globaltaxnews.ey.comSign up for tax alert emailsPrintDownload

25 May 2022

Hong Kong Tax Authority clarifies multiple issues around profits tax

In its 2021 annual meeting with tax practitioners, the Hong Kong Tax Authority clarified the following issues related to the profits tax:

When a Hong Kong resident enterprise has a “server permanent establishment (PE)” located outside Hong Kong which forms an essential and significant part of its e-commerce business, the Tax Authority has indicated that a part or all of its profits could be regarded as non-taxable offshore Hong Kong profits. The Tax Authority reconfirmed that the location of the server PE alone would not determine the locality of the profits, instead the core operations for the e-commerce transaction and the place where those operations had been carried out should be focused on.

Genuine businesses established in Hong Kong with a view to enjoy the tax concessions under the preferential tax regimes or the tax treaty network of Hong Kong would not fall under the anti-avoidance provisions of the “main purpose test.”

Transfer of trading stock between two related Hong Kong taxpayers at below market value would not be subject to tax adjustments under the arm’s-length transfer pricing rules if the transfer was: (i) in the course of trade; or (ii) made upon cessation of business, given certain conditions are satisfied.

Currently taxpayers can make an irrevocable election so that fair value changes from a financial instrument held for trading purposes could be taxed as reflected in the accounts rather than on realization basis. While taxation based on fair value accounting would not affect the general onshore-versus-offshore nature of the profits under the source principles, taxpayers should assess whether there is a reasonable prospect that the profits eventually realized could be regarded as being offshore sourced and non-taxable. It’s critical to note that even if the subsequent sales activities warrant an offshore claim of the profits, in practice, it may be difficult for taxpayers to re-open prior year tax assessments regarding the fair value changes which have already been taxed.

_________________________________________

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

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Document ID: 2022-5513

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more