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Tax Advisory Department
Author: Anna Chan, Partner
With a forecast budget surplus of HK$92.8 billion for 2016-2017 attributed mainly by land sales and stamp duty, Financial Secretary Paul Chan Mo-po has followed his predecessor’s path to hand out “candies” totaling HK$35.1 billion. But are you getting any of them? Please check out the list below:-
- Reduction on profits tax, salaries tax and tax under personal assessment by 75% for 2016-2017 subject to a cap of HK$20,000.
- Widening of the marginal bands for salaries tax from the current HK$40,000 to HK$45,000.
- Raising of the disabled dependent allowance from the current HK$66,000 to HK$75,000.
- Raising of the dependent brother/sister allowance from the current HK$33,000 to HK$37,500.
- Extension of the entitlement period for the tax reduction for home loan interest from 15 years of assessment to 20 years.
- Raising of the deduction ceiling for self-education expenses from the current HK$80,000 to HK$100,000.
- Waiving of government rates for four quarters of 2017-2018 subject to a cap of HK$1,000 per quarter.
Support for Small and Medium Enterprises (“SME”)
- Continuation of the Dedicated Fund on Branding, Upgrading and Domestic Sales in furthering business development in the Mainland.
- Continuation of the special concessionary measures under the SME Financing Guarantee Scheme to help enterprises tide over their liquidity needs.
- Strengthening of the underwriting capacity of the Hong Kog Export Credit Insurance Corporation (“ECIC”) to provide Hong Kong exporters with insurance protection against non-payment risks by raising the cap on the contingent liability of ECIC under contracts of insurance from HK$40 billion to HK$55 billion.
- Continuation of the Technology Voucher Programme to provide each eligible SME with funding of up to HK$200,000 to promote the effective use of technological services and solutions among SMEs for better operation efficiency.
With the aim to enhance Hong Kong’s overall competitiveness, new measures will also be introduced to nurture certain emerging industries:-
Aircraft Leasing Business
A dedicated tax regime has been proposed [Note: not the law yet] which would result in an effective tax rate of 1.65% (i.e., 20% x 8.25%) [as opposed to the 16.5% general tax rate] for qualifying transactions in order to attract aircraft financing and leasing business to Hong Kong. Details are as follows:-
- Qualifying aircraft lessors and qualifying aircraft leasing managers for offshore aircraft leasing transactions in Hong Kong (with non-Hong Kong aircraft operators as lessees) can enjoy half payment of the prevailing HK corporate income tax rate of 16.5% (i.e. 8.25%); and
- For qualifying aircraft lessors, only 20% of the profits (excluding tax depreciation) generated from the leasing of an aircraft to a non-Hong Kong aircraft operator will be regarded as HK source and subject to Hong Kong tax.
To facilitate Hong Kong’s development into a full-fledged fund service centre, the Government proposes to extend the profits tax exemption for qualifying offshore funds and offshore private equity funds to onshore privately-offered open-ended fund companies.
Other measures include:-
- The First Registration Tax exemption for electric vehicles which was introduced to promote a wider use of electric vehicles to replace diesel and petrol vehicles will be revised and the First Registration Tax waiver for electric private cars will be capped at HK$97,500 from 1 April 2017.
- The Government will issue a second batch of Silver Bond in 2017-2018 which targets at Hong Kong residents aged 65 or above who are looking for investment products with steady returns.
- Waiving the licence fees for tourism-related industries including restaurants and hawkers and fees for restricted food permits for one year.
For a deeper discussion or any enquiry, please contact one of our members of the Tax Advisory team.
