APJT Introduction

The Asia-Pacific Journal of Taxation (APJT) is a joint effort between the Taxation Institute of Hong Kong and the School of Accounting and Finance of The Hong Kong Polytechnic University.

It publishes research papers, commentary notes, book reviews and articles that address significant issues in the field of taxation relevant to Hong Kong, China and the Asian Pacific region.

The APJT aims to provide quality service to the readership by making its content ore informative and thorough, and by striking a proper balance between professionalism and intellectual stimulation.

The APJT normally publishes two issues every year.

Letter from the Editors

In recent years, the Hong Kong SAR Government (the “Government”) has been stepping up its efforts on two main streams of development of the Hong Kong tax system: first, bringing Hong Kong tax rules in line with international taxation guidance, and second, enhancing the competitive edge of the system to attract foreign investment.

In response to the requirements of international taxation guidance, the following major changes have been, or will be, made:

‧  One of the earlier initiatives relates to the transfer-pricing regime. The consolidated report of the Organisation for Economic Co-operation and Development (OECD), entitled Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report (“Action 13 Report”), was published in 2015. The Action 13 Report promulgates a standardised three-tiered approach for transfer pricing documentation. This standardised approach was incorporated into the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD on 10 July 2017. In Hong Kong, Transfer Pricing Rule 1 under section 50AAE (Transfer Pricing Rule for Transactions Between Associated Persons) took effect from the year of assessment 2018/19. Transfer Pricing Rule 2 under section 50AAK (Authorised OECD Approach (AOA)), which applies to treat a Hong Kong permanent establishment (“PE”) of a non-resident person as a separate enterprise for attributing income or loss on an arm’s length basis, took effect from 2019/20.

‧  Another move relates to the foreign-sourced income exemption (“FSIE”) regime. Effective 1 January 2023, certain foreign-sourced income accrued to a member of an MNE group (MNE entity) carrying on a trade, profession, or business in Hong Kong is chargeable to profits tax when it is received in Hong Kong. Subsequently, a refinement was made to the regime. Effective 1 January 2024, the scope of assets in relation to foreign-sourced disposal gains covers assets other than shares or equity interests. With this refinement, Hong Kong’s FSIE regime became fully compliant with the Guidance on FSIE Regimes updated by the European Union (“EU”) in December 2022. Consequently, Hong Kong was removed from the EU’s watchlist on tax co-operation.

‧  A new aircraft leasing tax regime took effect from the year of assessment 2023/24. The new regime was enacted in response to demand from the market and the OECD’s Base-Erosion and Profit-Shifting (BEPS) 2.0 (“BEPS 2.0”). Its key features are as follows:

(a) to provide tax deduction of the acquisition cost of aircraft;

(b) to expand the scope of the concession to include wet lease and funding lease and remove the old regime’s one-year term of lease restriction;

(c) to provide for a more general meaning of “aircraft leasing activity” which will cover leasing activities other than leasing aircraft to aircraft operators;

(d) to allow deduction of interest payable for acquisition of aircraft to a financier outside Hong Kong who is not a financial institution and may be an associate of the borrower; and

(e) to prescribe threshold requirements for aircraft lessors and aircraft leasing managers qualifying for the regime to comply with the OECD’s requirement.

 

‧  An upcoming change concerns the global minimum tax and the Hong Kong minimum top-up tax. The consultation paper on this was issued in December 2023. This change relates to the implementation of Pillar Two of BEPS 2.0. The BEPS 2.0 package was promulgated by the OECD in October 2021. The goal of the global anti-base erosion (“GloBE”) rules under Pillar Two is to ensure that large MNE groups with a consolidated annual revenue of at least 750 million euros pay a global minimum tax of at least 15 per cent on income derived by their constituent entities in every jurisdiction where they operate, thereby putting a floor on competition over corporate income tax. As announced by the Financial Secretary in the 2023-24 Budget, Hong Kong will apply the global minimum effective tax rate of 15 per cent on in-scope MNE groups starting from 2025.

 

Regarding strengthening the competitive edge of the Hong Kong tax system, the following key initiatives have been, or will be, implemented:

 

‧  Family office profits tax concessions are available for 1) eligible family-owned investment holding vehicles (“FIHVs”) managed by eligible single-family offices (“SFOs”) in Hong Kong and 2) family-owned special purpose entities for a year of assessment commencing on or after 1 April 2022. To qualify for the concessions, an FIHV must be managed by an eligible SFO and fulfil the minimum asset threshold requirement of HKD240 million and the substantial activities requirement.

‧  Tax deductions are available for spectrum utilisation fees (“SUFs”) under new legislation gazetted and effective on 19 January 2024. These fees were held as being capital in nature by China Mobile Hong Kong Company Limited v. Commissioner of Inland Revenue [2022 HKCA 1637]. The new legislation provides a tax deduction for capital expenditures incurred as SUFs by mobile network operators in respect of radio spectrum auctions conducted on or after 19 January 2024. However, SUFs paid or to be paid for auctions held before 19 January 2024 will continue to be non-deductible. The deduction for SUFs will generally be spread evenly over the spectrum assignment term (i.e. 15 years in general) in cases of both one-off lump sum payments and payments by instalments.

‧  A tax certainty enhancement scheme for onshore gains on the disposal of equity interests will apply to qualified onshore disposal gains in relation to any disposal which occurs on or after 1 January 2024 and accrues in the basis period for a year of assessment beginning on or after 1 April 2023.

‧  Patent box tax incentive legislation was gazetted on 28 March 2024 and will be available retrospectively from the year of assessment 2023/24. In general, the tax incentive means a 5 per cent concessionary tax rate for Hong Kong sourced taxable (i.e. non-capital) profits derived from the use or sale of eligible intellectual property.

‧  A company re-domiciliation regime is a key Government policy objective to enhance competitiveness through attracting enterprises and investment. It will be an inward re-domiciliation regime to turn the Hong Kong market into a cornucopia of enterprises that draws in foreign companies.

‧  Apart from the above, the two most recent initiatives are 1) the introduction of tax deduction for expenses incurred for reinstating the condition of premises under a lease to their original condition (reinstatement costs) for the year of assessment beginning on or after 1 April 2024 and 2) the removal of the time limit for claiming annual allowances in respect of a commercial or industrial building or structure starting from the year of assessment 2024/25.

 

This issue of the Journal contains a variety of articles contributed by authors from Hong Kong and overseas. In the Hong Kong Technical column, there is a review of recent Board of Review cases and also an article on the patent box tax incentive. Three articles are included in the PRC column: one on the latest developments regarding advance rulings, one on the tax impact of the new Company Law, and one discussing tax issues in relation to company reorganisation. In the International column, there are four articles: one on customs and indirect taxes related to logistics networks, one on crypto asset tax reporting, one discussing the Singaporean general anti-avoidance rule, and one looking at the Hong Kong patent box regime in the context of the global tax landscape.

 

We would like to express our heartfelt thanks to the authors for contributing these insightful articles. Our special thanks go to the reviewers for their valuable comments. Last but not least, we wish to thank our readers for their continued support. We hope you will enjoy reading the Journal. We welcome any comments and suggestions to improve its content and quality. If you wish to voice your views and suggestions on any tax matters, be they policy issues or practical matters, you are welcome to submit a letter to the editors.

The Joint Editors

October 2024

[1] https://www.ird.gov.hk/eng/tax/bus_fsie.htm#a03

[2] IRD: Onshore Gain on Disposal of Equity Interests – Tax Certainty Enhancement Scheme