2020 was an exceptionally challenging year all over the world. The coronavirus pandemic has severely impacted the operations of many businesses in Hong Kong, while the local economy is highly exposed to turbulence in international commerce. With the peak of the pandemic having passed, the HKSAR government will continue its financial support measures for local businesses. In addition to a few rounds of measures to support the affected industries and the general public, the local authorities have further refined the regulatory environment and tax system with a view towards diversifying and revitalizing the economy.
Ship leasing tax concession
The Inland Revenue (Amendment) (Ship Leasing Tax Concessions) Ordinance 2020 was gazetted on 10 June 2020 and takes effect retroactively from April 1, 2020.
The Ordinance provides tax exemptions for qualifying profits derived from ship leasing activities in relation to operating and funding leases carried out by ship lessors. At the same time, to facilitate the operation of ship lessors, qualifying profits derived from ship leasing management activities (e.g. setting up or managing a special purpose vehicle for owning a leased ship, arranging for the procurement or leasing of ships, and managing leases) carried out by ship leasing managers for ship lessors can generally enjoy a half-tax concession (i.e. a tax rate of 8.25 %).
Under the Ordinance, “ship” is defined as a vessel of any description capable of navigating in water (and includes barges, air-cushion vehicles, and dynamically supported crafts) but excludes junks, vessels propelled by oars, and military vessels. It also does not cover seaborne units, such as offshore drilling rigs, which are not capable of navigating in water. For qualifying ship leasing activities, the ship being leased should be over 500 gross tons, and be navigating solely (or mainly) outside Hong Kong waters.
Ship leasing activities consist of operating leases and finance leases, including sales, leasebacks and sub-leases. Also covered are certain corollary pre- and post-lease activities such as agreeing on funding terms, acquiring target ships, monitoring or revising funding and/or leasing agreements and managing risks associated with leases.
Ship leasing management activities cover a broad range of financing and management activities relating to ship leasing, including providing intra-group financing, providing credit support for external financing, and overseeing the design and construction of new-build ships.
The central management and control of qualifying ship lessors and qualifying ship leasing managers must be located in Hong Kong. The activities that produce their qualifying profits should also be carried out in Hong Kong, which will only be considered as such if the following threshold requirements are met:
For qualifying ship leasing managers, the Ordinance lays down the safe harbor rule which seeks to allow them to carry on certain non-qualifying activities. There are two alternative safe harbors as follows:
- at least 75 % of the profits come from qualifying activities; and
- the value of assets used by the company to conduct qualifying activities is at least 75 % of its total assets.
The new regime also incorporates the following anti-abuse features to safeguard the integrity of the tax system and to comply with international tax rules:
- requiring qualifying ship lessors and ship leasing managers to be standalone corporate entities to prohibit loss transfer;
- requiring qualifying ship lessors and ship leasing managers to conduct business transactions with their associated parties on an arm’s length basis;
- introducing main purpose tests to prevent tax avoidance and treaty shopping; and
- disallowing a qualifying ship lessor or a qualifying ship leasing manager to use the loss sustained in the year of assessment where its profits are assessed at 0 percent for set off against of its assessable profits for any subsequent year of assessment.
Profits tax concessions for insurance-related businesses
Currently within the insurance sector, tax incentives are only offered to captive insurers and professional reinsurers. The Inland Revenue (Amendment) (Profits Tax Concessions for Insurance-related businesses) Ordinance 2020 has been gazetted and will be effective from 19 March 2021, introducing the concessionary tax regime i.e. reduce profits tax rate by 50% (i.e. 8.25%) for eligible profits to the following insurance businesses:
- General insurance business
The Ordinance provides a concessionary profits tax rate (i.e. 8.25%) on eligible profits to specified insurers in respect of their general insurance business subject to various exceptions.
General insurance businesses that cover the following five types of specified risks and liabilities are excluded from the concessionary regime: health risk, mortgage guarantee risk, motor vehicle damage risk, employees’ compensation liability and owners’ corporation third-party liability.