By Anna Chan, Partner
To suppress the overheated property market, the Hong Kong government announced on 4 November 2016 that a flat rate of 15% would be levied on residential property transactions with effect from 5 November 2016 to replace the old rates for ad valorem stamp duty (“AVD”) (originally ranging from 1.5% to 8.5% depending on the value of the property). The new rate however will not cover non-residential properties such as car parks and industrial properties.The new AVD will be applicable to residential property transactions by individuals and companies, unless an exemption applies. All previous exceptions continue to apply. In particular, where a residential property is (i) acquired by a Hong Kong Permanent Resident (“HKPR”); (ii) acting on his/her own behalf; and (iii) does not own any other residential property in Hong Kong at the time of acquisition, a lower rate under Scale 2 annexed hereto (at a range from HK$100 to 4.25% of property value) would apply. Scale 2 is also applicable in the following circumstances:-
- acquisition of a residential property by a HKPR jointly as a co-owner with close relatives (i.e. spouse, parents, children, brothers and sisters) who are not HKPR and each of the purchasers is acting on his/her own behalf and does not own any other residential property in Hong Kong at the time of acquisition;
- acquisition or transfer of residential properties between close relatives, irrespective of whether they are HKPRs and whether they are beneficial owners of any other residential property in Hong Kong at the time of the acquisition or transfer;
- nomination of a close relative (irrespective of whether they are HKPRs or not) who are owners of other residential property in Hong Kong at the time of nomination, to take up the assignment of a residential property;
- acquisition or transfer of a property by a court order or pursuant to a court order, which includes a foreclosure order obtained by a mortgagee whether or not it falls under the definition of a financial institution within the meaning of section 2 of the Inland Revenue Ordinance (“IRO”); and
- transfer of a mortgaged property under a conveyance to/in its mortgagee that is a financial institution within the meaning of section 2 of the IRO or a receiver appointed by the mortgagee.
Further, no AVD would be charged in the following circumstances:-
- transfer of a property to a beneficiary of the estate of a deceased person in accordance with that provided under a will or the law of intestacy; or acquired the property by the right of survivorship; nomination of close relatives (regardless of whether they are HKPRs or not) who do not own any other residential property in Hong Kong at the time of nomination; and
- gift of properties received by charitable institutions exempted from tax under section 88 of the IRO.
Those who own a residential property at the time of acquiring the new one and pay for the higher stamp duty but subsequently sell the original property within 6 months, may apply for refund of overpaid AVD from the Inland Revenue Department.
Rates under Scale 2
|Consideration / Market Value||Rates||Maximum amount|
|Up to HK$2,000,000||HK$100||HK$100|
|HK$2,000,001 – HK$2,351,760||HK$100 + 10% of excess over HK$2,000,000||HK$35,276|
|HK$3,000,001 – HK$3,290,320||HK$45,000 + 10% of excess over HK$3,000,000||HK$74,032|
|HK$3,290,321 – HK$4,000,000||2.25%||HK$90,000|
|HK$4,000,001 – HK$4,428,570||HK$90,000 + 10% of excess over HK$4,000,000||HK$132,857|
|HK$4,428,571 – HK$6,000,000||3%||HK$180,000|
|HK$6,000,001 – HK$6,720,000||HK$180,000 + 10% of excess over HK$6,000,000||HK$252,000|
|HK$6,720,001 – HK$20,000,000||3.75%||HK$750,000|
|HK$20,000,001 – HK$21,739,120||HK$750,000 + 10% of excess over HK$20,000,000||HK$923,912|
Source: Inland Revenue Department
For a deeper discussion or any enquiry, please contact one of our members of the tax advisory team.
(852) 2522 6763
|(852) 2868 firstname.lastname@example.org|
|(852) 2868 email@example.com|
|(852) 2868 firstname.lastname@example.org|
|(852) 2868 email@example.com|
|(852) 2868 0696|
|(852) 2868 0696|
Disclaimer: This brochure is for reference only. Nothing herein shall be construed as legal advice to any person. Oldham, Li & Nie shall not be held liable for any loss and / or damage incurred by any person acting as a result of the materials contained in this brochure. Rates might vary from time to time.
With an aim to strengthen Hong Kong’s asset management industry, the Inland Revenue (Amendment) Bill 2015, after two rounds of industry-wide consultation, was enacted on 17 July 2015. Under the new law, offshore private equity funds (“PE Funds”) are now eligible to enjoy profits tax exemption in Hong Kong (subject to certain conditions).
