2011年5月9日 星期一

DIPN 25

Our web site : http://www.ird.gov.hkInland Revenue DepartmentHong KongDEPARTMENTAL INTERPRETATION AND PRACTICE NOTESNO. 25SERVICE COMPANY “TYPE I” ARRANGEMENTSSALARIES TAXThese notes are issued for the information and guidance of taxpayersand their authorised representatives. They have no binding force and do notaffect a person’s right of objection and appeal to the Commissioner, the Boardof Review or the Courts.Anthony AU-YEUNGCommissioner of Inland RevenueAugust 1995DEPARTMENTAL INTERPRETATION AND PRACTICE NOTESNo. 25CONTENTParagraphIntroduction 1How the amendments address the situation 5Scheme of the legislation 7Prima facie liability 8The operative provisions 11Section 9A(1)(i) 12Section 9A(1)(ii) 15Section 9A(1)(iii) 17Specified criteria 20Section 9A(3)(a) 21Section 9A(3)(b) 22Section 9A(3)(c) 23Section 9A(3)(d) 25Section 9A(3)(e) 27Section 9A(3)(f) 28The commissioner’s discretion : Section 9A(4) 32Advance rulings 39Compliance 41Commencement of the legislation 46iiPosition of the service company 50Service companies used by professionals 52AppendicesINTRODUCTIONFollowing the enactment of the Inland Revenue (Amendment) (No. 2)Ordinance 1995, it is considered necessary to explain why section 9A has beenadded to the main Ordinance and to lay down broad statements on theinterpretation and practice to be adopted by the Inland Revenue Department inrelation to the section.2. The Financial Secretary announced in his 1994-95 Budget Speechthat steps would be taken to deal with tax avoidance aspects of certain "servicecompany" arrangements. Two types of arrangements were identified as causingparticular concern. The first category was referred to as attempts to disguiseemployer/employee relationships (Type I cases), and the second (Type II cases)as arrangements involving the payment of inflated management fees.3. Departmental Interpretation & Practice Note No. 24 deals with TypeII cases, and seeks to discourage avoidance arrangement by explaining thecircumstances under which management fee claims will be challenged.4. With regard to Type I cases, they have typically involved servicesrendered by a person under employment-like conditions. Instead ofremuneration for the services being paid as salary to the individual concerned,it is paid as a consultancy fee to a company (service company) he or anassociate controls. The arrangement is structured with a view to the servicecompany paying little, if any, tax on the fee as a result of deductions claimedfor "tax efficient" employee benefits provided to the individual or his associates.Following consultations, the Administration concluded that legislation wasrequired to address avoidance involving such arrangements. This led to theAmendment Ordinance which was enacted on 6 July 1995 (Appendix A -Ordinance No. 54 of 1995) and came into operation on 18 August 1995.HOW THE AMENDMENTS ADDRESS THE SITUATION5. The amendments seek to address avoidance involving disguisedemployment arrangements by providing, in essence, that where remunerationfor services rendered by a person under employment-like conditions is paid notto the person, but to a company he (or an associate) controls, it will nonethelessbe treated as employment income of the person.26. One of the difficulties the Department faced in relation to these casesprior to the introduction of the legislation was the identification of thearrangements. The parties concerned directed their efforts at circumventingformal employer/employee relationships and accordingly did not comply withthe notification requirements imposed on employers and employees under theOrdinance. Identification should cease to be a problem under the newlegislation. The legislation makes it clear that for the purposes of the Ordinance(unless specified criteria are satisfied) the person for whom the services arerendered and the individual who renders the services are to be respectivelytreated as employer and employee. As such, the normal notification andcompliance requirements imposed by the Ordinance on employers andemployees will be applicable.SCHEME OF THE LEGISLATION7. Briefly, the legislation has three main elements which are containedin new section 9A -• The first, in effect, provides that there is a prima facie liabilityto Salaries Tax where remuneration for services rendered by a'relevant individual' is paid to a company controlled by theperson or his associate.• The second narrows the scope of the provisions by taking outcases which satisfy specified criteria, ie where particularindicators or hallmarks of an office or employment of profit arenot present under the arrangement.