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0 votes

Section 14(1) of Inland Revenue Ordinance (IRO):

"Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part."

Extended by Section 2(1):

"profits arising in or derived from Hong Kong for the purposes of Part IV shall, without in any way limiting the meaning of the term, include all profits from business transacted in Hong Kong, whether directly or through an agent."

Precedent cases (following cases' situations may enjoy further tax exemption after "carried business in HK"):

Case 1: CIR v Hang Seng Bank [1991] PC - Nature of income: securities trading

(DIPN 21:

Trading of listed securities: factors for determing the locality: Location of the stock exchange where the securities are traded

Over-the-Counter trading of listed securities / Trading of unlisted securities: Place where the contracts of purchase and sale are effected)

Case 2: CIR v Orion Caribbean Limited (1997) PC - Nature of income: interest income on borrowing and lending made by a non-financial institution

(DIPN 21: Interest income - Non-financial institutions

a. Simple loan of money (i.e., mere lending of the company's own surplus funds: ) - factors for determing the locality: Place where the money is first made available to borrower (i.e. "provision of credit test")

b. No simple loan of money - factors for determing the locality: Place where the activities producing the interest income are performed (i.e. "operation test")

asked by (8.2k points)

5 Answers

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Tax exemption for case 1's situation:

The Revenue (Profits Tax Exemption for Offshore Funds) Ordinance 2006 (the 2006 Ordinance) was enacted in March 2006. 

The Exemption Provisions exempt non-resident persons (including individuals, corporations, partnerships and trustees of trust estates) from tax in respect of profits derived from certain specified transactions carried out through or arranged by specified persons

Specified transactions are broadly defined in the Ordinance to cover typical transactions carried out by offshore funds in Hong Kong. Schedule 16 to the Ordinance contains the list of specified transactions which include six categories of transactions:

(a) a transaction in securities; 

(b) a transaction in futures contracts; 

(c) a transaction in foreign exchange contracts; 

(d) a transaction consisting in the making of a deposit other than by way of a money-lending business; 

(e) a transaction in foreign currencies; and 

(f) a transaction in exchange-traded commodities. 

A specified person normally is a corporation licensed or an authorized financial institution registered under the SFO for carrying on a business in any regulated activity as defined by Part 1 of Schedule 5 to the SFO. 

Reference: DIPN 43

https://www.ird.gov.hk/eng/pdf/e_dipn43.pdf

answered by (8.2k points)

Further tax exemption for Profits Tax Exemption for Offshore Funds

the Inland Revenue (Amendment) (No. 2) Ordinance 2015 (the 2015 Ordinance) was enacted to extend the profits tax exemption for offshore funds to offshore private equity funds

The 2015 Ordinance has amended the definition of “securities” in Schedule 16 to the Ordinance so that a transaction in securities of an SPV or an excepted private company is a “specified transaction”. 

Reference: DIPN 51

https://www.ird.gov.hk/eng/pdf/e_dipn51.pdf

0 votes

Tax exemption for case 2's situation (PS: seems if no such exemption, the HK qualifying corporate treasury centers's interest income may be taxable while the interest expenses may not be deductible when executing inter-group financing)

Tax exemption (concessionary profit tax rate of 8.25%) for qualifying corporate treasury centers:

Criteria for qualifying corporate treasury centers:

  • Wholly carries out "corporate treasury activities" in Hong Kong
  • Satisfies "safe harbour rule" (corporate treasury profits and corporate treasury assets >= 75%
  • Commissioner's determination

Financial Institutions are not eligible to be a qualifying corporate treasury centers.

Three types of "corporate treasury activities":

  • Carrying on an intra-group financing business (borrowing / lending of money to associated corporations)
  • Providing qualifying corporate treasury services to associated corporations
  • Entering into qualifying corporate treasury transactions for associated corporations.

Only profits derived from those activities in realtion to non-HK associated corporations may be eligible for the concessionary tax rate.

Should have sufficient business substance in Hong Kong (Corporate Management Center must be exercised in Hong Kong).

Reference: DIPN 52

https://www.ird.gov.hk/eng/pdf/e_dipn52.pdf

answered by (8.2k points)
0 votes

Income for ship within the water of Hong Kong is relevant sum (Ship registered and managed in Hong Kong but income not generated within "Hong Kong's water" not taxable).

