Proposed profits tax concessions for various maritime services in Hong Kong SAR
Lewis Lu and John Timpany of KPMG China discuss recently introduced concessions for certain shipping-related businesses in Hong Kong SAR.
The Inland Revenue (Amendment) (Tax Concessions for Certain Shipping-related Activities) Bill 2022 was officially announced on June 2 2022. The Bill introduced a concessionary tax regime for profits derived from qualifying ship agency, ship management, and ship broking activities in Hong Kong SAR.
The proposed tax regime
The tax concessions
Profits derived from qualifying shipping-related activities carried out for:
Corresponding tax concession
An associated ship lessor or ship leasing manager in respect of its activities that generate income entitled to the 0% tax rate under the existing ship leasing tax regime.
0% tax rate
An associated ship leasing manager in respect of its activities that generate income entitled to the 8.25% tax rate under the existing ship leasing tax regime;
An associated shipping principal (for example, a ship lessor or ship leasing manager) that is subject to the 16.5% tax rate (see the anti-tax arbitrage rule discussed below); or
An unrelated shipping principal.
8.25% tax rate
A connected ship operator in respect of its ship operation activities that generate income entitled to a tax exemption under section 23B of the Inland Revenue Ordinance (IRO).
The qualifying criteria
1. The entity-based approach
The ship agent, ship manager or ship broker must be a standalone corporation predominantly carrying out the qualifying shipping-related activities in Hong Kong SAR.
Under the safe harbour rules, the ship agent, ship manager or ship broker is allowed to engage in non-qualifying activities provided that the amount of profits derived from the qualifying shipping-related activities is not less than 75% of its total profits, and the value of assets used to carry out the qualifying shipping-related activities is not less than 75% of the total value of all assets at the end of:
The subject year of assessment (YOA); or
The subject YOA and the preceding one or two YOAs on an average basis.
Ship agents and brokers need to carry out at least one qualifying ship agency or broking activity for a YOA, while ship managers need to carry out at least two qualifying ship management activities.
The commissioner of inland revenue may, on application by a corporation, determine that it is a qualifying ship agent, ship manager or ship broker for a YOA even though the corporation does not satisfy the requirements discussed above.
2. The central management and control (CMC) requirement
The ship agent, ship manager or ship broker must exercise its CMC in Hong Kong SAR.
3. The substantial activity requirements
The ship agent, ship manager or ship broker must employ at least one full-time qualified employee, and incur at least HKD 1 million ($130,000) of annual operating expenditure for carrying out the core income generating activities (CIGAs) in Hong Kong SAR.
The CIGAs can be outsourced to a group company and, in this case, the employees of and the operating expenditure incurred by the group company would be considered if certain conditions are met.
The qualifying activities must be carried out or arranged to be carried out by the ship agent, ship manager or ship broker in Hong Kong SAR.
The anti-avoidance provisions
1. The main purposes test
The proposed tax concessions would not apply if the main purpose, or one of the main purposes, of an arrangement entered into by the ship agent, ship manager or ship broker is to obtain a tax benefit under the IRO or a tax treaty.
2. The anti-tax arbitrage rule
The tax deduction for service fees paid by an entity that is subject to the full-profits tax rate to a connected qualifying ship agent, ship manager, or ship broker that is subject to the half-rate would be reduced by reference to the amount of tax saving obtained by the service fee recipient.
3. The arm’s-length principle
Transactions entered into between a qualifying ship agent, ship manager, or ship broker and its associates in connection with the qualifying activities that are not on an arm’s-length basis would be subject to transfer pricing (TP) adjustments.
We welcome the proposed concessionary tax regime for various high-value added maritime services in Hong Kong SAR. It would help develop a more vibrant maritime ecosystem and consolidate Hong Kong SAR’s position as an international maritime centre, which is in line with its economic development strategies, as set out in the 14th National Five-Year Plan of the People’s Republic of China (PRC).
For further comments on the proposed tax regime, along an overview of the similar tax incentives in Singapore, please see KPMG’s Hong Kong SAR Tax Alert.