• The third element is another "escape clause" for the benefit oftaxpayers. It provides the Commissioner with a discretionarypower to exclude a case where, even though an indicator ofemployment might be present, he is satisfied that in carryingout the services under the agreement the relevant individual wasnot in substance holding an office or employment of profit.The three elements are further discussed below, together with related matters.3PRIMA FACIE LIABILITY8. The opening words to section 9A(1) set the scene by specifying thecircumstances under which the new provisions can have application toremuneration paid under an (service company) agreement. In this regard, anarrangement will come within the scope of the section where -(i) there is an agreement;(ii) a person ("relevant person")carrying on, or deemed under theOrdinance to be carrying on, a trade, profession or business, orprescribed activity, is a party to the agreement;(iii) services have been carried out under the agreement by anindividual ("relevant individual"), on or after the day theAmendment Ordinance came into operation(the "appointedday"), for the relevant person or any other person; and(iv) remuneration for the services has been paid or credited on orafter the appointed day to a corporation or trustee as specifiedin section 9A(1)(a), (b) or (c).9. In considering whether the circumstances referred to above arepresent in relation to a particular arrangement, the following points should bekept in mind:As regards (i), the agreement need not be in writing and can havebeen entered into before, on or after the appointed day.With regard to(ii), generally section 9A(1) will only have applicationwhere the relevant person is carrying on, or is deemed to be carryingon, a trade, profession or business. It is expected, based onexperience prior to the introduction of the Amendment Ordinance,that this will cover the vast majority of disguised employmentarrangements. However, if it is discovered that other relevant personsare entering into such arrangements, section 9A(6) provides theCommissioner with the power to bring the persons concerned withinthe ambit of the legislation by prescribing, by notice in the Gazette,an activity for the purposes of section 9A. Such a notice will involve4subsidiary legislation and will be subject to the scrutiny of theLegislative Council under section 34 of the Interpretation andGeneral Clauses Ordinance (Cap. 1).In relation to (iii), although section 9A(1) can only apply to aparticular relevant individual where he has carried out services underan agreement, it does not require that the agreement itself mustcontain any specific reference to the relevant individual or to theservice company. In other words, it cannot be claimed that section9A does not apply to a particular arrangement simply because therelevant individual is not mentioned in the agreement. Also, theapplication of the new legislation is not restricted to the situationwhere the services are carried out by the relevant individual for therelevant person. To ensure that arrangements involving third partiesare catered for (eg where the services are carried out for a subsidiaryof the relevant person), the subsection refers to services carried out"for the relevant person or any other person".As regards (iv), where a disguised employment arrangement is used,the remuneration under the agreement will clearly not be paiddirectly by the relevant person to the relevant individual. Typically,payment is made to a company controlled by the relevant individual.However, to restrict opportunities for circumvention of theprovisions, section 9A(1) caters not only for this type of situation,but also for arrangements under which payment is made to acompany controlled by an associate of the relevant individual or to atrust under which the relevant individual or an associate is abeneficiary. However, in this context, for the sake of brevity the term"service company" is used.10. The new provisions encompass arrangements which involve one ormore than one associate, together with or without the relevant individual.Relevant terms, such as "associate", "beneficiary", "control", "principal officer"and "relative" are defined in section 9A(8) and are along similar lines to thosecontained in sections 16E, 21A and 39E of the Ordinance. It should be noted,however, that the definition of "associate" used in section 9A(8) has beenworded so that where more than one relevant individual carries out servicesunder a single agreement, each will be an associate of the other.5The Operative Provisions11. Where the circumstances referred to above are present, a servicecompany arrangement is subject to what may be called the operative provisionsof section 9A(1), contained in paragraphs (i), (ii) and (iii), unless it falls outsidetheir application by virtue of the escape clauses provided in subsections (3) and(4). In essence, as indicated earlier, the effect of the operative provisions is totreat the relevant individual and the relevant person as employee and employerrespectively, and the remuneration for the services carried out by the relevantindividual as his income from an employment of profit, and thereforechargeable to Salaries Tax.Section 9A(1)(i)12. This paragraph provides that the relevant individual is to be treatedas having an employment of profit with the relevant person. Subparagraphs(A)(I) and (A)(II) set down the rules for determining the date ofcommencement of the employment. Where the relevant person is carrying on atrade, profession or business, the date of commencement is taken to be the daythe relevant individual commenced to carry out services under the agreement oron the appointed day, whichever is the later [(A)(I)]. Accordingly, for disguisedemployment arrangements which commenced prior to the introduction of thelegislation, the date of commencement is taken to be the appointed day.13. If the relevant person is carrying on a prescribed