Hong Kong-incorporated Web3 Companies with Employees Working Remotely in Mainland China: How Are Individual Income Taxes Handled in Both Jurisdictions?

Introduction: A tax issue that Web3 practitioners cannot avoid

For Web3 projects, incorporating a company in Hong Kong is an extremely common arrangement driven by financing, licensing and business-layout considerations; and it is likewise an industry norm for research and development teams and operations teams to remain in the mainland and collaborate remotely. This gives rise to a frequently occurring issue that is widely misjudged:The employee's labor contract is signed with the Hong Kong company, the salary is paid by the Hong Kong company, and the person works in the mainland — is this salary subject to tax in Hong Kong? Must it be declared in the mainland? Will it be taxed twice, once on each side?

Answering this question requires looking at two sets of rules at the same time:Hong Kong determines whether it has taxing rights based on the "source of income", while the mainland determines whether worldwide declaration is required based on "tax resident status"The two sets of rules operate in parallel, and double taxation is avoided through the Arrangement between the Mainland and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter the "Arrangement") and the tax credit mechanism.

The following is set out in layers.

I. Quick overview of conclusions

Regardless of which scenario applies,the same salary will not be fully taxed twice by both jurisdictions—the Arrangement and the respective credit rules of the two jurisdictions provide a fallback. However, "no double taxation" does not mean "no need to declare"; procedural obligations cannot be omitted.

II. Hong Kong Salaries Tax: Taxing Power Determined by "Source of Income"

(1) Basic principles

Section 8(1) of the Hong Kong Inland Revenue Ordinance establishes the territorial source principle for salaries tax: only employment income "arising in or derived from Hong Kong" falls within the scope of taxation. Whether income is sourced from Hong Kong depends primarily onwhere the services are provided, not on where the wages are paid or where the contract is signed.

(2) Three typical scenarios

1. The employee works remotely in the Mainland throughout

A development engineer writes code in Shenzhen, an operations team handles community management in Chengdu, and a researcher produces reports in Shanghai—where the services are provided entirely in the Mainland, Hong Kong generally has no taxing right. However, attention should be paid to the "60-day rule" under sections 8(1A)(b) and 8(1B) of the Inland Revenue Ordinance: where a taxpayer visits Hong Kong for not more than 60 days in aggregate in a year of assessment, an exemption may be claimed; once the aggregate reaches 61 days and services are provided in Hong Kong (for example, attending an offline meeting or working on-site in Hong Kong),the exemption ceases to apply in its entirety—if the employment is a Hong Kong employment, the income for the whole year may fall within the scope of taxation, rather than tax being charged only on the portion attributable to services provided in Hong Kong.

A common procedural misconception warrants particular note:no tax liability does not mean no filing obligationWhere wages are paid by a Hong Kong company, the company must submit an Employer's Return (IR56B) each year, and the employee will also receive an Individual Tax Return (BIR60); even if the 60-day exemption conditions are met, the taxpayer must still, in the tax return,An exemption application must be proactively submitted, and the exemption takes effect only after assessment and approval by the tax authority; it is not granted automatically.

2. Employee works in Hong Kong on a long-term basis

The services are provided in Hong Kong, and Hong Kong exercises its taxing rights. Salaries tax is calculated under two methods, the "progressive rate" and the "standard rate",and is levied at the lower of the two(the calculation methods are set out in detail in Part V below).

3. Employee travels between the two places

Many core members of Web3 teams need to come to Hong Kong frequently—to meet investors, attend industry events, and handle banking and compliance matters. The Hong Kong Inland Revenue Department will first distinguish whether the employment is "Hong Kong employment" or "non-Hong Kong employment"; the factors considered include the place where the employment contract is negotiated and performed, the employer's place of residence, and the place where remuneration is paid:

• Non-Hong Kong employment: tax is calculated only on the portion of services actually provided in Hong Kong, apportioned by number of days, and the portion of services provided in the mainland is not counted;
• Hong Kong employment: in principle, the entire year's employment income falls within the scope of taxation, and day-based apportionment does not apply—unless all services throughout the year are provided outside Hong Kong and visits to Hong Kong do not exceed 60 days.

