On 7 June 2017, the Commissioner of China’s State Administration of Taxation (SAT) signed, on behalf of Hong Kong, the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which aims to close loopholes in the current bilateral tax treaties and lessen the opportunity for tax avoidance.
In implementing the Multilateral Instrument, Hong Kong has taken a pragmatic approach, opting into the provisions of the Convention that represent the minimum standards including the principal purpose test for preventing treaty abuse and the requirement for allowing a minimum three-year period for a person to present its case for Mutual Agreement Procedure (MAP). Hong Kong has opted out of other provisions that are not mandatory such as provisions addressing hybrid mismatches and changes to combat artificial avoidance of a permanent establishment.
On 15 June 2017, the Hong Kong Inland Revenue Department (IRD) issued a notice on the property tax obligations of property owners. Property tax is charged on property owners by reference to the actual rent receivable (including lease premium) in the relevant year of assessment. Owners in receipt of rental income must inform the tax department in writing if they are liable to tax and supply the particulars of the property not later than 4 months after the end of the basis period for the year of assessment (e.g. on or before 31 July 2017 for the year of assessment 2016/17), unless they have already received the appropriate tax returns.
A return issued by the IRD should be completed and furnished to the IRD within the stipulated time limit for official record updating purposes even if no rental was received in respect of the property concerned. Owners chargeable to property tax must keep sufficient rent records, such as lease agreements and duplicates of rental receipts for at least 7 years. They must inform the Department of any change of address in writing within one month.
Where a corporation has been exempted from property tax and there is a change in the ownership or use of the property, or in any other circumstances which may affect such exemption, the corporation must notify the Department in writing of the change within 30 days after the event. Heavy penalties may be incurred for failure to comply with the requirements of the Inland Revenue Ordinance.
Inland Revenue (Amendment) (No. 2) Ordinance 2017 (Amendment Ordinance) was gazetted June 16 and will come into effect on July 1, 2017. The Amendment Ordinance enables Hong Kong to implement automatic exchange of financial account information in tax matters (AEOI) more effectively.
As an international financial centre Hong Kong has been committed to enhancing tax transparency and combatting cross-border tax evasion. Hong Kong has been making preparations for the implementation of the common reporting standard for AEOI as set out by the Organisation for Economic Cooperation and Development (OECD). At the same time, both the OECD and the European Union (EU) have been closely monitoring jurisdictions’ progress in the implementation of AEOI.
The Amendment Ordinance can ensure that Hong Kong preserves the financial account information from the second half of 2017 for exchanging with other jurisdictions. This enables the effective implementation of AEOI without introducing an undue compliance burden to financial institutions.
To implement AEOI, from July 1, 2017, the list of “reportable jurisdictions” under the Inland Revenue Ordinance will be expanded to cover 75 jurisdictions, comprising 13 confirmed AEOI partners and 62 prospective AEOI partners. The 62 prospective AEOI partners include the following three categories:
(a) jurisdictions which have expressed an interest in conducting AEOI with Hong Kong or jurisdictions suggested by the OECD;
(b) Hong Kong’s tax treaty partners which have committed to AEOI; and
(c) all member states of the EU.
The Amendment Ordinance does not alter the privacy and data protection requirements on AEOI under the Inland Revenue Ordinance. Hong Kong would only conduct AEOI with jurisdictions which have signed dedicated exchange agreements with Hong Kong and have fulfilled the OECD’s standard and relevant safeguards for protecting data privacy and confidentiality of the information exchanged.
Hong Kong has signed an agreement with Indonesia for conducting automatic exchange of financial account information in tax matters (AEOI), a Government spokesman said on June 16, 2017.
The spokesman added that they have been seeking to expand Hong Kong’s AEOI network with their tax treaty partners. Including the agreement with Indonesia, Hong Kong now has 13 AEOI partners. The others are Belgium, Canada, Guernsey, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Portugal, South Africa and the United Kingdom.
The spokesman also added that the Government plans to extend the application of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters to Hong Kong. An amendment bill will be introduced into the Legislative Council in late 2017.
Hong Kong has signed an agreement with Ireland for conducting automatic exchange of financial account information in tax matters (AEOI) from 2018 onwards, a Government spokesman said on June 8, 2017.
The spokesman added that they have been seeking to expand Hong Kong’s AEOI network with their tax treaty partners. Including the agreement with Ireland, Hong Kong now has 12 AEOI partners. The others are Belgium, Canada, Guernsey, Italy, Japan, Korea, Mexico, the Netherlands, Portugal, South Africa and the United Kingdom.
The spokesman also said that the Government also plans to extend the application of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters to Hong Kong. An amendment bill will be introduced into the Legislative Council in late 2017. This will help further expand Hong Kong’s AEOI network.
On 3 May 2017, the government of Belarus ratified the agreement with Hong Kong for the avoidance of double taxation. The agreement was signed on 16 January 2017 and was adopted by the Belarus House of Representatives on April 19, 2017. The agreement was approved by the Belarus Council of Republic on April 21, 2017.
Under the agreement, double taxation will be avoided using the credit method. Any Belarus tax paid by Hong Kong companies will be allowed as a credit against the tax payable in Hong Kong on the same profits, subject to the provisions of the tax laws of Hong Kong. Likewise, for Belarus companies, the tax they paid in Hong Kong will be allowed as a credit against the tax payable on the same income in Belarus.
Under the agreement, the withholding tax rate on dividends will be limited to 5% (currently at 12 per cent for companies and 13 per cent for individuals) of the gross amount. Interest will be capped at 5% (currently at 10 per cent for companies and 13 per cent for individuals). The withholding tax rate on royalties will be at 5 per cent (currently at 15 per cent for companies and 13 per cent for individuals) and it will be further reduced to 3 per cent if the royalties are for the use of, or the right to use, aircraft.
The Government introduced in March this year tax concessions for the aircraft leasing industry to foster the proposed development of Hong Kong as an aircraft leasing centre. On March 10 2017, the Hong Kong government gazetted the Inland Revenue (Amendment) (No.2) Bill 2017, which formally introduces a concessionary tax regime for certain aircraft leasing activities. The tax concessions are offered to two classes of persons, qualifying aircraft lessors and qualifying aircraft leasing managers.
The main features of the proposed regime are as follows;
- An 8.25% tax rate applies to all qualifying profits of qualifying aircraft lessors (this is half of the prevailing profits tax rate for corporations); and
- The assessable amount of leasing income of a qualifying aircraft lessor is deemed to be 20% of the gross leasing income less deductible expenditure (excluding tax depreciation).
- An 8.25% tax rate also applies to all qualifying profits of qualifying aircraft leasing managers.
To be eligible for the tax concessions, the aircraft lessor must be a “qualifying aircraft lessor” that satisfies some conditions including lessor must be a corporation with its central management and control in Hong Kong. The lessor must be the owner of the aircraft being leased and must not carry out in Hong Kong any activities other than qualifying aircraft leasing activities.
To qualify as a “qualifying aircraft leasing manager”, the manager must satisfy some conditions including at least 75% of its profits arise from, and 75% of its assets are deployed for, the aircraft leasing management business. The manager must be a corporation with its central management and control in Hong Kong. The aircraft leasing management activities must not be carried out from a permanent establishment outside Hong Kong. The manager must have elected in writing that it wishes to opt into the tax concessionary regime.