activity, rather thana trade, profession or business, the date of commencement is taken to be theday the Commissioner prescribed the activity by notice in the Gazette undersection 9A(6) or, if it is later, the day the relevant individual commenced tocarry out services under the agreement [(A)(II)].14. By virtue of paragraph(i)(B), the employment of profit is treated ascontinuing until the agreement terminates "without the relevant individualcontinuing to carry out any of these services as an employee of the relevantperson". In other words, if the relevant individual continues to serve as anemployee of the relevant person after the agreement terminates, the situationwill not be viewed as involving a cessation of employment.6Section 9A(1)(ii)15. This paragraph unequivocally states that whilst the relevantindividual is treated, under paragraph (i), as having an employment of profitwith the relevant person -(a) "the relevant individual shall be treated as an employee of therelevant person"; and(b) "the relevant person shall be treated as the employer of therelevant individual".16. It is pertinent in this regard that the closing words of section 9A(1)provide in effect that where the operative provisions are applicable "the otherprovisions of this Ordinance (including section 52) shall be construedaccordingly". It follows that if an arrangement comes within the scope of theoperative provisions the relevant person concerned is subject to the compliancerequirements imposed on employers, and in particular those under section 52concerning notification of commencement and cessation of employment etc.Persons who fail to comply with the requirements in question may be liableunder the offence provisions contained in Part XIV of the Ordinance.Section 9A(1)(iii)17. This paragraph ensures that the remuneration referred to insubsection (1) (ie the remuneration which is paid or credited on or after theappointed day to the service company for services carried out under theagreement by the relevant individual on or after that day) is treated asemployment income of the relevant individual. To cover the timing aspect forthe purposes of section 11B, the paragraph also provides that the remunerationshould be treated as being "received by and accrued to the relevant individualat the time that it is paid or credited to the corporation or trust concerned".18. Situations may arise where remuneration is paid or credited after theappointed day in respect of services which are carried out by the relevantindividual partly before and partly after that day. In such cases the Departmentaccepts that only the remuneration which is reasonably attributable to theservices carried out on or after the appointed day comes within the scope of7section 9A. The Department will generally allow apportionment on a time basis,although no hard and fast rules are laid down. Whatever basis is used it shouldbe clearly explained in the Salaries Tax Return of the relevant individual. As tothe taxation treatment of the remuneration attributable to the services carriedout prior to the appointed day, see para 48 below.19. It is also possible that a single service company agreement mayprovide for services to be carried out by more than one relevant individualand/or for payments to be made for purposes other than remuneration for suchservices. Where such an arrangement is used it is in the interests of the partiesconcerned to clearly specify, in the agreement or otherwise, exactly what eachpayment is for, including the amount of remuneration for the services carriedout by each relevant individual. Section 9A(2) is relevant in this regard. Thissubsection provides, in essence, that where an agreement does not specify theremuneration of a particular relevant individual, any sum paid or credited underthe agreement to the service company will be treated as remuneration forservices carried out by that individual unless it is established to the satisfactionof the Commissioner by the relevant individual concerned or the relevantperson that all or part of the sum should be excluded on the ground that it waspaid for some other purpose. In other words, unless the relevant particulars areprovided, each relevant individual will be potentially liable to Salaries Tax inrespect of the full amount paid or credited to the service company on or afterthe appointed day.SPECIFIED CRITERIA20. The operative provisions discussed above do not apply in relation toremuneration under an agreement where all of the specified criteria laid downin section 9A(3) are satisfied. The criteria in question represent some of thefactors which may indicate that the services carried out under an agreement donot in substance amount to holding an office or employment of profit. Passingor failing any particular criterion is not necessarily conclusive either way. Forexample, a person may be paid on a periodic basis which does not satisfysection 9A(3)(d), yet still be able to satisfy the Commissioner that he does notin substance hold an office or employment of profit. The Department accepts,however, that if the criteria are all satisfied an office or employment of profit isnot involved. Each is briefly discussed in turn below.8Section 9A(3)(a)21. This criterion will be satisfied if neither the agreement nor anyrelated