Exception note — company directors: Founders or core members of Web3 projects often concurrently serve as directors of Hong Kong companies, in which case the rules are stricter. Paragraph 34 of the Hong Kong Inland Revenue Department's Departmental Interpretation and Practice Notes No. 10 (DIPN 10) expressly provides that where the central management and control of a company is exercised in Hong Kong, director's fees constitute Hong Kong-sourced income,and are fully taxable regardless of where the director performs his or her duties; the 60-day rule does not apply, nor may the amount be apportioned on a per-day basisWhere a founder receives remuneration in the combined form of "director's fees + salary", the tax treatment of the two components differs and should be assessed separately.

III. Mainland individual income tax: filing obligations determined by "tax resident status"

(1) Determination of resident status

Article 1 of the Individual Income Tax Law of the People's Republic of China provides that an individual who isdomiciledwithin China, or who is not domiciled in China but has resided in China for an aggregate of183 days or morein a tax year, is a resident individual; a resident individual is taxed onall income derived from within and outside Chinapay individual income tax.

Two concepts here are prone to being misunderstood from their literal wording and require accurate understanding:

• "Domicile" ≠ owning real propertyUnder tax law, this refers to habitual residence within the territory by reason of household registration, family, and economic interestshabitual residenceWeb3 practitioners whose family is in the mainland, even if they frequently travel to and from Hong Kong or overseas, are mainland tax residents as long as their family and center of interests are in the mainland;
• "worldwide income"means that, as long as one is a mainland tax resident, wages paid by a Hong Kong company are likewise within the scope of declaration. Tax may be credited in accordance with law, butthe declaration obligation itself cannot be exempted。

(II) The case of non-residents

Only where an individual does not constitute a mainland tax resident (no domicile and fewer than 183 days of residence in the year) is tax payable solely on income sourced within the territory. For most practitioners whose family is in the mainland, they generally fall within the resident category.

IV. Regulated on Both Sides: How Double Taxation Is Coordinated

Where an employee is assigned to work in Hong Kong, or resides in Shenzhen and commutes to Hong Kong for work each day, situations may arise in which both sides simultaneously assert resident status or taxing rights. Coordination operates at two levels:

(1) Conflict of residence status: the "tie-breaker rule" determines attribution

Hong Kong may determine an individual to be a Hong Kong resident under criteria such as "more than 180 days in Hong Kong in a year of assessment," while the Mainland may determine that same individual to be a Mainland resident under the "place of domicile" criterion. In the event of a dual resident status conflict, the tie-breaker rule provided in Article 4 of the Arrangement examines in sequence:

1. permanent homein the side in which it is located;
2. where a permanent home is available in both sides or in neither, examine thecentre of vital interests(the side with which the individual's personal and economic relations are closer);
3. where this cannot be determined, examine thehabitual abode；
4. where this still cannot be determined, the competent authorities of both sides shall resolve the matter through consultation.

It should be emphasized: The tie-breaker rule resolves "which party's tax resident you are,"without changing the taxing right of the place where the income is sourcedHong Kong may still tax wages for services provided in Hong Kong; the Mainland still requires residents to file, and the Hong Kong tax already paid may be credited against Mainland tax upon application with tax payment certificates.

(2) The "183-day exemption": all three conditions must be met

Where a Mainland resident is assigned to provide services in Hong Kong and simultaneously meets the following three conditions, Hong Kong does not tax that employment income, and tax is payable only in the Mainland:

1. in the tax year concerned, beginning or ending inany twelve-month periodthe aggregate period of stay in Hong Kong does not exceed 183 days;
2. the remunerationis not paid by or on behalf of a Hong Kong employer；
3. the remunerationis not borne by a permanent establishment that the employer has in Hong Kong。

In practice, the third condition is the most easily overlooked—if the salary cost is in fact borne by the Hong Kong company, it is generally difficult to satisfy the exemption conditions.

