Hong Kong: Hong Kong introduces new transfer pricing regime

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Hong Kong: Hong Kong introduces new transfer pricing regime

Sponsored by

sponsored-firms-kpmg.png
intl-updates-small.jpg

In July 2018, transfer pricing (TP) legislation – Inland Revenue (Amendment) (No 6) Bill 2017 (BEPS Bill) – was passed in Hong Kong. This represents one of the biggest changes to Hong Kong tax in recent years. Many of the provisions within the BEPS Bill will have retrospective effect from the year of assessment 2018/19. The notable amendments to the initial proposal are:

  • Domestic transactions are excluded from the TP scope provided that certain conditions are fulfilled; and

  • Documentation thresholds have been relaxed to alleviate the burden on smaller Hong Kong businesses of proving their compliance with the arm's-length principle.

The BEPS Bill codifies the arm's-length principle as the fundamental TP rule in Hong Kong. The Inland Revenue Department (IRD) is empowered to adjust profits/losses where a transaction between two related parties is not carried out under normal commercial terms that would have been undertaken between independent persons.

The BEPS Bill has introduced various provisions covering deeming provisions on intangibles, valuation of trading stock, penalties and non-compliance, dispute resolution mechanisms, advance pricing arrangements (APAs), and specific provisions relating to permanent establishments (PEs).

In the case of a PE, TP rules will apply to any non-resident who has a PE that carries on a trade, profession or business in Hong Kong. The BEPS Bill provides guidance on how profits should be attributable to a PE. The income/loss attributable to a PE will be determined by treating the PE as a separate and distinct entity and by adopting the so-called 'authorised OECD approach'. Further guidance by the IRD will be issued.

Taxpayers will be required to provide tax authorities with additional information, so it is expected that the IRD will also be asking challenging questions that may lead to substantial tax adjustments and potential double taxation. It is important that Hong Kong corporate taxpayers revisit their TP policies, and their positions with respect to their value chains and related-party transactions to ensure that these remain appropriate.

Hong Kong proposes a vacancy tax on empty new flats

In June 2018, the Hong Kong government proposed a new vacancy tax on vacant properties. The aim of the vacancy tax is to encourage property developers to release more flats and prevent them from hoarding newly built flats in Hong Kong.

Hong Kong has continued to be one the world's least affordable housing markets, as property prices continue to soar despite cooling measures introduced by the Hong Kong government. High housing prices have long been a sore point with the public, but strong demand means the property market continues to rise.

The vacancy tax is targeted at newly built flats and will apply where properties remain unoccupied for six months in any year. A grace period will apply for the first 12 months after obtaining an occupation permit. It is proposed that the tax will be levied at the rate of 200% of the property's annual rental value, calculated by reference to market rates as determined by government assessors.

Developers will be required to submit a report on the status of their properties annually. The new tax will not apply to vacant properties held by persons other than developers. The new measures will need to be approved by the Legislative Council before they become law. Unlike most taxes, the new tax does not aim to produce revenue. It is intended to encourage developers to release residential units more quickly into the market and address concerns about the spiraling cost of real estate in Hong Kong.

The degree of impact the measures will have will depend on the detailed arrangements, which have not yet been released. There are certain issues that would need to be addressed that include how the term 'developers' is defined, the treatment of intra-group transactions, and how occupation is to be measured and policed. Draft legislation is expected to be introduced that hopefully will address these matters.

more across site & shared bottom lb ros

More from across our site

The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
The tax agency has increased compliance yield from wealthy individuals but cannot identify how much tax is paid by UK billionaires, the committee also claimed
Saffery cautioned that documentation requirements in new government proposals must be limited if medium-sized companies are not exempted from TP
The global minimum tax deal is not viable without US participation, Friedrich Merz has argued
Section 899 of the ‘one big beautiful’ bill would have spelled disaster for many international investors into the US, but following its shelving, attention turns to the fate of the OECD’s pillars
DLA Piper’s co-head of tax for the US and Latin America tells ITR about her fervent belief in equal access to the law, loving yoga, and paternal inspirations
Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
Gift this article