be;

(c)      the performance by the relevant individual of any of those services is not subject to any control or supervision –

1. which may be commonly exercised by an employer in relation to the performance of his employee’s duties; and

1. by any person (including the relevant person) other than the corporation or trustee concerned referred to in subsection (1)(a), (b) or (c);

1. the remuneration referred to in that subsection is not paid or credited periodically and calculated on a basis commonly used in relation to the payment or crediting and calculation of remuneration under a contract of employment;

1. the relevant person does not have the right to cause any of those services to cease to be carried out in a manner, or for a reason, commonly provided for in relation to the dismissal of an employee under a contract of employment; and

1. the relevant individual is not held out to the public to be an officer or employee of the relevant person.

(4)   Paragraphs (i), (ii) and (iii) of subsection (1) shall not apply where the relevant individual establishes to the satisfaction of the Commissioner that at all relevant times the carrying out of the services referred to in that subsection was not in substance the holding by him of an office or employment of profit with the relevant person.’

Answer 1

The ‘relevant person’ here was the Hospital, the relevant agreement was Contract D, the ‘relevant individual’ was the Taxpayer and

Answer 2

The remuneration for the Taxpayer’s services was paid or credited to SA, which was a corporation controlled by Dr H being the Taxpayer’s associate (‘associate’ is defined under section 9A(8).

Answer 3

At all material times, the Taxpayer had only one full time job – working as a Deputy Director or Consultant at the Hospital. He had committed himself to work exclusively for the Hospital for five years. He received a steady monthly income from the Hospital. He was under the Hospital’s control and held himself out as its officer. Last but not least, we are unable to see any real entrepreneurship on the part of the Taxpayer in the picture – there was no business decision or managerial function to be made or discharged and there was no risk taken by the Taxpayer. Standing back and looking at the picture, we are drawn to the conclusion that the relationship in question was, in substance, one of employment. In the premises, section 9A(4) is not satisfied.