(where applicable) the continued holding of those securities, whether or not those or other securities are pledged as security for the accommodation. If the relief under section 8(1A)(c) or tax credit under section 50 is allowed to a taxpayer and subsequently such relief or credit becomes excessive as a result of an adjustment to his or her foreign tax liability, the taxpayer is required to give a written notice to the Commissioner within 3 months after the adjustment is made. Hong Kong SAR does not have any specific incentives for foreign investment, except that offshore funds may be exempt from profits tax under certain circumstances. Last modified 26 May 2022 Download PDF Your message was not sent. the income is used to buy movable property, and the property is brought into Hong Kong. An arrangement may have more than one main purpose and it is sufficient that at least one of which was to obtain a tax benefit, even if that was not the dominant purpose. If the employee's monthly relevant income falls under HKD7,100 (approximately USD915), their monthly contributions to MPF are not required, but the employer's contributions remain the same. The headline rate of corporate income tax in Jurisdiction A is 20%. Under the new FSIE regime, the provisions relating to the nexus requirement should be read in the way that best secures consistency with the requirements and guidance in Chapter 4 of the BEPS Action 5 Report. Yes, because the income is actually charged to a tax similar to profits tax in Jurisdiction A and the applicable rate is above 15%. We defend our clients in Hong Kong tax audit and investigation instigated by the Hong Kong's tax authorities, resolve tax disputes and agree on the amount of tax undercharged plus penalty by compromised settlement with the tax authorities. In assessing whether a PEHE has satisfied the reduced ES requirement, the IRD will take into account the commercial reality of the taxpayer, having regard to its entire operations. Hong Kong does not tax capital gains. The FTC will be limited to the amount of Hong Kong profits tax attributable to the passive income . A deduction is available for foreign tax paid, on a turnover basis, in respect of profits that are also taxable in Hong Kong. the highest corporate tax rate) of the foreign jurisdiction in which the specified foreign-sourced income, underlying profits or related downstream income is taxed. The Amendment Ordinance provides the following definitions: Treatment of Specified Foreign-sourced Income. Interaction with other deeming provisions in the IRO. 41), Lloyds or an approved association of underwriters; an authorized institution as defined by section 2(1) of the Banking Ordinance (Cap. It adopts a territorial taxation system, which only taxes income earned in Hong Kong. If an income or profits are taxable under a special tax legislation at a lower rate than in the main legislation of the jurisdiction, and the lower rate is not a tax incentive for carrying out substantive activities, the headline tax rate should be the highest stipulated tax rate in the special legislation. Yes, because the preferential tax regime is a tax incentive for carrying out substantive activities in Jurisdiction A and the applicable tax rate (i.e. This is significantly lower than many taxes in western nations, inclusive of United States expat tax. 112) (IRO), came into operation. Any tax credit allowed will be set off against the profits tax payable in respect of the specified foreign-sourced income concerned. Loss sustained in respect of foreign-sourced qualifying IP income. This seeks to ensure that there is a direct nexus between the income receiving benefits and the expenditures contributing to that income. Where the excepted portion of a qualifying IP income derived from a patent application made under Cap. All member jurisdictions of the Inclusive Framework on BEPS with IP regimes have either adopted the nexus approach or abolished their non-compliant regimes. Any that portion of loss not so set off may be carried forward and set off, in accordance with section 19C of the IRO, against the assessable profits of the MNE entity in subsequent years of assessment. Factors that will be taken into account include: Outsourcing of specified economic activities. For profits tax purposes, the basis period is the accounting year of the taxpayer ended in the year of assessment. an insurer authorized under the Insurance Ordinance (Cap. In monitoring the outsourcing of specified economic activities, an MNE entity must ensure that the outsourced entity has the capacity to perform the activities concerned in Hong Kong. There are 2 streams for which you may be eligible. 3 months) or with a period of call or notice of less than that period, other than any float or SVF deposit as defined bysection 2of the Payment Systems and Stored Value Facilities Ordinance (Cap. whether office premises have been used for undertaking the specified economic activities and whether the premises are adequate for such activities. bank, restricted licence bank or deposit-taking company). The R&D fraction is calculated in accordance with the following formula and capped at 100%. sourced and not subject to Hong Kong. Where Hong Kong has a double taxation arrangement with the other jurisdiction, a full credit for tax paid may be available in Hong Kong. According to the Urban Land Institute Asia Pacific Centre for Housing, the median price of Singapore's private homes is $1.2 million, compared to $1.16 million in Hong Kong. As the mode of operation of MNE entities varies from industry to industry, it is neither feasible nor appropriate to specify any minimum thresholds for determining whether the adequacy tests are satisfied for the purposes of economic substance requirement. By continuing to browse this site you agree to the use of cookies. With effect from the year of assessment 2018/19, section 16(2J) of the IRO restricts the application of section 16(1)(c) of the IRO. However, if the income concerned is taxable under a special tax legislation (e.g. the headline rate of corporate income tax) in Jurisdiction A is above 15%. In this regard, foreign-sourced interest, dividend and disposal gain that are incidental to the entitys business refer to the income that accrues as a result of, or consequent upon, the relevant business. The Hong Kong government agrees to co-operate with and has committed to the EU to amend the Inland Revenue Ordinance by the end of 2022 and implement relevant measures in 2023 to support the combating