(3) Credit mechanism

For income tax already paid overseas by a Mainland resident on foreign-source income, a credit may be claimed against the Mainland tax payable, provided that the credit amount does not exceed the tax payable on that income computed under Mainland tax law;any excess may be carried forward for credit within the following five tax years。

V. How Salaries Tax Is Calculated: The Lower of Two Methods

Hong Kong salaries tax is computed under two methods, and the taxpayer pays the lower of the two amounts:

• Progressive rates: the five-tier progressive rates ranging from 2% to 17% apply to the net chargeable income (income − deductions − allowances);
• Standard rate: the standard rate applies to net income (a two-tier regime has applied from the 2024/25 year of assessment: 15% on the first HK$5 million of net income and 16% on the excess).

Example (for illustration of the logic only, not a precise calculation)

Assume that the technical lead of a Web3 project is assigned to work in Hong Kong with an annual salary of HK$1 million. For simplicity, only the basic allowance is taken into account, other deductions such as MPF contributions are disregarded, and no currency conversion is performed:

Step 1: Each jurisdiction performs its own calculation.：

• Hong Kong: calculate separately under the progressive rates and the standard rate, and take the lower amount;
• Mainland China: include the income in comprehensive income and calculate the tax payable on that foreign-source income according to the Mainland tax rate schedule.

Step 2: Credit the Hong Kong tax paid against the Mainland tax.：

• If the Mainland tax payable on that income ishigher thanthe Hong Kong tax paid, the difference is paid as additional tax in Mainland China;
• if the Mainland tax payable islower thanthe Hong Kong tax paid, no additional tax is payable for that year, and any unused credit may be carried forward and used as a credit in the following five years.

VI. Corporate-side issue: whether wages paid to Mainland employees can be deducted before tax

This is an issue of equal concern to founders and finance teams. The answer isIn principle, yes: Section 16(1) of the Inland Revenue Ordinance provides that expenses incurred in the production of chargeable profits are deductible, and employee salaries are ordinarily a deductible item. The test for deductibilityis unrelated to where the employee is located or whether the employee is a Hong Kong resident; the only question is whether the expense was incurred for the operation of the Hong Kong company.

However, three conditions must be satisfied at the same time:

1. the employment relationship is genuine, supported by a contract, working-hours records, code commits and work deliverables, among other evidence;
2. the remuneration level is commensurate with the position and market conditions and is not obviously abnormally high;
3. the beneficiary of the services is indeed the Hong Kong company。

The third point is a high-risk area for Web3 projects. The multi-entity structure common in the industry—a Hong Kong company holding a licence or contracting externally, while a mainland affiliated entity actually uses the R&D results—means that if the employment contract is signed with the Hong Kong company but the employees in fact work entirely for the mainland affiliated entity, the salaries are not incurred for the Hong Kong company's own business, and the tax authority is entitled to challenge the deduction, which may even triggertransfer pricing adjustments—that is, the tax authority re-determines cost allocation and profit attribution between related parties. Therefore,"who signs the employment contracts, who owns the R&D results and intellectual property, and who bears the costs" should be thought through at the structure-design stagerather than after-the-fact remediation.

VII. Three Common Misconceptions

Misconception 1: "Salaries paid in Hong Kong cannot be traced by the mainland."

This does not hold. Mainland residents have an obligation to proactively declare their worldwide income; automatic exchange of tax-related financial account information under CRS is already in effect between the mainland and Hong Kong; Hong Kong employers file employee remuneration with the Inland Revenue Department each year (IR56B), and individual employees also have tax filing records. The information chain is complete.