undertaking provides for remuneration for the services carried out bythe relevant individual to include or to be the provision of any of the specified(or similar) employment-type benefits or any benefit (including money) inlieu thereof. It should be noted that in considering whether or not the criterionhas been satisfied, the key question is not whether the relevant individual hasdirectly received a benefit as compensation, but whether the agreement (orrelated undertaking) provides for the remuneration to include such a benefit orcompensation (ie the identity of the recipient need not be taken into account).Section 9A(3)(b)22. This criterion reflects the view that it is far more usual for anemployment relationship to require that services be performed personally by aparticular individual than it would be in the case of an independent contractor.In the latter situation it is not unusual to allow the engagement ofsub-contractors. However, it is recognized that an independent contractor maybe engaged on terms which require a certain individual to carry out servicesrequired (eg a particular architect may be nominated to prepare the plans for abuilding). Accordingly, the general position under this provision is that thecriterion will not be satisfied where the agreement (or any related undertaking)requires that the services be performed personally by the relevant individual.However, to cater for a genuine contractor who has more than one client, it willbe satisfied where the relevant individual also carries out the same or similarservices for persons other than the person for whom they are carried out underthe agreement.Section 9A(3)(c)23. This provision is concerned with the question of whether the relevantindividual in performing the services under the agreement is subject to controlor supervision of a kind which is usual under an employment relationship. Inthis regard, the criterion will be satisfied if there is not any control orsupervision "which may be commonly exercised by an employer in relation tothe performance of his employee's duties". It would be unusual for a relevantperson to exercise such control or supervision in respect of an individual9carrying out duties on behalf of an independent contractor. Whereas anemployer normally (although there can be exceptions) has the right to direct themanner in which work is performed by an employee, a contractor usually hasfreedom as to the way in which tasks are carried out, subject to compliancewith job specifications as detailed in the relevant contract. Accordingly, wheresupervision or control of the kind specified is present, it will generally providea strong indication of employment.24. In considering the position of a relevant individual in relation to thiscriterion, section 9A(3)(c)(ii) has the effect of providing that any control orsupervision exercised by the service company concerned may be disregarded.As a matter of practice the Department will also not take into account anysupervision or control which can be directly attributed to statutory requirementsand is not dependent on the existence of an employer/employee relationship.Section 9A(3)(d)25. The focus of this provision is the basis on which the remunerationis paid or credited. The criterion will be satisfied if the remuneration "is notpaid or credited periodically and calculated on a basis commonly used inrelation to the payment or crediting and calculation of remuneration under acontract of employment". As such, regard must be had not only to the questionof whether payments are made periodically, but also to the basis for calculatingthe payments for the work performed.26. It should as a rule be a relatively straightforward matter todistinguish payments of a kind made to contractors, even if made byinstalments or as progress payments, from those made on a basis used underemployment contracts. For contractor situations the payments will generally bein relation to an agreed sum for specified work under a contract, whereas foremployment cases payments are usually in respect of the time worked orposition occupied and made on a regular basis (eg weekly, fortnightly ormonthly).Section 9A(3)(e)27. This criterion is concerned with the provisions under the agreementrelating to the termination of the arrangement between the parties. It will be10satisfied if the relevant person does not have the right to cause any of theservices under the agreement "to cease to be carried out in a manner, or for areason, commonly provided for in relation to the dismissal of an employeeunder a contract of employment". In this regard, the services of an employeecan generally be terminated by providing the relevant notice and/or meetingother requirements under an award or statute. By way of contrast, under arelationship involving an independent contractor, the contract will usually bedischarged by performance, but may also specify other circumstances, such asdefault situations, under which it can be terminated.Section 9A(3)(f)28. As is stated in the provision, this criterion will be satisfied where"the relevant individual is not held out to the public to be an officer oremployee of the relevant person". The term "held out to the public" is notdefined in the Ordinance and should therefore be given its ordinary meaning.As