Column: HK Technical Column(s)

Under Hong Kong’s territorial tax system, only interest income that is derived from Hong Kong (or deemed as such) can generally be within the scope of Hong Kong Profits Tax. Hong Kong companies that lend overseas are in some cases not subject to Hong Kong Profits Tax on interest receipts. Under new proposals made by the Organisation for Economic Co-operation and Development (“OECD”), Hong Kong’s approach to taxing interest could come under increasing pressure. The denial of foreign interest deduction or the blocking of treaty access for interest withholding tax relief are among the potential implications of these new proposals. Multinational groups should be considering now what to do if such rules were to be enacted, including contingency plans looking at bringing such payments within the Hong Kong tax net and a consideration of the Hong Kong Corporate Treasury Centre (“CTC”) regime for qualifying entities. With indications that the Hong Kong Government is planning to enhance the CTC regime, if...

As a general rule, the well-informed Hong Kong tax practitioner tends to anticipate developments in Inland Revenue Department (IRD) departmental interpretation and practice notes (DIPNs) with a sense of dread and stoic resignation. In our well-worn cynicism, we assume there will be something wrong with the positions of laws pronounced on behalf of the Commissioner, ex cathedra; the question is only just how wrong the guidance will be and what sort of impact it will have on our clients. The August 2019 revision of DIPN No.28 on the deductibility of foreign taxes under section 16(1) of the Inland Revenue Ordinance (IRO), however, presented the long-suffering tax practitioner with a piece of technical analysis so patently wrong and illinformed that it can only, as I have written in the past in regard to the carry-forward of losses pursuant to an amalgamation, have been impelled by practical concerns, rather than technical purism. At least, one would very much hope that to be...

For over a decade, the Hong Kong SAR Government had been modifying the specific tax exemption regimes for investment funds (especially privately offered funds) with a view to attracting more funds and fund managers to establish themselves in Hong Kong. The journey began in 2006 when the first offshore fund exemption regime (section 20AC of the Inland Revenue Ordinance (“IRO”)) was introduced; this regime basically provides Hong Kong profits tax exemption for privately offered nonresident hedge funds retrospectively from the year of assessment 1996/97. Amendments were made in 2015 (section 20ACA was added) to expand the scope of exemption to cover privately offered private equity (“PE”) / venture capital (“VC”) funds provided certain conditions are met....

The Inland Revenue (Amendment) (No. 5) Ordinance 2018 has recently been enacted to grant tax deductions for three new types of specified intellectual property rights (“IPRs”), namely performer’s economic rights, protected payout-design (topography) rights, and protected plant variety rights. These new tax deductions work within the existing tax deduction regime that comprises two main provisions of the Inland Revenue Ordinance (“IRO”):Section 16E, which is not affected by the new law and which grants a 100 per cent tax write-off in the year of purchase for the costs of patent rights and rights to know-how where specified conditions are satisfied; Section 16E, which after the enactment of the new law effective from the year of assessment 2018/19 extends its coverage from registered trademarks, copyrights, and registered designs to include the three new types of IPRs detailed above. Under section 16EA, tax deductions for capital expenditure incurred on the purchase of such IPRs will generally be spread over five successive years in...

Multinational enterprises (MNEs) ordinarily operate in a vertically integrated manner, but each ‘profit centre’ optimises its own profits. Transfer pricing (“TP”) policy is at the heart of this phenomenon as it determines how MNEs’ profits should be optimised in such a decentralised structure. Transaction cost economics stresses that local information specialisation causes information asymmetries in MNEs, and it is costly for the management of MNEs to obtain all necessary local information. With the implementation of the OECD-based TP regime in Hong Kong, MNEs need to step up their efforts in collecting local information to meet the disclosure requirement. This paper discusses the relationship between the valuable information embodied in MNEs and their strategic TP policies. It also examines the relationship between the information embodied in multifaceted global firms and their cross-jurisdictional transactions....

have previously written in this journal that all tax was, at its origin, territorial and that even residencebased systems of taxation have not thereby ceased to be territorial, but rather have merely expanded the nexus of territoriality to focus on the attributes of the taxpayer itself – whether these be nationality, place of management, or place of principal seat and so forth – as opposed to being limited to the activities carried on by the taxpayer.2 The notion of a permanent establishment (“PE”) is an extension of the criterion of geographic nexus that lies at the foundation of all revenue law: a PE is the taxable presence of a person in a jurisdiction in which that person is not resident. In general, a PE is not a subsidiary or associated person of the nonresident enterprise;3 instead, it is comprised in the same legal person as the head office. For example, the Hong Kong branch of a bank incorporated and tax...

This article summarises 12 cases reported in Volume 32 Second and Third Supplements of the Inland Revenue Board of Review Decisions. These include five cases on salaries tax and four cases on profits tax. There are also two penalty tax cases, one of which also considers the issue of eligibility for personal assessment, and one case-stated case....

This article provides background on the Guangdong-Hong Kong-Macau Bay Area (“the GBA”) initiative, summarises its current implementation status, and discusses a list of recommended tax and business measures for Hong Kong and the mainland that could support Hong Kong’s ability to address the challenges faced in fully capitalising on the opportunities arising from the GBA initiative. Taking into consideration the current tax legislation in Hong Kong and the existing tax and business regulations in the mainland, our recommended tax and business measures are: 1) refining the intellectual property (“IP”) taxation regime in Hong Kong; 2) enhancing research and development tax deduction in Hong Kong; 3) granting Hong Kong tax relief for plants and machinery and IP used in the GBA to produce Hong Kong chargeable profits; 4) reducing the individual tax and other costs in the mainland for Hong Kong residents working in the GBA; 5) allowing Hong Kong companies to set up branches in the GBA, and 6) reducing...

This paper reviews the Hong Kong Government’s initiative to implement the enhanced tax deduction on research and development (“R&D”) expenditure and argues that, with the specific anti-avoidance measures introduced, coupled with the various deeming provisions of the Inland Revenue Ordinance (“IRO”), including the new section 15F, businesses may find Hong Kong an unfriendly or even aggressive tax jurisdiction for intellectual property (“IP”) related activities. The objectives of encouraging enterprises to invest more in R&D in Hong Kong, to promote local R&D activities, and to groom local R&D talent may not be attainable....

The Inland Revenue Ordinance of Hong Kong (Cap. 112 of the Laws of Hong Kong) (“IRO”) has contained provisions dealing with charities since 1949. The direct effect of those provisions (contained in Section 88 IRO) is to provide an exemption from tax for “charitable institutions and trusts of a public character”. An indirect effect, however, is to regulate the deduction of donations to charities. In particular, charitable donations are deductible, subject to certain limitations, but only where the recipient is an institution which qualifies for the tax exemption under Section 88 IRO. Moreover, an exemption from stamp duty is provided for certain transfers of immoveable property or Hong Kong stock to, or on trust for, a charitable institution or trust of a public character. This article looks at the legislative provisions, as well as the practices of the Hong Kong Inland Revenue Department (IRD), with regard to charities and considers whether those practices might be expected to change as a...