Misconception 2: Copying "day-counting" schemes found online

Day-count rules genuinely exist (the Hong Kong 60-day rule and 183-day rule, and the mainland 183-day rule), but their application involves numerous details: the Hong Kong 60-day rule counts "visits" rather than "provision of services"; the 183 days under the Arrangement is calculated onany rolling twelve-monthbasis, rather than on a calendar-year basis; mainland days of residence are counted on afull 24 hours as one daybasis. Each person's residence arrangements, family center of gravity and manner of contract signing differ; directly applying another person's scheme is very likely to produce a wrong conclusion. A professional assessment based on the facts of the individual case should be made before implementation.

Misconception 3: "If no one withholds tax on foreign-source income, it need not be declared."

Incorrect. Salaries paid by a Hong Kong company constitute foreign-source income,no domestic withholding agent, and the employee must file a voluntary declaration through the Individual Income Tax APP during the annual comprehensive income reconciliation period. Article 10 of the Individual Income Tax Law expressly provides that where taxable income is obtained and there is no withholding agent, where the withholding agent has not withheld tax, or where overseas income is obtained, the taxpayer shall file a tax declaration in accordance with the law. Those unfamiliar with the filing procedures may entrust a professional service institution to handle the matter.

VIII. Declaration and Payment: A Separate Timetable on Each Side

Hong Kong side(usually handled by the company or tax representative):

Mainland side(handled by the employee personally):

IX. Repatriating salaries to the mainland: lawful pathways and two red lines

Wages are lawful labor income and are classified as "employee remuneration" under the foreign exchange administration framework, falling withinpersonal foreign exchange income under the current account, and can be settled and repatriated through regular bank channels:

• within the annual facilitation quota (equivalent to USD 50,000): settlement may be processed directly upon presentation of the individual's valid identity document;
• exceeding the facilitation quota: upon presentation of authenticity materials such as the employment contract and proof of income, processsettlement that does not draw on the annual facilitation quota, which presents no legal obstacle.

Two red lines must not be crossed:

1. underground banks or off-exchange conversion channels for virtual currency: these are unlawful and non-compliant channels; funds may be frozen, and in serious cases this may constitute a criminal offense — for Web3 practitioners, the practice of "moving funds through USDT for a round before cashing out" likewise falls within this risk area and does not constitute a lawful settlement path;
2. Split foreign exchange settlement: Splitting large-amount funds into multiple transactions and using the quotas of relatives and friends to circumvent administration is a practice subject to priority monitoring by foreign exchange authorities; the relevant parties may be placed on a "watch list," which may affect their subsequent normal foreign exchange settlement and sale.

Conclusion and lawyer's notes

For Web3 projects, the difficulty in the tax treatment of a "Hong Kong contracting + Mainland employment" structure lies not in the rules themselves, but inmatching the facts of each case to the provisions of the rules: how the nature of employment is characterized, how days spent in Hong Kong are counted, how deductions and credits are coordinated, and how related-party transactions are priced under a multi-entity structure—each of these depends on an assessment of the specific facts. Before establishing such a structure, a project is advised to complete three tasks:

1. identify employees' actual places of work, the content of their duties and the entities that benefit, and establish a documented evidence chain (contracts, working-time records, deliverables, and agreements on intellectual property ownership);
2. assess the tax burdens and filing obligations in both jurisdictions in advance under the framework set out in this article, and evaluate whether exemption and credit conditions are triggered;
3. where founder-director status, allocation of employment costs among multiple entities, or mixed "fiat currency + token" remuneration arrangements are involved, conduct a case-specific tax and compliance assessment in advance.

Mankun Law Firm continuously provides services in Web3 project structuring, cross-border employment and Hong Kong-related tax compliance. If you require a case-specific assessment of particular arrangements, you are welcome to contact us (WeChat: mankunlvsuo / Email: service@mankunlaw.com).

Disclaimer: This article provides a general introduction to legal and tax knowledge and does not constitute legal advice or tax advice for any specific case. As to the specific application of the statutory provisions, tax guidance and tax rate standards referred to herein, the currently effective laws and regulations and the opinions of tax authorities and professional advisers shall prevail.