[Section 23C & 23D may similarly apply to aircraft. Aircraft rental coming??]

IRO Section 23B

Ascertainment of the assessable profits of a ship-owner carrying on business in Hong Kong*

(1)

Where a person carries on a business as an owner of ships and—

(a)

the business is normally controlled or managed in Hong Kong; or

(b)

the person is a company incorporated in Hong Kong,

that person shall be deemed to be carrying on that business in Hong Kong.

(2)

Subject to subsection (6), where a person to whom subsection (1) does not apply carries on a business as an owner of ships, and any ship owned by that person calls at any location within the waters of Hong Kong, that person shall be deemed to be carrying on that business in Hong Kong.

(3)

Subject to subsections (4) and (5), where a person is deemed to be carrying on a business as an owner of ships in Hong Kong under subsection (1) or (2), as the case may be, the assessable profits of that person from that business for a year of assessment shall be the sum bearing the same ratio to the aggregate of the relevant sums earned by or accrued to that person during the basis period for that year of assessment as that person’s total shipping profits for the basis period bear to the aggregate of the total shipping income earned by or accrued to that person during that basis period for that year of assessment.

relevant sums (有關款項) means—

(a)

any sums derived from, attributable to, or in respect of—

(i)

any relevant carriage shipped in Hong Kong;

(ii)

any towage operation undertaken by a ship within the waters of Hong Kong, or any towage operation undertaken by that ship commencing from any location within those waters, as the case may be;

(iii)

any dredging operation undertaken by a ship within the waters of Hong Kong;

(iv)

any charter hire in respect of—

(A)

the operation of a ship navigating solely or mainly within the waters of Hong Kong; or

(B)

a charter-party where one of the parties thereto is a relevant limited partnership;

(b)

one half of any sums derived from, attributable to, or in respect of, any charter hire in respect of the operation of a ship navigating between any location within the waters of Hong Kong and any location within river trade waters,

but does not include exempt sums;

answered by (8.2k points)

Letter draft to IRD for application of tax exemption under Section 23B:

SUPER KING LIMITED (“company”)

Application For Exemption From Tax In Hong Kong Under Section 23B of the Inland Revenue Ordinance

I, being an auditor licensed to practise in Hong Kong, hereby confirm that throughout the period since DD MMMM YYYY:-

  1. The company is deemed to be carrying on a business in Hong Kong as an owner of “registered ship” (as defined in section 23B(12));
  2. Shipping income earned by or accrued to the company does not include any “relevant sum” (as defined in section 23B(12))

Yours faithfully

OECD - BEPS form filling requirement for ship owner (new in 2018):

[P.S. interpretation on the form https://www.ird.gov.hk/eng/ese/efile/u1/index.php

Part 3 provides information of the group;

Part 5 provides whole turnover and profit of the company;

Part 6 provides Exempt Sums waived HK Profits Tax;

Part 7 provides the company's Hong Kong local business activities' financial data (local business substance to support the HK Profits Tax exemption, HK report to OECD]

0 votes

Section 88 of the Inland Revenue Ordinance - Charity exempt form tax

IRD guidance: https://www.ird.gov.hk/eng/tax/ach_tgc.htm

Key extract:

WHAT IS A CHARITY?