Before the enactment of the new law, to qualify as an offshore fund for profits tax exemption, all of the following conditions were required to be satisfied:-
- The fund is a non-resident, i.e. its central management and control are exercised outside Hong Kong;
- Its activities in Hong Kong are restricted to “specified transactions” which are set out in Appendix C to Departmental Interpretation & Practice Notes (“DIPN”) No. 43; and
- Those transactions are carried out through, or arranged by “specified persons” which normally refer to corporations licensed with the Securities & Futures Commission of Hong Kong (“SFC”).
DIPN No. 43 explicitly excludes the investments in private companies’ shares from “specified transactions”, limiting PE Funds’ ability to rely on the exemption. Another limitation under the old law is that it is uncommon for a PE Fund to engage a “specified person” who is licensed with the SFC to manage its transactions. As such, offshore PE Funds could hardly be exempted from Hong Kong profits tax in the past.
Changes under the new law:-
1. Broadening the coverage of transactions under “specified transactions”
Under the new law, PE Funds with a portfolio of investments in excepted private company (“EPC”) can now fulfill the requirement of conducing “specified transactions”.
Schedule 16 of the Inland Revenue Ordinance (“IRO”) was amended to include transactions in shares, stocks, debentures, loan stocks, funds, bonds, or note of, or issued by EPC or a special purpose vehicle (“SPV”) (as defined below).
An EPC is defined as a private company incorporated outside Hong Kong that, at all times within 3 years before a transaction giving rise to the relevant profits is carried out, meets the following conditions:-
- Did not carry on any business through or from a permanent establishment in Hong Kong;
- Did not hold share capital (whether directly or indirectly) in one or more private companies carrying on any business through or from a permanent establishment in Hong Kong, or the aggregate value of such holding of capital is equivalent to not more than 10% of the value of its own assets; and
- Did not hold immovable property in Hong Kong or share capital (whether directly or indirectly) in one or more private companies with direct or indirect holding of immovable property in Hong Kong, or the aggregate value of such holding of the property and capital is equivalent to not more than 10% of the value of its own assets.
2. Providing profits tax exemption to SPVs
SPVs are often used by PE funds to structure investments in private companies, for the purpose of isolating financial risks and legal liability of the underlying investments from the funds. In this connection, under the new law, profits tax exemption is provided to SPVs in respect of any gains derived from holding of investments in EPCs or other SPVs (i.e. interposed SPVs).
As stated in the new law, a SPV refers to a corporation, partnership, trustee of a trust estate or any other entity that:-
- Is wholly or partially owned by a non-resident person;
- Is established solely for the purpose of holding, directly or indirectly, and administering one or more EPCs;
- Is incorporated, registered or appointed in or outside Hong Kong;
- Does not carry on any trade or activities except for the purpose of holding, directly or indirectly, and administering one or more EPCs; and
- Is not itself an EPC.
It should be however noted that the formation of an eligible SPV should be solely for the purposes of holding and administering an EPC, with no other trade or activities. More importantly, the SPV should be owned by a non-resident, whether wholly or jointly with others. In case one of the owners is a Hong Kong tax resident, the tax exemption will be limited to the profits attributable to the ownership of non-residents only.
3. Waiving the requirement of PE Funds to be managed by a “specified person”
Appointing a “specified person” to carry out or arrange transactions is no longer required for PE Funds, as long as the funds are a “qualifying fund” that falls within the following descriptions:-
- At all times after the final closing of sales of interests:-
- The number of investors exceeds 4; and
- The capital commitments made by investors, excluding the originator and its associates, exceed 90% of the aggregate capital commitments.
- The portion of the net proceeds arising out of the transactions of the fund to be received by the originator and its associates, after deducting the portion attributable to their capital contributions, is agreed under an agreement governing the operation of the fund to be an amount not exceeding 30% of the net proceeds.
4. Introducing additional anti-avoidance provision
To avoid abuse by resident investors by simply converting their taxable profits to non-taxable income via an offshore fund structure, additional anti-avoidance provision was introduced.