such, if either the relevant individual or relevant person acts in a manner ordoes something that is intended to lead members of the public to believe thatthe relevant individual is an officer or employee of the relevant person, thecriterion will not have been satisfied. This could occur, for example, throughmaterial included in trade or professional directories, journals or otherpublications, the issue of name cards, statements made at public functions,information contained in press releases etc.29. It is appreciated that there may be cases where "independent" agentsworking in, for example, the real estate and insurance fields will be unable tosatisfy this criterion. However, if the persons concerned are held out to thepublic to be employees of the organizations they represent, then their cases willin any event warrant close examination before it is accepted that employment isnot involved30. Where all of the specified criteria are satisfied, a relevant individualwill not have any liability to Salaries Tax by virtue of section 9A. Likewise, thesection will not have the effect of imposing on the relevant person thecompliance requirements applicable to employers under section 52.31. Where a relevant individual is unable to meet one or more of thespecified criteria, it does not necessarily follow that the operative provisions11shall apply to remuneration under the agreement. Section 9A(4) providesanother avenue of escape for those cases where the relevant individualestablishes to the satisfaction of the Commissioner that at all relevant times thecarrying out of the services under the agreement "was not in substance theholding by him of an office or employment of profit with the relevant person".THE COMMISSIONER’S DISCRETION : SECTION 9A(4)32. Section 9A(3) may be viewed as a somewhat mechanical means ofascertaining whether the operative provisions can be disregarded. However, theapproach has been taken on the footing that where none of the indicators ofemployment covered by the specified criteria is present, it may be safelyconcluded, without examining the case in greater detail, that in substanceemployment is not involved. In short, it is intended to be a pragmatic approachfor the convenience of taxpayers and the Revenue alike.33. The situation is clearly quite different where one of the specifiedcriteria is not satisfied. In such a case there will at least be an indication of anemployment relationship. Careful consideration of all of the circumstances ofthe arrangement will be required before it can be concluded whether or not insubstance one exists.34. In considering cases under subsection(4) the Commissioner will ofcourse have regard to the substantial body of case law concerning thedistinction between a contract of service (ie one of employment) and a contractfor services (ie independent contractor). The test originally considered to bedecisive in this area focused on the issue of control : "a servant is a personsubject to the command of his master as to the manner in which he shall do hiswork" [Yewens v. Noakes (1880) 1 TC 260, CA].35. Although in many cases the control test can still be simply appliedto determine the matter, there are situations where it proves to be inadequate.For example,it is not now unusual for professional or highly skilled individualsto perform their tasks on the basis of their own judgement when engaged asemployees. It is therefore not surprising that a further test, known as theintegration test, was recognized alongside the control test. This wasintroduced by Lord Denning in Bank voor Handel en Scheepvaart NV v.Administrator of Hungarian Property [1954] 35 TC 311, HL where he said -12"In this connection I would observe the test of being a servant doesnot nowadays rest on submission to orders. It depends on whetherthe person is part and parcel of the organization."36. A further test, the economic reality test, was applied in MarketInvestigations Ltd. v. Minister of Social Security, [1969] 2 QB 173. This testhas regard to matters such as whether the individual is involved in themanagement of the work and is placed at financial risk, whether he can employothers to assist and whether he provides major equipment. However, in 1984the Court of Appeal, in Nethermere (St. Neots) Ltd. v. Gardiner 1CR 612,rejected the view that the economic reality test was "the fundamental test" andregarded it as "no more than a useful test".37. What has become clear from the cases, as Nolan J stated in the Courtof Appeal in Hall v. Lorimer [1993] STC 23 (at 28), is that -"In cases of this sort there is no single path to a correct decision. Anapproach which suits the facts and arguments of one case may beunhelpful in another."He went on to cite with approval (at 29) the views expressed by Mummery Jearlier in the case in the High Court, where he said –"The process involves painting a picture in each individual case. AsVinelott J said in Walls v. Sinnett (Inspector of Taxes) [1986] STC236 at 245 : "It is, in my judgement, impossible in a field where avery large number of factors have to be weighed to gain any realassistance by looking at the facts of another case and comparing themone by one to see what facts are common, what are different and whatparticular weight is given by another tribunal to the common