Tax Residency Status and Its Impact on Annuities: Tax Treatment Across Jurisdictions

The Hong Kong Inland Revenue Department (IRD) revised its interpretation of the “ordinarily resident in Hong Kong” test in Departmental Interpretation and Practice Notes (DIPN) No. 10 (Revised) in October 2024, tightening the criteria for individuals claiming non-Hong Kong sourced income. This shift, combined with the OECD’s ongoing Base Erosion and Profit Shifting (BEPS) initiatives and the implementation of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCAA) in Hong Kong since 2018, has created a new compliance landscape for annuity holders. For a 55+ retiree who has worked in Hong Kong for decades but now splits time between a home in the New Territories and a retirement property in Penang, the question of whether annuity income is taxable in Hong Kong, Malaysia, or both is no longer a theoretical exercise. The IRD’s 2024 DIPN explicitly states that a person’s “habitual abode” and “centre of vital interests” are now weighted more heavily than the number of days physically present, directly impacting the tax treatment of annuity payouts. This article examines how tax residency status—determined by domestic law and double taxation agreements (DTAs)—governs the taxation of annuity income across three key jurisdictions for Hong Kong residents: Hong Kong SAR, Singapore, and Taiwan.

The Hong Kong Framework: Source Principle and the Residency Trap

Source Taxation vs. Worldwide Taxation

Hong Kong operates a territorial source principle of taxation, not a worldwide system. Under Section 8 of the Inland Revenue Ordinance (Cap. 112), salaries tax is chargeable on income arising in or derived from Hong Kong. For annuities, the key distinction is whether the income is sourced from Hong Kong. The IRD’s position, as outlined in DIPN No. 10 (Revised, 2024), is that annuity income from a Hong Kong insurer (e.g., an insurer authorised under the Insurance Ordinance, Cap. 41) is generally considered Hong Kong-sourced and therefore subject to profits tax or salaries tax depending on the policyholder’s status. However, a critical nuance exists: if the annuity is purchased with funds that were themselves not subject to Hong Kong tax (e.g., capital gains from a foreign property sale), the IRD may still deem the annuity income as Hong Kong-sourced if the policy is issued by a Hong Kong insurer and the contract is signed in Hong Kong. The IRD’s 2024 DIPN clarifies that the “location of the contract” is a primary factor, not the source of the premium funds.

The “Ordinarily Resident” Threshold and Its 2024 Tightening

The 2024 revision to DIPN No. 10 introduced a stricter test for “ordinarily resident in Hong Kong.” Previously, a person could maintain non-resident status by spending fewer than 183 days in Hong Kong per year. The revised DIPN now requires an individual to demonstrate their “centre of vital interests” is outside Hong Kong. This includes factors such as:

• Location of the individual’s permanent home.
• Location of their family members.
• Location of their business or employment.
• Location of their social and economic ties.

For an annuity holder who has a Hong Kong insurance policy but spends 200 days a year in Singapore, the IRD may now argue that their centre of vital interests remains in Hong Kong if their family, bank accounts, and professional network remain there. The practical consequence is that annuity income from a Hong Kong policy could be subject to Hong Kong salaries tax (at progressive rates up to 17% on net assessable income) even if the individual is physically absent for most of the year. The IRD’s 2024 DIPN explicitly cites the OECD’s Model Tax Convention commentary on the “centre of vital interests” test, aligning Hong Kong’s interpretation with international standards.

Tax Treatment of Annuity Payouts

Under the Inland Revenue Ordinance, annuity income received by an individual is classified as “income from employment” (if the annuity is linked to a former employer’s pension scheme) or “other income” (if purchased privately). For a private annuity, the tax treatment depends on the capital element. Section 8(1)(c) of the IRO exempts the capital portion of an annuity—the part that represents a return of the original premium—from tax. The IRD requires the insurer to provide a breakdown of the capital and income elements in the policy schedule. For a typical life annuity purchased at age 65 with a premium of HKD 1,000,000 and a monthly payout of HKD 6,500, the IRD’s standard approach is to treat approximately 60-70% of each payout as a return of capital (tax-free) and the remaining 30-40% as interest income (taxable). However, this ratio is not fixed; it depends on the individual’s life expectancy and the annuity’s actuarial assumptions. The IRD’s 2024 DIPN does not alter this capital/income split methodology but reinforces that the entire annuity income stream is subject to Hong Kong tax if the policy is Hong Kong-sourced, regardless of the individual’s residency status.