  • 1. Charity is not equivalent to "voluntary" or "non-profit-making" organisation
  • Not all "Voluntary" or so-called "non-profit-making" organisations are charities, however worthy their causes may be. In fact, there is no provision in the Inland Revenue Ordinance which exempts a "voluntary" or "non-profit-making" organisation from tax.
  • 2. Charity must be established exclusively for charitable purposes
  •  Generally speaking, for an institution or a trust to be a charity, it must be established for purposes which are exclusively charitable according to law. The law defining the legal attributes of a charity is based upon case law developed through court decisions.
  • 3. Charitable purposes are classified into four heads
  • For practical purposes, the judgement of Lord MacNaghten in the case of I T Special Commissioners v Pemsel (3 TC 53) is regarded as an authoritative summary of the purposes that may be accepted as charitable. These are: -
  •  
    • a. relief of poverty;
    • b. advancement of education;
    • c. advancement of religion; and
    • d. other purposes of a charitable nature beneficial to the community not falling under any of the preceding heads.
  • While the purposes under the first three heads may be in relation to activities carried on in any part of the world, those under head (d) will only be regarded as charitable if they are of benefit to the Hong Kong community.
  • 4. Charity must be established for public benefit
  • A purpose is not charitable unless it is directed to the public or a sufficient section of it. An institution cannot generally be charitable if it is in principle established for the benefit of specific individuals. It is, however, not possible to lay down any precise definition of what constitutes a sufficient section of the public. Each case must be considered on its own merit.
  • 5. EXAMPLES OF PURPOSES WHICH THE COURT HAD HELD TO BE CHARITABLE PURPOSES
    • a. Relief of poor people;
    • b. Relief of victims of a particular disaster;
    • c. Relief of sickness;
    • d. Relief of physically and mentally disabled;
    • e. Establishment or maintenance of non-profit-making schools;
    • f. Provision of scholarships;
    • g. Diffusion of knowledge of particular academic subjects;
    • h. Establishment or maintenance of a church;
    • i. Establishment of religious institutions of a public character;
    • j. Prevention of cruelty to animals;
    • k. Protection and safeguarding of the environment or countryside.
  • EXAMPLES OF PURPOSES WHICH THE COURTS HAD HELD TO BE NON-CHARITABLE PURPOSES
    • a. Attainment of a political object;
    • b. Promotion of the benefits of the founders or subscribers;
    • c. Provision of a playing field, recreation ground or scholarship fund for employees of a particular company or industry;
    • d. Encouragement of a particular sport such as angling or cricket.
answered by (8.2k points)

Seems cause of 2017/18 legislative council hot discussion topic, IRD focus on Directors' Remuneration of Charitable Institutions & Trusts.

Normal following may be queried by IRD:

  1. Name and position/capacity of each recipient
  2. Amount received by each recipient
  3. Duties of each recipient
IRD also concern as following:
  • Your attention is drawn that all income and property of a charity shall be applied solely for furthering its charitable objects. It is thus important for charities to maintain reliable internal controls and accounting system so as to safeguard the assets from being exposed to risks.

Relevant Inland Revenue Ordinance (Cap. 112) clauses (extra only):

Section: 88 

Heading: Exemption of charitable bodies

Notwithstanding anything to the contrary in this Ordinance contained there shall be exempt and there shall be deemed always to have been exempt from tax any charitable institution or trust of a public character:

Provided that where a trade or business is carried on by any such institution or trust the profits derived from such trade or business shall be exempt and shall be deemed to have been exempt from tax only if such profits are applied solely for charitable purposes and are not expended substantially outside Hong Kong and either—  

(Amended 7 of 1986 s. 12)

  • (a) the trade or business is exercised in the course of the actual carrying out of the expressed objects of such institution or trust; or
  • (b) the work in connection with the trade or business is mainly carried on by persons for whose benefit such institution or trust is established.

(Added 3 of 1949 s. 18. Amended 30 of 1950 Schedule; 49 of 1956 s. 66; 26 of 1969 s. 40; 65 of 1970 s. 10)

0 votes

[PS: seems Guang Dong Province, Mainland, PRC does not allow “contract processing” (來料加工) anymore so that here just for reference only. The reference value can be on when your HK company has an assets used by a subcontractor in Mainland, PRC, how much allowance can be claimed in the HK company's HK tax computation, relating to Section 16(G) of IRO.

For Section 16(G) of IRO, can see point 8 of following topic:

http://www.hkaudit.net/?qa=76/tax-practical-useful-miscellaneous-sundry-points-summary]

For “contract processing” (來料加工) arrangements, recognizing the operations of the Hong Kong company in the Mainland, an apportionment of profits on a 50:50 basis is usually accepted.

Reference 1: DIPN 21, paragraph 33 - 38

DIPN 21 link: https://www.ird.gov.hk/eng/pdf/e_dipn21.pdf

Reference 2: https://www.ird.gov.hk/eng/pdf/e_cbmtb.pdf

answered by (8.2k points)
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