facts.The facts as a whole must be looked at, and a factor which may becompelling in one case in the light of the facts of that case may not becompelling in the context of another case." ".It should therefore be clear that the Commissioner will only be able to form aview for the purposes of section 9A(4) if he is provided with comprehensivedetails of all the facts surrounding an agreement.1338. A relevant individual who wishes to have the Commissioner exercisehis discretion under the subsection may advise the Department either at thetime of lodging his or her Salaries Tax Return or by means of a separateapplication for an advance ruling which can be made at any time. Thesupporting material and information required is the same in each case and isdiscussed below.ADANCE RULINGS39. A request for an advance ruling should be in writing and beaddressed to the Commissioner. It must be signed by the relevant individual orhis authorized representative. The following material and information shouldsupport the request -(a) Copies of the agreement and any related undertaking. If anagreement or undertaking has not been reduced to writing, anexplanation of why this is the case should be provided togetherwith full details of its terms and conditions.(b) If not otherwise apparent, full details of the remunerationpayable under each agreement (or undertaking).(c) Copies of the respective organization charts of the relevantperson and the service company.(d) A statement setting out the relevant individual's :(i) duties and obligations in relation to the relevant personand the service company respectively; and(ii) previous employment history, if any, with the relevantperson or any associated party.(e) A statement listing, together with supporting details, thespecified criteria in subsection (3) which have been satisfied.14(f) An explanation of why it is considered that the relevantindividual did not in substance hold an office or employment ofprofit.To facilitate consideration of the application, answers should also be providedto the questions listed on Appendix B. If a particular question is not pertinentto the relevant individual's situation, this should be noted together with a briefexplanation of why that is the case.40. Under normal circumstances, where the information referred toabove is provided, it should be sufficient to allow a ruling to be made. In suchcases, it will be issued in letter form signed by the Commissioner or anauthorised officer, generally within 3 months of the date of application. Insome cases, however, it may be necessary for the Department to seek furtherinformation from the relevant individual or a third party. Where this occurs itmay not be possible to issue the ruling within the 3 months period. It should benoted that rulings will not be provided in respect of hypothetical, contemplatedor proposed situations.COMPLIANCE41. From the perspective of the relevant person, if an agreement hasbeen entered into which comes within section 9A(1) and is not excluded fromthe scope of the operative provisions by virtue of subsection (3) or (4), therewill be an obligation to comply with the notification requirements of section 52(ie on the basis that the relevant person is the employer of the relevantindividual - see paras. 11 to 19 above). On the other hand, if it is clear thatsubsection (3) or (4) is applicable, the provisions of section 52 will not apply.42. It is possible, however, that a relevant person may be unsure as towhether the operative provisions apply to a particular arrangement (eg it maynot be clear as to whether the relevant individual controls the service companyor whether all of the specified criteria in subsection (3) have been satisfied). Tocater for such cases, new section 80(1AA) in effect allows a relevant person topresume in certain circumstances that the reporting obligations do not apply.The section provides that it shall be a defence in any proceedings against aperson for failure to comply with the requirements of section 52(4), (5), (6) or15(7) if he shows that he relied upon a statement in writing by the relevantindividual "in the form specified" and it was reasonable for him to rely uponthat statement. In this regard, section 80(1AC) provides that the Commissionermay specify the form of statement by notice in the Gazette (see Appendix C).43. It can be seen from the specified form that a relevant individualshould only complete the statement where he is able to say that, to the best ofhis knowledge and belief, one or more of the following situations is applicablein relation to the agreement -(a) the party to which the remuneration is paid or credited is not acorporation or trustee of the kind referred to in section 9A(1)(eg if a corporation, it is not controlled in the mannerdescribed);(b) all of the specified criteria are satisfied;(c) the Commissioner has confirmed in writing that he is satisfiedthat in carrying out services under the agreement he is not insubstance holding an office or employment of profit with therelevant person.44. It goes without saying that the defence provided for in section80(1AA) will not apply if a relevant person has reason to doubt that therelevant individual is entitled to make a statement of the kind in question. Insuch a situation the relevant person