Singapore: The Territorial System and the DTA with Hong Kong

Singapore’s Source-Based Taxation

Singapore, like Hong Kong, operates a territorial tax system under the Income Tax Act (Cap. 134). Annuity income from a Singapore-licensed insurer is generally considered Singapore-sourced and subject to income tax at progressive rates up to 22% (2025 assessment year). However, a key exemption exists under Section 13(1)(zd) of the Act: annuity income from a Singapore insurer is exempt from tax if the policyholder is a Singapore tax resident and the annuity is purchased with funds that were not previously taxed in Singapore. This exemption is designed to encourage retirement savings. For a Hong Kong resident who purchases an annuity from a Singapore insurer, the income is Singapore-sourced and subject to Singapore tax, but the Hong Kong-Singapore Double Taxation Agreement (DTA), which entered into force in 2015, provides a mechanism to avoid double taxation.

The Hong Kong-Singapore DTA: Article 18 (Pensions and Annuities)

Article 18 of the Hong Kong-Singapore DTA (2015) specifically addresses annuities. It states that annuities (defined as “a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth”) are taxable only in the contracting state where the recipient is a resident. This is a critical distinction from the OECD Model Convention, which typically taxes annuities in the source state. Under the Hong Kong-Singapore DTA, if a Hong Kong resident (as determined by Hong Kong’s domestic law) receives annuity income from a Singapore insurer, the income is taxable only in Hong Kong. Conversely, if a Singapore resident receives annuity income from a Hong Kong insurer, it is taxable only in Singapore.

For a Hong Kong retiree who holds a Singapore annuity policy, the DTA effectively shifts the taxing right from Singapore (the source) to Hong Kong (the residence). The retiree must file a tax return in Hong Kong declaring the annuity income, but they can claim a foreign tax credit in Hong Kong for any tax paid in Singapore (though none would be due under the DTA). The practical challenge lies in proving Hong Kong tax residency to the Singapore IRAS (Inland Revenue Authority of Singapore). The IRAS requires a Certificate of Resident Status from the Hong Kong IRD, which the IRD issues based on the “ordinarily resident” test. Given the 2024 tightening of this test, a retiree who spends significant time in Singapore may struggle to obtain this certificate, potentially falling into a residency gap where neither jurisdiction claims the right to tax the income.

Practical Implications for the 55+ Retiree

A Hong Kong resident who purchases a Singapore annuity with a premium of SGD 200,000 (approximately HKD 1,160,000) and receives monthly payouts of SGD 1,200 (approximately HKD 6,960) must navigate the DTA. If the retiree can demonstrate Hong Kong tax residency (e.g., by maintaining a home in Hong Kong, having a Hong Kong bank account, and spending fewer than 183 days in Singapore), the annuity income is taxable only in Hong Kong. The capital element (approximately 65% of each payout, or SGD 780) is tax-free in Hong Kong under Section 8(1)(c) of the IRO, while the income element (SGD 420) is subject to Hong Kong salaries tax at progressive rates. However, if the retiree fails the “ordinarily resident” test—perhaps because they spend 250 days a year in Singapore and have their family there—the IRD may deem them a non-resident, and the DTA’s protection collapses. In that case, the Singapore IRAS would tax the full annuity payout at Singapore’s rates, with no relief available in Hong Kong.

Taiwan: The Worldwide System and the 2023 Tax Reform

Taiwan’s Shift to Worldwide Taxation

Taiwan operates a worldwide taxation system for its tax residents. Under the Income Tax Act (the “Act”), a Taiwanese tax resident is defined as an individual who has a domicile in Taiwan and resides there for at least 31 days in a tax year, or who does not have a domicile but resides in Taiwan for at least 183 days in a tax year. This definition is broader than Hong Kong’s “ordinarily resident” test and includes individuals who maintain a permanent home in Taiwan, even if they spend less than 183 days there, provided they have a “habitual abode.” A 2023 amendment to the Act (effective 1 January 2024) expanded the definition of “domicile” to include individuals who have a “centre of economic interests” in Taiwan, such as owning a business, having a bank account, or receiving rental income there.

For annuity income, Taiwan taxes worldwide income of its residents. This means a Taiwanese tax resident who purchases an annuity from a Hong Kong insurer must declare the annuity payouts in their Taiwan tax return. The tax treatment of the annuity itself follows the “capital and income” principle similar to Hong Kong: the return of capital is tax-free, while the interest portion is taxable as “miscellaneous income” at progressive rates up to 40% (2025 assessment year). However, a key difference exists: Taiwan does not have a DTA with Hong Kong. The absence of a DTA means that double taxation relief is limited to unilateral foreign tax credits under Article 3-4 of the Act. The credit is capped at the amount of Taiwan tax attributable to the foreign income and is subject to a “basket” limitation—the taxpayer must aggregate all foreign-source income and claim a single credit.

