New tax concessions available for shipping-related activities
Changes to Hong Kong’s Inland Revenue Ordinance (IRO) enacted on 22 July 2022 (Inland Revenue (Amendment) (Tax Concessions for Certain Shipping-Related Activities) introduce concessionary profits tax rates for “qualifying shipping commercial principals” (namely, ship agents, managers and brokers) to encourage such principals to set up a presence in Hong Kong and solidify Hong Kong’s position as a global maritime centre. The new rules contain anti-abuse measures to safeguard the integrity of the Hong Kong system and ensure Hong Kong’s compliance with international tax rules.
The tax concessions apply retroactively to amounts received by or accrued on or after 1 April 2022.
Overview of the tax concessions
A tax concession is available to a qualifying shipping commercial principal from carrying out a qualifying shipping activity in Hong Kong. In particular, profits derived by a shipping commercial principal are subject to a profits tax rate of 8.25%, which is 50% of the normal 16.5% rate for corporations. Additionally, a shipping commercial principal that generates income from carrying out a qualifying activity for an associated shipping enterprise that itself is entitled to a concessionary tax rate or an income exemption under the IRO is subject to the same concessionary tax rate or exemption as that applicable to the associated shipping enterprise.
The following requirements must be met for a shipping commercial principal to qualify for the tax concessions:
- The shipping commercial principal must be a standalone corporate entity predominantly engaged in qualifying shipping-related activities that it carries out or arranges to be carried out in Hong Kong. If the shipping commercial principal carries out other non-qualifying shipping-related activities that generate income, it must meet the safe harbour rule (i.e., the percentage of profits and assets related to those activities may not be more than 25% of the principal’s aggregate profits and assets). A shipping commercial principal that fails to meet the safe harbour rule may apply to the Commissioner of Inland Revenue (CIR) to determine whether the principal qualifies.
- A ship agency, management or broking activity—all of which are defined in the bill—carried out by a shipping commercial principal is considered a qualifying activity if the activity is carried out in the ordinary course of the principal’s business in Hong Kong.
- The minimum number of qualifying shipping-related activities that must be carried out for a year of assessment are as follows:
- Ship agents – at least one qualifying ship agency activity;
- Ship managers – at least two qualifying ship management activities; and
- Ship brokers – at least one qualifying ship broking activity.
A shipping commercial principal that fails to meet these minimums may apply to the CIR to make the determination.
- The central management and control of the qualifying shipping commercial principal must be exercised in Hong Kong.
- A qualifying shipping-related activity is considered to be carried out in Hong Kong or arranged to be carried out in Hong Kong if the average number of qualified full-time employees in Hong Kong and the total amount of operating expenditure incurred in Hong Kong in a year of assessment are adequate in the CIR’s opinion. However, the following thresholds must be met:
- There must be at least one qualified full-time employee in Hong Kong; and
- Operating expenditure must be at least HKD 1 million.
- A shipping commercial principal has to make an election in writing that the tax concession applies to it, and once made, the election is irrevocable.
- The following anti-abuse rules apply:
- Transactions entered into with associates that are not in accordance with the arm’s length principle will be re-assessed and subject to transfer pricing adjustments.
- The tax concession will be denied if the main purpose, or one of the main purposes, of the arrangement entered into is to obtain a tax benefit for profits tax under the IRO or an applicable tax arrangement.
- A tax deduction for service fees paid by a party that is subject to the full 16.5% profits tax rate to a qualifying shipping commercial principal that is subject to the concessionary tax rate of 8.25% will be reduced by reference to the amount of tax savings obtained by the qualifying shipping commercial principal.
The tax concessions effectively extend the previous tax concessions available to Hong Kong-based ship lessors, ship leasing managers and ship operators to shipping commercial principals whose ordinary course of business is conducted in Hong Kong. However, it should be noted that in anticipation of the introduction of a potential domestic minimum tax under the BEPS 2.0 initiative, shipping commercial principals that are part of large multinational groups may not be benefited by the profits tax concession.
We welcome the government’s move to facilitate the development of the maritime industry in Hong Kong and trust that the government will continue to actively explore non-tax incentives to consolidate the overall capabilities of Hong Kong as a leading international maritime centre.