should, as a matter of prudence, proceed onthe footing that the reporting requirements are applicable. The Department willnot, however, take any action in relation to a failure of the employer to complywith the requirements if during the relevant period the relevant individual wasawaiting the outcome of an application for a ruling from the Commissionerunder section 9A(4).45. As far as the relevant individual is concerned, if he has any doubt asto whether the service company is of the kind referred to in section 9A(1) orwhether all of the specified criteria are satisfied, he should obtain a ruling fromthe Commissioner before providing the relevant person with a statement inwriting. In this regard, it should be kept in mind that new section 80(1AB)provides that a person who knowingly or recklessly makes such a statement16which in a material respect is false or misleading shall be guilty of an offence.The sanctions provided for under sections 82 and 82A may also haveapplication where a relevant individual fails to comply with his obligations.COMMENCEMENT OF THE LEGISLATION46. As provided in the Amendment Ordinance, the new legislation cameinto operation on the "appointed day" (ie 18 August 1995). The legislation doesnot apply to any service company agreement entered into before the appointedday where the remuneration was paid or the services were carried out, or bothwere effected, prior to that date. The legislation will apply in relation to such anagreement where the remuneration is paid or credited and the services arecarried out on or after that date. The legislation will, of course, also apply inrespect of agreements entered into on or after the appointed day.47. The "appointed day" serves to place it beyond any doubt that wherean arrangement is in existence on or after that date and comes within the scopeof the legislation, there is a compliance obligation to provide information to theDepartment. As far as arrangements which commenced before the appointedday are concerned, the Department will not take any penalty action in respectof failure to comply with section 52 reporting requirements that may haveexisted before that date. A table setting out the Department's position inrelation to the application of sections 9A and 52 is attached as Appendix D.48. One of the purposes of the legislation is to facilitate the identificationof disguised employment arrangements. It stands to reason that where it isestablished that such an arrangement exists, income derived both before andafter the appointed day may be charged to Salaries Tax. The Department's viewis that if the provisions of the Ordinance (including sections 61 and 61A)existing prior to the introduction of section 9A had the effect of rendering theearlier income chargeable to Salaries Tax, it is only appropriate to assess theincome accordingly.49. It is pertinent to mention at this point that where an arrangement fallsoutside the scope of section 9A (ie, even if entered into after the appointed day),it may still, depending on the facts of the case, be charged to Salaries Tax byapplication of the general anti-avoidance provisions. For example, it might be17considered appropriate to apply those provisions if a "relevant person" notcarrying on a trade, profession or business or prescribed activity engaged aperson to carry out services under a disguised employment agreement. TheDepartment considers that its position in this regard is supported by thedecision of the Privy Council in CIR v. Challenge Corporation Limited [1987]2 WLR 24. This was to the effect that a general anti-avoidance provision canapply notwithstanding the existence of related specific anti-avoidanceprovisions.POSITION OF THE SERVICE COMPANY50. To prevent double taxation, section 9A(5) provides that where byvirtue of section 9A a relevant individual is chargeable to Salaries Tax onremuneration referred to in subsection (1), the corporation or trustee (ie theservice company) to whom that remuneration is paid or credited is notchargeable to tax on the remuneration. Accordingly, no deduction ordepreciation allowance will be granted to the service company in respect ofrelated expenditure.51. Subsection (5) also provides, in effect, that the relevant individual isnot chargeable to tax on any remuneration paid or credited to him by theservice company as an employee to the extent that the remuneration isattributable to services carried out under the agreement. This exemption willnot apply in respect of any remuneration which is not attributable to suchservices, e.g. services carried out by the relevant individual which are unrelatedto the agreement with the relevant person.Service Companies used by Professionals52. Reflecting the taxation principle that it is not possible for a man toemploy himself, section 9A(7) has the effect of providing that the proprietorsand partners of unincorporated businesses (eg professional firms) with servicecompanies are excluded from the application of the operative provisions ofsection 9A. Section 9A(7)(b)(i) covers the situation where a sole proprietorshipis involved and section 9A(7)(b)(ii) addresses partnership cases. TheDepartment's treatment of service company arrangements of this kind isdetailed in DIPN No. 24.

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