Column: HK Technical Column(s)

 An Overview of Pillar Two Under BEPS 2.0   The Pillar Two framework of the OECD’s Base Erosion and Profit Shifting (“BEPS”) 2.0 initiative includes four key components, namely the Subject-to-Tax Rule (“STTR”), the domestic minimum top-up tax (“DMTT”), the Income Inclusion Rule (“IIR”), and the Undertaxed Profits Rule (“UTPR”). The IIR and UTPR are collectively known as the Global Anti-Base Erosion (“GloBE”) model rules. Additional taxes may be imposed on the low-taxed profits derived by large multinational enterprise (“MNE”) groups under one or more of these four rules of Pillar Two, which apply in the following order: ...

Introduction and Background Hong Kong is a major step closer to adopting Pillar 2 of the Base Erosion and Profiting Shifting (“BEPS”) 2.0 through the gazetting of the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024 (the Amendment Bill) on 27 December 2024.[1] This was followed by the subsequent enactment of the Amendment Bill in an amended form as the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 (the Amendment Ordinance) on 28 May 2025.[2] The Amendment Ordinance, as gazetted on 6 June 2025, applies to a fiscal year beginning on or after 1 January 2025. The definition of “tax resident of Hong Kong” introduced into section 2 of the Inland Revenue Ordinance (the Ordinance) by the Amendment Ordinance, however, applied retrospectively from 1 January 2024. The Amendment Ordinance reflects the outcome of a significant decision made by Hong Kong in July 2021 when it joined the then 130-plus jurisdictions in accepting the international tax reform...

Volume 38 Third Supplement, Volume 39, and Volume 39 First Supplement were published in March 2025, June 2025, and September 2025, respectively. Ten cases were reported in these three publications: three salaries tax cases, one property tax case, and six profits tax cases. The three salaries tax cases respectively concerned 1) whether the tax assessed had already been paid and the deductibility of home loan interest, 2) whether the taxpayer was liable to salaries tax, and 3) whether termination payments were subject to salaries tax. All three cases were dismissed by the Board of Review, with costs being imposed on the taxpayer in one of the cases. The property tax case concerned whether rental income paid to a joint owner to the order of the taxpayer was liable to property tax; this case was dismissed by the Board. The six profits tax cases covered six issues: 1) the absence of the appellant from a Board hearing, 2) the source of...

This article summarises the following: The key features of the patent box tax incentive The major clarifications made by the government during the legislative process How the inclusion of research and development (“R&D”) expenditures for non-eligible intellectual properties (“IPs”) under the transitional rule could drag down the R&D fraction or nexus ratio for the eligible IPs The merits of also adopting the product-based approach to ascertaining the portion of embedded IP income eligible for the concessionary tax rate The uncertainties surrounding the conditions under which a licensee of an eligible IP can benefit from the tax incentive The definition of an R&D activity under the new law as compared with that apparently adopted under the nexus approach ...

Introduction Intellectual property (“IP”) has become a cornerstone of modern economies, driving innovation, competitiveness, and economic growth. Recognising the importance of IP and its highly mobile nature, many countries and jurisdictions have implemented tax incentive regimes to attract and retain businesses that generate valuable IP. Governments have designed various strategies to promote research and development (“R&D”) activities, including grants, loans, R&D investments, additional R&D expense deductions, R&D tax credits, accelerated depreciation, and patent box regimes. Patent box regimes, in particular, are designed to encourage companies to conduct high-value R&D and to commercialise their patents and other IP within a jurisdiction’s borders by providing material tax preference treatments. Aside from stimulating the R&D activities of indigenous companies, multinational corporations (MNCs) are often the targets of patent box regimes for relocating patents, IP, and R&D activities to the jurisdiction. A recent addition to the world of patent box regimes is the one introduced by the Hong Kong Special Administrative Region (hereinafter, “Hong Kong”). As...

Introduction and Historical Context   It has been observed that the Commissioner of Inland Revenue (Commissioner) has in recent times begun to challenge loan interest receipts that had previously been treated as non-taxable by reason of falling outside any of the taxing schedules in the Inland Revenue Ordinance (“IRO”),[i] querying whether the receipts in question are, in fact and law, taxable. The Inland Revenue Department (IRD) departing from well-established assessing practice is not a new phenomenon. Experienced practitioners will recall similar attacks on so-called ‘offshore claims’,[ii] employment-related security schemes, and the grant of certificates of resident status. As with vogues in fashion, the time of those disputes, which in their day greatly animated both practitioners and the IRD, has come and gone. Today’s flavour of the month is interest income and so that is the topic of this article. Pausing there, readers should take note that the analysis in this article is deeply indebted to a previous article published by the author...

Volume 38 of Inland Revenue Board of Review Decisions and the First and Second Supplements were published from June 2024 to December 2024. Twelve cases were reported in these three publications: six profits tax cases, five salaries tax cases, and one property tax case.   Of the six profits tax cases, four concerned whether the disposal of the properties or shares in question was in the nature of a trade or the sale of capital assets and two cases concerned the source of profits and the reopening of assessments under section 70A of the Inland Revenue Ordinance (“IRO”). All six cases were dismissed by the Board, with costs imposed on the taxpayer in five of them. A common reason behind the dismissals was that the taxpayers had failed to discharge the burden of proof imposed on them by section 68(4). Taxpayers should note that before the Board, it is for the appellants to prove that the assessment is wrong or improper and...

The Second and Third Supplements of Volume 37 of Inland Revenue Board of Review Decisions were published in December 2023 and March 2024, respectively. Seven cases were reported in these two publications: five salaries tax cases and two profits tax cases. Of the five salaries tax cases, one relates to the taxability of a share option, one concerns the timing of the taxability of awards under incentive plans, one relates to the deduction of dependent brother or sister allowance, and two concern late appeal. The two profits tax cases concern the taxability of profits derived from the sale of properties....

The second and third supplements to Volume 36 of Inland Revenue Board of Review Decisions were published in November 2022 and March 2023, respectively. Sixteen cases were reported in these two supplements, including eight profits tax cases, seven salaries tax cases, and one property tax case. Five of these sixteen cases concerned appeal out of time. The Board refused to grant any extension of time and dismissed all these cases without proceeding to consider the substantive issues. Of the other salaries tax cases, two related to dual-employment contract arrangements and two concerned source of employment and whether the income was derived from employment or office. Of the other profits tax cases, one concerned the deductibility of expenses, three were related to the taxability of profits on the disposal of property, one considered the source of profits, one was related to the tax exemption of charitable institutions, and one concerned the timing of the taxability of a fee....

Tax laws for digital businesses are clearly lagging behind the speed at which the digital economy is developing, particularly with respect to cloud computing offerings. Many of the tax laws were developed at a time when traditional bricks and mortar businesses were commonplace and focused on the concept of a physical presence. Although, with the development of technology over time , various forms of cloud service models and many hybrids have been produced, we clearly cannot cover all of them, and so this article focuses on software as a service (“SaaS”). For simplicity, when referring to SaaS, a general rule of thumb is to define it as a “cloud-based software delivery model in which the cloud provider develops and maintains cloud application software, provides automatic software updates, and makes software available to its customers via the Internet on a pay-as-you-go basis”. Suffice to say when the “service” is delivered digitally and the business may not require many physical operations, a huge...