World Wide Tax News Issue 54 - March 2020

Budget highlights 2020/21

The Financial Secretary, Mr Paul Chan Mo-po, delivered his fourth Budget on 26 February 2020. As expected, Mr Chan forecast a deficit for 2019/20 after 15 years of surplus. He continued to offer short-term relief measures including tax reductions, property rates and business registration fee waivers to support enterprises, safeguard jobs, stimulate the economy and smoothen livelihoods. He also proposed additional funding and incentives to support Hong Kong’s pillar and other sectors. We summarise below the main proposals of international interest.

Tax rates

No changes are proposed to the rates of tax for 2020/21 for:

  • Corporations (16.5%; first HKD 2,000,000 assessable profits of eligible taxpayers chargeable at half of the tax rate);
  • Unincorporated businesses (15%; first HKD 2,000,000 assessable profits of eligible taxpayers chargeable at half of the tax rate);
  • Property tax (15%); and
  • Salaries tax (lower of standard tax rate at 15% and progressive tax rates from 2% to 17%).

For profits tax, salaries tax, and tax under personal assessment, there will be a reduction of 100% of the tax for 2019/20, capped at HKD 20,000.

Industry-specific tax incentives

Financial services

  • Stamp duty on stock transfers paid by the Exchange Traded Fund (ETF) market markers when creating and redeeming ETF units in Hong Kong is to be waived.
  • A limited partnership regime will be established, and there will be a tax concession for carried interest issued by private equity funds, to attract them to become domiciled and operate in Hong Kong.

Innovation and technology

  • An enhanced tax deduction will continue to be offered for qualifying research and development (R&D) expenditure (a 300% tax deduction for the first HKD 2 million qualifying R&D expenditure, and a 200% deduction for the remainder)

Trading and logistics

  • The relevant legislation will be amended to provide tax concessions for the ship leasing business, including offering a profits tax exemption to qualifying ship lessors and a half-rate profits tax concession to qualifying ship leasing managers.
  • The relevant legislation will be amended to reduce the profits tax rate by one-half for eligible insurance businesses, including marine insurance.
  • Other tax measures will be explored to attract more global shipping business operators and commercial principals to set up business in Hong Kong.

Hong Kong tax system

In view of the anticipated deficits for the 2021/22 to 2024/25 financial years, there may be a need to consider seeking new revenue sources or revising tax rates. Mr Chan says that the Government will seek advice from scholars, experts and members of the business community on the impact on the Hong Kong tax regime in view of the OECD's proposal of setting rules to imposing a global minimum tax rate.

BDO comments

  • The Financial Secretary mentions a number of tax measures.  However, most of them are repackaged from existing initiatives or continuous projects.
  • Except for an indication of the intention to offer tax concession for carried interest issued by private equity funds operating in Hong Kong, the measures discussed in the Budget Speech are brought forward initiatives such as R&D tax deductions, tax incentives for ship leasing activities and eligible insurance business, and a limited partnership regime for private equity funds in Hong Kong.
  • A tax concession for carried interest would definitely increase asset management activities and promote Hong Kong as the preferred asset management centre, provided the qualifying conditions are attractive. Clear rules with bright-line tests would also provide tax certainty for asset management industry.
  • The Financial Secretary hints that our territorial-source-based tax system would have to react to the OECD’s proposal of a global minimum tax rate.  However, it appears that the Government still needs to work out its directions and specific details. The Government may take this opportunity to consider suggestions from industries and professional bodies including our proposals on items such as digital tax and a luxury goods tax.

The Budget proposals will be subject to review and modification by the Legislative Council prior to the enactment of the legislation.

Agnes Cheung
[email protected]