Hong Kong: Rapid changes to tax policies to drive its competitive edge

December 14 2017

As global tax rates continue to fall, tax policy is at the forefront to drive Hong Kong's economic growth. In recent years, the Hong Kong government has introduced various initiatives to bolster Hong Kong's position as a global financial centre.

Aircraft leasing regime

A new tax incentive for aircraft leasing was introduced in July 2017 to enhance Hong Kong as a centre for aircraft leasing. The main benefits of the aircraft leasing concessions include:

An effective tax rate of 1.65% will be levied on profits earned by 'qualifying aircraft lessors';
A concessional 8.25% tax rate will apply to profits from 'qualifying aircraft leasing management' activities.

To benefit from these tax concessions, 'qualifying aircraft lessors' and 'qualifying aircraft leasing managers' must not be aircraft operators and must only conduct qualifying activities. In October 2017, the Inland Revenue Department (IRD) issued DIPN 54 to clarify various tax issues concerning the application of the new concessionary tax regime.

BEPS and transfer pricing

As part of Hong Kong's commitment and participation in the OECD's BEPS project, the Hong Kong government will introduce comprehensive transfer pricing rules as well as a transfer pricing documentation regime. The new transfer pricing rules will be largely based on the OECD's transfer pricing guidelines and will likely be introduced in early 2018.

In addition, on June 7 2017, with 67 other jurisdictions, Hong Kong joined the Multilateral Instrument (MLI) where Hong Kong submitted a list of 36 comprehensive double tax agreements (DTAs) that it designated as its covered tax agreements through the MLI mechanism.

Offshore PE funds tax exemption and open-ended fund companies

The most significant legislative change affecting the funds industry has been the extension of the offshore fund tax exemption to private equity (PE) funds in July 2015 (offshore PE fund tax exemption) to exempt offshore PE funds from tax in Hong Kong in respect of investments outside of Hong Kong.

Given the important role that PE funds play in raising capital for businesses, further proposals have been made by the Financial Services Development Council to enhance its tax initiatives to make them more business-friendly and favourable to the PE and venture capital industry. This includes extending the offshore PE funds tax exemption to cover in investments in Hong Kong businesses and onshore privately offered open-ended fund companies (OFCs). On June 28 2017, a bill was introduced to provide a tax exemption to OFCs. This is another government initiative to attract more funds to domicile in Hong Kong.

Future developments in 2018

Hong Kong's new chief executive has signalled that tax reform will be a priority. Some of the new tax policy initiatives that have been announced, include:

A two-tier profits tax rate – the first HK$2 million of profits of a group will be taxed at 8.25% (with the remainder subject to tax at 16.5%); and
A super deduction for research and development expenditure – a 300% deduction will apply for the first HK$2 million of such expenditure, and 200% thereafter.

Going forward, Hong Kong needs to ensure its tax rules align with international tax rules in order to continue to make Hong Kong an attractive place to establish new businesses.