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June 23, 2022
2022-0973

Hong Kong proposes shipping-related tax concession regime

Executive summary

On 15 June 2022, the Inland Revenue (Amendment) (Tax Concessions for Certain Shipping-related Activities) Bill 2022 was submitted to Hong Kong's Legislative Council. The bill introduces a dedicated tax concession regime offering tax incentives to qualifying shipping commercial principals (i.e., ship agents, ship managers and ship brokers) in Hong Kong.

This Alert summarizes the key provisions of the tax regime.

Detailed discussion

Subject to certain anti-avoidance provisions, the proposed tax concession regime provides that:

  • Qualifying profits of a qualifying shipping commercial principal derived from carrying out a qualifying activity in Hong Kong will be taxed at a concessionary tax rate at 8.25%.
  • Qualifying profits derived by a qualifying shipping commercial principal from carrying out a qualifying activity for an associated shipping enterprise,1 which is entitled to a concessionary tax rate or income exemption, will also be eligible for the same tax concession as the associated shipping enterprise.

The proposed tax concessions will apply to sums received or accrued on or after 1 April 2022. Taxpayers must elect in writing if they plan to avail themselves of the above tax concessions. Such an election, once made, is irrevocable for so long as the taxpayer remains as a qualifying shipping commercial principal.

Eligibility to the proposed tax concession regime

The table below lists out the qualifying requirements for the proposed tax concession regime:

Qualifying requirements

Details

Qualifying shipping commercial principal

  • A qualifying shipping commercial principal must be a standalone corporate entity solely engaging in the relevant qualifying activity or able to satisfy the safe harbor rule. A corporation which fails to meet these conditions may nonetheless obtain a determination of the Commissioner of Inland Revenue.

Qualifying activity

  • The qualifying "ship agency activity," "ship management activity" and "ship broking activity" are specifically defined and should be carried out in the ordinary course of the principal's business carried on in Hong Kong.
  • For both ship agents and ship brokers, the corporation concerned must carry out at least one or more relevant qualifying activities for a year of assessment. For ship managers, the corporation concerned must carry out at least two or more relevant qualifying activities for a year of assessment.
Substance requirement
  • A qualifying shipping commercial principal must exercise its central management and control in Hong Kong.
  • A qualifying shipping commercial principal must undertake to carry out the core income generating activities in Hong Kong by:

    - Having at least one full-time qualified employee in Hong Kong

    - Incurring at least HK$1 million of annual operating expenditure in Hong Kong

    In addition to the above minimum thresholds, an "adequate" number of employees and relevant expenses incurred should also be satisfied.

Specific anti-avoidance provisions

The Bill contains the following specific anti-avoidance provisions that would operate to:

  • Reassess a qualifying shipping commercial principal based on the arm's-length profits that would have been accrued to it if it did not conduct business transactions with its associated parties on an arm's-length basis.
  • Deny a qualifying shipping commercial principal the above tax concessions if the main purpose, or one of the main purposes, of entering into an arrangement is to obtain a tax benefit under the Inland Revenue Ordinance or a tax treaty.
  • Limit the tax deduction for service fees paid by a party who is subject to tax at full-rate at 16.5% to its connected qualifying shipping commercial principal who is subject to concessionary tax rate at 8.25%.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

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ENDNOTE

1 An associated shipping enterprise refers to a person who is a ship lessor, ship leasing manager, ship operator or ship owner entitled to tax concessions or exemption under section 14P(1), 14T(1) or 23B of the Inland Revenue Ordinance and (a) over which the qualifying shipping commercial principal has control, (b) which has control over the qualifying shipping commercial principal or (c) which is under the control of the same person as the qualifying shipping commercial principal.

 

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