The original anti-avoidance provision deems profits of an exempted fund as assessable profits arising in or derived from Hong Kong if:-
- 30% or more of the beneficial interest in the exempted fund is held by a resident person; or
- any beneficial interest in the exempted fund is held by a resident person in the case where such exempted fund is the resident person’s associate.
The above thresholds also apply to the deeming provision under the new law.
It should be noted that the deeming provisions would not apply if the IRD is of the view that the beneficial interest in an exempt fund is “bona fide widely held”. The term “bona fide widely held” is not defined in the IRO but DIPN No. 20 states that a fund is “bona fide widely held” if it has:-
- more than 50 persons holding all of the units or shares in the fund; and
- more than 21 persons holding units or shares entitling, directly or indirectly, to 75%, or more, of the income or property of the fund.
To take advantage of the new profits tax exemption, offshore PE Funds and fund managers are strongly advised to review their / their clients’ investment portfolio. For a deeper discussion or any enquiry, please contact one of our members of the tax advisory team.
Joey Chan: firstname.lastname@example.org
Terence Siu: email@example.com
K.F. Yan: firstname.lastname@example.org
Disclaimer: This brochure is for reference only. Nothing herein shall be construed as legal advice to any person. Oldham, Li & Nie shall not be held liable for any loss and / or damage incurred by any person acting as a result of the materials contained in this brochure.
The rule of thumb in determining whether a termination payment received by an employee is taxable or not is:-
- Whether the payment arises from an office or employment; and
- Whether the payment is made in consideration of services rendered in the past, present or future.
The treatment, however, differs according to the nature of termination payments.
1. Payment in lieu of notice
Prior to the year of assessment 2012/13, it was the Inland Revenue Department’s (“IRD”) practice to treat payment in lieu of notice made in accordance with the terms of the employment contract or the provisions of the Hong Kong Employment Ordinance (“EO”) as non-taxable.
However, such tax treatment was no longer adopted as a result of a Court of Final Appeal case in 2011 which held that payment in lieu of notice contractually agreed by the employer and the employee should be income arising from employment and hence chargeable to salaries tax.
It follows that from year of assessment 2012/13 onwards, payment in lieu of notice accrued to employees on or after 1 April 2012, whether paid under an express or an implied contract term, will be assessable to salaries tax.
2. Payment in lieu of leave
Cash payment in lieu of leave accrued at termination of employment is similar to salary received by an employee during sick leave, and is thus taxable.
3. Severance payments / long service payments
Under the EO, an employee who satisfies the prescribed conditions and a qualifying period of employment is eligible for severance payment or long service payment. Both are calculated based on the years of service at a rate of 2/3 of monthly salary or 2/3 of HK$22,500, whichever is lower. The IRD considers that those statutory payments provided by the EO are not payments made for services rendered but payments made to terminate the employment. They therefore fall outside the scope of salaries tax.
It should however be noted that the amount in excess of the statutory entitlement is taxable.
4. Compensation payments
It is not uncommon that an employee receives a lump sum payment as compensation in the case of early termination of employment by his or her employer. The taxability of such payment is often subject to dispute.
There are a number of case laws in the UK and Hong Kong concerning the taxability of compensation payments. Decisions handed down by the Courts in Hong Kong suggest that the following principle is heavily relied upon by the Court:-
- A payment is assessable if it is paid in return for “acting as” an employee since it is considered to be “an inducement to enter into employment and provide future services”;
- A payment made in return for “being” an employee is also assessable since it represents “a reward for past services”;
- A payment that is not paid for the above purpose but is paid for some other reason e.g. loss of office, cancellation of employment agreement, abrogation of rights would not be subject to tax;
- A payment should be viewed as a matter of substance and not merely of form.
If you would like to discuss anything contained in this article, please contact one of our tax advisory team.
Joey Chan: email@example.com
Terence Siu: firstname.lastname@example.org
K.F. Yan: email@example.com
Disclaimer: This article is for reference only. Nothing herein shall be construed as legal advice to any person. Oldham, Li & Nie shall not be held liable for any loss and / or damage incurred by any person acting as a result of the materials contained in this brochure.