The Cross-Strait Annuity Market

Taiwan’s annuity market is dominated by domestic insurers, but a growing number of high-net-worth individuals (HNWIs) purchase annuities from Hong Kong insurers, attracted by higher yields and product flexibility. According to data from the Taiwan Insurance Institute (2024), cross-border annuity premiums from Taiwan to Hong Kong totalled NTD 12.8 billion (approximately HKD 3.1 billion) in 2023, a 15% increase year-on-year. For a Taiwanese retiree who holds a Hong Kong annuity policy with a premium of HKD 2,000,000 and monthly payouts of HKD 12,000, the tax treatment is as follows:

• Taiwan tax residency: If the retiree spends more than 183 days in Taiwan or maintains a centre of economic interests there, they are a Taiwan tax resident.
• Annuity income: The capital element (approximately 60% of each payout, or HKD 7,200) is tax-free in Taiwan. The income element (HKD 4,800) is taxable in Taiwan at progressive rates.
• Double taxation: Since no DTA exists, the retiree cannot claim a foreign tax credit in Hong Kong for any Taiwan tax paid. However, the Hong Kong IRD does not tax the annuity income if the retiree is a Taiwan resident and the policy is considered Taiwan-sourced under Hong Kong’s territorial rules (which is unlikely, as the contract is in Hong Kong). The practical risk is that the retiree is taxed in Taiwan on the income element, and the Hong Kong IRD may also claim tax if it deems the income Hong Kong-sourced. This creates a potential double taxation scenario with no treaty relief.

The 2023 Tax Reform and Its Impact on Annuity Holders

The 2023 amendment to Taiwan’s Income Tax Act introduced a “controlled foreign corporation” (CFC) rule for individuals effective 1 January 2024. This rule requires Taiwanese tax residents to report and pay tax on the undistributed income of certain foreign entities (including insurance policies structured through offshore vehicles) if the individual holds a 10% or greater interest. For annuity holders, this is relevant if the annuity is purchased through a BVI or Cayman Islands special purpose vehicle (SPV). The CFC rule deems the SPV’s income as the individual’s income, potentially subjecting the entire annuity payout to Taiwan tax, even if the capital element would otherwise be exempt. The Taiwan Ministry of Finance (MOF) estimates that approximately 1,200 Taiwanese residents hold annuities through offshore SPVs, with an average premium of NTD 15 million (approximately HKD 3.6 million) per policy.

The Residency Determination: A Three-Jurisdiction Comparison

The “183-Day Rule” vs. “Centre of Vital Interests”

The three jurisdictions apply different tests for tax residency, creating a patchwork for the mobile retiree. Hong Kong uses the “ordinarily resident” test, which the 2024 DIPN has aligned with the OECD’s “centre of vital interests” approach. Singapore uses a “183-day rule” (Section 13(1)(a) of the Income Tax Act) but also considers the individual’s “habitual abode” and “economic ties.” Taiwan uses a “domicile and 31-day rule” combined with the “centre of economic interests” test. For a retiree who splits time between all three, the residency tie-breaker under the applicable DTAs (Hong Kong-Singapore only) is the “centre of vital interests” test. If the retiree’s centre of vital interests is in Hong Kong, they are a Hong Kong resident for DTA purposes, and Singapore’s annuity income is taxable only in Hong Kong. If the centre is in Singapore, they are a Singapore resident, and Hong Kong’s annuity income is taxable only in Singapore. Taiwan, lacking a DTA with either, remains a wildcard.

The Practical Compliance Burden

The compliance burden for a retiree holding annuities in multiple jurisdictions is significant. The IRD requires annual tax returns for all Hong Kong-sourced income, including annuity payouts. The Singapore IRAS requires a declaration of foreign-source income if the individual is a Singapore resident, but annuity income from a Hong Kong insurer is exempt under the DTA if residency is established. The Taiwan MOF requires a full worldwide income disclosure, including annuity income from Hong Kong and Singapore, with a foreign tax credit claim for any tax paid in those jurisdictions. The key documentation required includes:

• A Certificate of Resident Status from the Hong Kong IRD (for DTA claims).
• A breakdown of capital and income elements from each insurer.
• Proof of days spent in each jurisdiction (passport stamps, flight itineraries).
• Evidence of the centre of vital interests (property deeds, bank statements, family details).

Actionable Takeaways

1. Verify your tax residency status annually: The IRD’s 2024 DIPN requires a factual determination of your “centre of vital interests” each tax year; a single year’s absence can shift your residency and the tax treatment of your annuity income.
2. Use the Hong Kong-Singapore DTA to your advantage: If you hold a Singapore annuity, ensure you obtain a Certificate of Resident Status from the Hong Kong IRD to shift the taxing right to Hong Kong, where the capital element is tax-free.
3. Avoid Taiwan annuities if you are a Taiwan tax resident: The absence of a DTA with Hong Kong creates a high risk of double taxation on the income element, particularly after the 2023 CFC rule expansion.
4. Request a capital/income breakdown from your insurer annually: The IRD and IRAS both require this breakdown for tax returns; without it, the full payout may be treated as taxable income.
5. Document your centre of vital interests meticulously: Maintain a log of days spent in each jurisdiction, property ownership records, bank statements, and family location evidence to support your residency claim in a tax audit.