The Hong Kong government promulgated the Inland Revenue (Amendment) (Tax Concessions for Certain Shipping-related Activities) Ordinance 2022 (“the Ordinance”) on 22 July 2022, which offers tax incentives to qualifying shipping commercial principals. Under the new concessionary regime, ship agents, ship managers and ship brokers will be entitled to half-rate profits tax concessions (i.e., at 8.25 percent compared to 16.5 percent) for carrying out qualifying activities in Hong Kong.
Often been crowned the premier maritime hub that is steeped in history, Hong Kong relishes an almost unrivalled competitive advantage in the provision of diverse high value-added maritime services with around 900 shipping-related enterprises. Despite constituting a hefty proportion of the maritime cluster, ship agents, ship managers and ship brokers have so far been excluded from any preferential tax treatment. Attracting high-quality maritime businesses to Hong Kong has been deemed of paramount importance to bolstering Hong Kong’s competitiveness as a maritime center; with this in mind, the tax concessions were introduced.
Furthermore, the Ordinance dovetails with the Outline of the 14th Five-Year Plan for National Economic and Social Development of the People’s Republic of China and the Long-Range Objectives Through the Year 2035 and the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area, both of which support further reinforcing Hong Kong’s role as an international maritime center as well as encouraging the development of high value-added maritime services.
According to a spokesperson for the Transport and Logistics Bureau, “Ship agency, ship management and ship broking businesses are important maritime business services supporting international shipping activities. The newly introduced tax measures will provide economic incentives for qualifying ship agents, ship managers and ship brokers to operate in Hong Kong. As these businesses serve to facilitate ship ownership and operation, which also generate demand for other maritime business services, fostering the development of shipping commercial principals in Hong Kong is conducive to the growth of our shipping business and maritime cluster.”
How to qualify for the new concessionary tax regime
The Ordinance provides that:
- Profits derived by a qualifying shipping commercial principal* (i.e., a qualifying ship agent, ship manager or ship broker) from engaging in a qualifying activity** (i.e., a qualifying ship agency activity, ship management activity or ship broking activity) in Hong Kong will be entitled to a reduced profits tax rate at 8.25%; and
- Profits derived by a qualifying shipping commercial principal from carrying out a qualifying activity for an associated shipping enterprise***, which is entitled to a concessionary tax rate or income exemption, shall also be subject to the same reduced tax rate as enjoyed by the associated shipping enterprise.
*A “qualifying shipping commercial principal” refers to a standalone corporate entity solely engaging in qualifying activities or able to fulfil the safe habor rule below:
- A standalone corporate entity predominantly engaging in qualifying activities; and
- The standalone entity may carry out other non-qualifying profit-generating activities, but the percentage of profits derived from, and the percentage of assets used to carry out such activities should not exceed more than 25% of its total profits and assets in a given basis period. In other words, the percentage of profits and assets related to qualifying activities shall be no less than 75% of its total profits and assets in a given basis period.
**A “qualifying activity” refers to a ship agency, ship management or ship broking activity carried out by a qualifying shipping commercial principal in the ordinary course of the principal’s business in Hong Kong.
***An “associated shipping enterprise” refers to a ship lessor, ship leasing manager, ship operator or ship owner, who is entitled to tax concessions or exemption and a) over whom the qualifying entity has control, b) who has control over the qualifying entity, or c) who is subject to the control of the same person as the qualifying entity.
Further safeguarding requirements
In order to safeguard against attempts to defraud the tax system and ensure compliance with international tax laws, the Ordinance provides that the qualifying shipping commercial principal shall satisfy the additional requirements below:
- Central management and control
The qualifying shipping commercial principal is required to exercise its central management and control in Hong Kong, i.e., the highest level of control of its business.
- Substantial activity
The qualifying shipping commercial principal is required to carry out its core income-generating activities in Hong Kong, which entail the following:
– Hiring at least one full-time qualified employee; and
– Incurring at least HKD 1 million of operating expenditure in Hong Kong yearly.
- Arm’s length principle for transfer pricing
Transactions between the qualifying shipping commercial principal and its associated parties are subject to the arm’s length principle and should, therefore, be on the same terms and conditions which would have been agreed between independent entities.
- Main purpose test
The main purpose of the qualifying shipping commercial principal entering into an agreement – in respect of profits accrued that are subject to the concessionary regime – shall not be to obtain a tax benefit.
- Anti-tax arbitrage rule
To prevent exploitation of the differences between tax systems for the purpose of obtaining tax benefits, the tax deduction for service fees paid by an entity subject to the full tax rate to a related qualifying shipping commercial principal subject to the reduced tax rate shall be lowered with reference to the amount of tax savings obtained.
The Ordinance is expected to go a long way towards providing a boost to Hong Kong’s competitiveness as an international maritime hub. With its regional counterparts vying for the much-coveted title of the go-to maritime hub, Hong Kong would need to look to its laurels.