Hong Kong: Proposed tax concessions for maritime services

Profits derived by ship agents, ship managers, and ship brokers in Hong Kong

Profits derived by ship agents, ship managers, and ship brokers in Hong Kong

Proposed tax legislation would introduce a concessionary tax regime for ship agency, ship management, and ship broking businesses in Hong Kong. 

Under the proposed regime, profits derived by ship agents, ship managers, and ship brokers in Hong Kong would benefit from a profits tax exemption or a concessionary profits tax rate of 0% or 8.25% if the specified conditions are met. Subject to the completion of the legislative process, the tax concessions would apply from 1 April 2022.

Tax concessions

Tax concession

Profits eligible for the concessionary tax rates / tax exemption

0% tax rate

  • Profits derived from qualifying shipping-related activities carried out for an associated ship lessor or ship leasing manager in respect of its activities that generate income entitled to the 0% tax rate under the existing ship leasing tax regime

8.25% tax rate

  • Profits derived from qualifying shipping-related activities carried out for an associated ship leasing manager in respect of its activities that generate income entitled to the 8.25% tax rate under the existing ship leasing tax regime
  • Profits derived from qualifying shipping-related activities carried out for an associated shipping principal (e.g., ship lessor or ship leasing manager) that is subject to the 16.5% tax rate
  • Profits derived from qualifying shipping-related activities carried out for an unrelated shipping principal

Tax exemption

  • Profits derived from qualifying shipping-related activities carried out for a connected ship operator in respect of its ship operation activities that generate income entitled to a tax exemption under section 23B of the Inland Revenue Ordinance

Qualifying criteria

Entity-based approach

  • The ship agent, ship manager, or ship broker must be a standalone corporation pre-dominantly carrying out the qualifying shipping-related activities in Hong Kong, subject to the safe harbor rules discussed below. 
  • The minimum numbers of qualifying shipping-related activities that need to be carried out for a year of assessment (YOA) are as follows:
    • For ship agents—at least one qualifying ship agency activity
    • For ship managers—at least two qualifying ship management activities
    • For ship brokers—at least one qualifying ship broking activity
  • Under the safe harbor rules, the ship agent, ship manager, or ship broker is allowed to engage in non-qualifying activities provided that (1) the amount of its profits derived from the qualifying shipping-related activities is not lower than 75% of the total profits accrued to the corporation during the basis period, and (2) the value of its assets used to carry out the qualifying shipping-related activities is not lower than 75% of the total value of all assets of the corporation as at the end of the basis period:
    • For the subject YOA (i.e., the one-year safe harbor), or
    • For the subject YOA and the preceding one or two YOAs on an average basis (i.e., the multiple-year safe harbor)
  • The Commissioner of Inland Revenue may, on application by a corporation, determine that it is a qualifying ship agent, qualifying ship manager, or qualifying ship broker for a YOA even though the corporation does not satisfy the minimum number of qualifying activities requirement or the safe harbor rules discussed above.

Central management and control requirement

  • The ship agent, ship manager or ship broker has to exercise its central management and control in Hong Kong.

The substantial activity requirements

  • The ship agent, ship manager, or ship broker has to meet the following minimum threshold requirements: (1) to employ at least one full-time qualified employee, and (2) to incur at least HK$1 million of annual operating expenditure for carrying out the core income generating activities in Hong Kong.
  • The core income generating activities can be outsourced to a group company and in such case, the employees of and the operating expenditure incurred by a group company would be taken into account if certain conditions are met (e.g., an arm’s length service fee is charged by the group company and the ship agent, ship manager, or ship broker has exercised adequate monitoring of the core income generating activities carried out by the group company).
  • The qualifying activities have to be carried out by the ship agent, ship manager or ship broker in Hong Kong or arranged by it to be carried out in Hong Kong.

Anti-avoidance provisions

Main purposes test

  • The proposed tax concessions would not apply if the main purpose, or one of the main purposes, of an arrangement entered into by the ship agent, ship manager or ship broker is to obtain a tax benefit under the Inland Revenue Ordinance or a tax treaty.

Anti-tax arbitrage rule

  • The tax deduction for service fees paid by an entity that is subject to the full profits tax rate (16.5%) to a connected qualifying ship agent, ship manager or ship broker that is subject to the 8.25% rate would be reduced by reference to the amount of tax saving obtained by the service fee recipient.

Arm’s length principle

  • Transactions entered into between a qualifying ship agent, ship manager or ship broker and its associates in connection with the qualifying activities that are not on an arm’s length basis would be subject to transfer pricing adjustments.

KPMG observation

The proposed concessionary tax regime for maritime services in Hong Kong is competitive in terms of the tax rate, the minimum substance requirement and the fact that the tax concessions are not subject to pre-approval or renewal requirement.
 

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com

 

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