A specified insurer in accordance with the Ordinance is:
- a corporation which carries on or from Hong Kong a class of insurance business as specified in Schedule 1 to the Insurance Ordinance (“IO”); and
- either (a) a company authorized by the Insurance Authority under section 8 of the IO to carry on business, except a professional reinsurer and an authorized captive insurer; (b) Lloyds; or (c) approved association of underwriters.
- General reinsurance business
The tax concession currently available to professional reinsurers will be extended to all the general reinsurance business conducted by specified insurers. Under the Ordinance, a general reinsurance business means a business providing reinsurance of liabilities under a contract of insurance effected by an insurer or Lloyd’s in the course of carrying on a general insurance business or carrying on a business similar to a general insurance business under the law of a place outside Hong Kong.
- Insurance brokerage business
The concessionary regime also extends to licensed insurance brokers which serve as professional advisors to their clients in selecting an appropriate insurance product. Under the Ordinance, profits from the licensed insurance broker related to the contract on insurance is eligible for the concessionary regime if the contract is effected by a professional reinsurer, or a specified insurer which is eligible for concessionary tax regime
The activities which generate the profits eligible for the concessionary tax rate must be substantially carried out in Hong Kong. Profits from transactions carried out by specified insurers in which the main purpose (or one of the purposes) is to avoid, reduce or postpone the tax liability are not eligible for the tax concession.
Tax exemptions in respect of relief measures under the Anti-epidemic Fund
The Exemption from Salaries Tax and Profits Tax (Anti-epidemic Fund) Order (“the Exemption Order”) came into effect on 29 May 2020. The Exemption Order conditionally exempts individuals and businesses from the payment of salaries tax and profits tax as part of financial assistance or relief provided under the Anti-epidemic Fund (“AEF”). The exemption applies to salaries tax and profits tax chargeable for the year of assessment from 1 April 2019 and all subsequent years of assessment.
The exemption, does not, however, apply to trading receipts arising in or derived from Hong Kong, other than sums paid under an AEF programme to recipients on a matching arrangement to fulfil the purpose the programme. Trading receipts include but are not limited to (a) proceeds of sale of goods (e.g. income received out of the AEF from the sale of masks); (b) consideration for provision of services (e.g. fees received by service contractors of the Government for implementing AEF programmes); and (c) monies received from the letting, sub-letting or licensing of any premises or portion of any premises (e.g. reimbursements received by landlords from the Government for offering rental waivers to tenants).
Reduction of profits tax, salaries tax and tax under personal assessment for 2020/21
In the 2021/22 Budget announced on 24 February 2021, the Financial Secretary proposed a one-off reduction of profits tax, salaries tax and tax under personal assessment for the year of assessment 2020/21 by 100 %, subject to a ceiling of $10,000 per case. This measure requires legislative amendments before implementation.
For profits tax, the ceiling of the tax reduction is applied to each business. For salaries tax, the ceiling is applied to each individual taxpayer; but for married couples jointly assessed, the ceiling is applied to each married couple (i.e. capped at $10,000 in total). For personal assessment, the ceiling is applied to each single taxpayer or married person who elects for personal assessment separately from his/her spouse. If a taxpayer elects for personal assessment jointly with his/her spouse, the tax reduction is capped at $10,000 for the married couple.
The proposed tax reduction is not applicable to property tax. Individuals with rental income, if eligible for personal assessment, may be able to enjoy such reduction under personal assessment.
We welcome the introduction of these tax concessions. The concessionary tax regimes for shipping and insurance businesses also enhance the competitiveness of Hong Kong as a major international maritime service hub and an global financial center, bringing new business opportunities to the region while creating jobs in the professional services sector. As 2021 brings the advent of vaccines and the beginning of the road to recovery, the Hong Kong government’s continued concessionary tax and business support policies are set to assist businesses through the transition period.
Should you have any enquiries regarding Hong Kong’s concessionary tax policies, we are always available for a free initial consultation.