of cross-border tax evasion. the portion of the loss that is not attributable to the excepted portion of the qualifying IP income) may be set off against the assessable profits of the MNE entity for that year of assessment. DLA Piper is a global law firm operating through various separate and distinct legal entities. Anewly incorporated business in Hong Kong usually receives its first profits tax return around 18 months from the date of commencement of business or the date of incorporation. In addition, residential property transactions in Hong Kong may also attract Buyer's Stamp Duty and Special Stamp Duty. Yes, because the highest corporate income tax rate applicable to the income is above 15%. Under the new FSIE regime, specified foreign-sourced income will be deemed to be sourced from Hong Kong and chargeable to profits tax if: Specified foreign-sourced income will be exempt from profits tax if the economic substance requirement, participation requirement or nexus requirement (as the case may be) is satisfied in the year of assessment in which the income accrues to the MNE entity (i.e. 2017 - 2023 PwC. Foreign tax credit. 514 or under the law of any place outside Hong Kong is not chargeable to profits tax in a year of assessment due to the operation of the nexus requirement and the patent application is withdrawn, abandoned or refused in a subsequent year of assessment, the excepted portion of the income would be regarded as specified foreign-sourced income received in Hong Kong in that subsequent year of assessment and be chargeable to profits tax. 155) (BO); or. Foreign tax credits are available if foreign taxes are payable/paid by a Hong Kong tax resident on income derived from a jurisdiction that has entered into a CDTA with Hong Kong SAR and the same income is subject to tax in Hong Kong SAR. The tax rates in Hong Kong are as follows: Net taxable income (2018/2019) Rate. The Inland Revenue (Amendment) (No. Depending on your tax residence and the nature of your business, we will mainly provide solutions within these jurisdictions: Hong Kong, with a local company or with anoffshore structure. The market has re-priced quickly, albeit at different speeds. The year of assessment runs from April 1 to March 31. A collection of entities that are related through ownership or control such that the assets, liabilities, income, expenses and cash flows of those entities are required under applicable accounting principles to be included in the consolidated financial statements of the ultimate parent entity of the collection; or are excluded from the consolidated financial statements of the ultimate parent entity solely on size or materiality grounds or on the grounds that the entities are held for sale; or, An entity that is located in one jurisdiction and has one or more permanent establishments in other jurisdictions. The existing taxes to which this Agreement shall apply are: (a) in the case of the Hong Kong Special Administrative Region, the taxes imposed by the Government of the Hong Kong Special Administrative Region under the Inland Revenue Ordinance ("Hong Kong Special Administrative Region tax"); (b) in the case of Canada, the taxes imposed by the Government of Canada under the Income Tax Act . Return of the Withholding Tax Deduction . For any similar tax payable on specified foreign-sourced income in a non-CDTA territory, unilateral tax credit will be provided to the MNE entity if it is a Hong Kong resident person. Taxpayers are required to take all reasonable steps to minimise the foreign tax payable before making a claim for tax credit in Hong Kong SAR. This site uses cookies to collect information about your browsing activities in order to provide you with more relevant content and promotional materials, and help us understand your interests and enhance the site. , Get the latest KPMG thought leadership directly to your individual personalized dashboard, Latest updates on the foreign-sourced income exemption regime in Hong Kong, Download a PDF version of this article Opens in a new window, View Print friendly version of this article Opens in a new window, Hong Kong Tax Alert - Issue 21, October 2022, Hong Kong Tax Alert - Issue 24, November 2022, https://www.gld.gov.hk/egazette/pdf/20222643/es32022264319.pdf, Legislative Council of the Hong Kong Special Administrative Region - Bills Committee (legco.gov.hk), https://www.legco.gov.hk/yr2022/english/bc/bc06/papers/bc06cb1-833-1-e.pdf. an entity licensed under Part V of the Securities and Futures Ordinance (Cap. This is notwithstanding the dividend was taxed at only 10 % in Jurisdiction A. However, losses cannot be carried back to offset against assessable profits in prior basis periods. Money Talk Get ready to add important dates to your 2023 calendar. If the MNE entity fails all exceptions, specified foreign-sourced income will be subject to profits tax in the year of assessment in which such income is received by the MNE entity in Hong Kong (i.e. Find out more. A taxpayer could claim the entire $1,000 as a tax credit, which is a dollar-for-dollar reduction in taxes, and the . Advance Ruling on Compliance with the Economic Substance Requirement. The Hong Kong SAR Government has published its bill to amend the law relating to deductions for tax paid overseas. Losses attributable to the operation of the trade, profession or business carried on in Hong Kong can be carried forward indefinitely to offset against future assessable profits until fully utilized. The only withholding tax is on any payment made to a nonresident for the use of, or the right to use, certain intellectual property in Hong Kong, or outside Hong Kong where the payments are deductible for the taxpayer. QE does not include interest payments, payments for any land or buildings, or for any alteration, addition or extension to any building and acquisition of intellectual property. withholding tax on royalties, licensing fees, service fees management feesand ), subject to the provisions in section 16(1)(c), are not deductible. The Hong Kong government amended the Inland Revenue Ordinance in July 2018 in order to meet the international standards of transfer pricing developed under the OECD. Any allowance or balancing charge relating to the production of a specified foreign-sourced income under Part 6 of the IRO will also be taken into account when calculating the assessable profits of an MNE entity for the year of assessment in which the income is received in Hong Kong. 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