February 28, 2020
Hong Kong introduces tax concessions for ship lessors and ship leasing managers
The Hong Kong Government introduced the Inland Revenue (Amendment) (Ship Leasing Tax Concessions) Bill 2020 (the Bill) on 17 January 2020. The Bill proposes a tax regime offering tax incentives to qualifying ship lessors and qualifying ship leasing managers in Hong Kong.
The provisions of the Bill will apply for income received or accrued on or after 1 April 2020.
This Alert summarizes the key provision of the tax regime.
The proposed tax regime provides:
1. The tax rate on the qualifying profits of qualifying ship lessors derived from a qualifying ship leasing activity will be 0%.
2. The tax rate on the qualifying profits of qualifying ship leasing managers carrying out qualifying ship leasing management activities for a non-associated qualifying ship lessor will be 8.25%. The tax rate will be reduced to 0% if the qualifying ship lessor is an associated corporation.
3. The deemed taxable amount in respect of the qualifying ship leasing income of a qualifying ship owner-lessor derived from an operating lease will be equal to 20% of rental income reduced by deductible expenses (excluding depreciation).
4. The taxable amount in respect of income derived from a finance lease by a qualifying ship lessor will be equal to the relevant finance charges or interest received from the lease reduced by deductible expenses.
Additional conditions to be satisfied for the application of the concessionary tax rates
In addition to the above, a qualifying ship lessor or a qualifying ship leasing manager must satisfy the following specified conditions in order to avail themselves of the proposed dedicated tax regime:
1. The central management and control of the lessor or manager must be exercised in Hong Kong.
2. The activities that produce the qualifying profits in that year must be either: (i) carried out in Hong Kong by the lessor or manager themselves; or (ii) arranged by the lessor or manager to be carried out in Hong Kong.2
3. The aforesaid activities are not carried out by a permanent establishment located outside of Hong Kong.
Ships held at least three years to be treated as capital assets
The Bill specifies that a ship owned by a qualifying ship lessor is to be treated as a capital asset of the lessor, for the purpose of profits tax in Hong Kong, if the lessor: (i) has used the ship for carrying out a qualifying ship leasing activity for a continuous period of not less than three years immediately before the lessor disposes of the ship; and (ii) the above tax concessions apply in respect of the leasing of the ship for all relevant taxable years.
Therefore, given that Hong Kong does not tax capital gains, a qualifying ship lessor satisfying the above conditions would not be liable to Hong Kong profits tax in respect of gains derived from the disposal of the ship.
1. A corporation not dedicated solely to carrying out one or more of the qualifying ship leasing management activities, would nonetheless qualify as a qualifying ship leasing manager under the following two safe harbor rules: (i) The relevant profit derived from, and assets employed in, the qualifying ship leasing management activities of the corporation are both not less than 75% of the total profit derived and total assets employed by the corporation. (ii) Where the corporation fails to qualify as a qualifying ship leasing manager based on the aforesaid condition, the corporation concerned may nonetheless make an application to the Commissioner of Inland Revenue (CIR) requesting the CIR to determine it as being a qualifying ship leasing manager. The CIR may make such a determination if he is satisfied that the otherwise non-qualification of the corporation for the year in question arose not out of the ordinary course of business of the corporation.
2. Taxpayers must meet the following substance thresholds: (i) employ at least two qualified full-time employees in Hong Kong for a ship lessor and at least one qualified full-time employee in Hong Kong for a ship leasing manager; and (ii) incur annual operating expenditure in Hong Kong of not less than HK$7.8 million for a ship lessor and HK$1 million for a ship leasing manager.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York