Articles by Practice Area
- How to be eligible for the treaty benefits for China-sourced passive income under the New Rules?
- China Waives Work Permits for Hong Kong, Taiwan and Macau Residents
- OLN Ranked by Benchmark Litigation 2018
- Launching a Startup in Hong Kong? These are the Legal Issues You Need to Know
- Buying A Chinese Company? Why China Deals DON’T Get Done.
Tax Advisory Department
by Anna Chan
The State Administration of Taxation of China (“SAT”) recently released Public Notice  No. 9 (“Public Notice 9”) which provides additional guidance in assessing the beneficial ownership for treaty purposes to be aligned with the international standards.
Impact of Public Notice 9
Public Notice 9 replaces Guoshuihan  No. 601 (“Circular 601”) and Public Notice  No. 30 (“Public Notice 30”) and has come into effect from 1 April 2018. The impact of Public Notice 9 are as follows:-
(i) Amendments to the unfavourable factors as listed in Circular 601
(ii) Extension to the Safe Harbour Rule for dividends as listed in Public Notice 30
Distribution of income: The recipient of the income is obligated to distribute more than 50% of such income (as opposed to 60% as stated in Circular 601) to a resident(s) of a third jurisdiction within 12 months after the receipt of such income.
In addition, the term “obligated” is now more broadly defined as “including having contractual obligation or actual payment even if no contractual obligation”
the following recipients of China-sourced dividends will automatically recognized as beneficial owners without the need to undergo an assessment based on the unfavourable factors:-
(1) Government of the contracting state (an extension from Public Notice 30);
(2) Company that is a resident of the contracting state and listed in the contracting state;
(3) Individual who is a resident of the contracting state (an extension from Public Notice 30); and
(4) Recipient that is directly or indirectly wholly owned by one or more parties listed above. In cases of indirect ownership, the intermediary shareholders must be either Chinese residents or residents of the contracting states (unless it falls into either the “same country rule” or “same treaty benefit rule” as detailed below).
Substantive business activities: Public Notice 9 now broadly states that it would be an unfavourable factor if the business activities conducted by the recipient of the income do not constitute substantive business activities, which is determined based on the functions performed and the risks assumed by the recipient
No tax in residence jurisdiction: Same as Circular 601, the income is not subject to tax or it would be taxed at a very low effective tax rate in the residence jurisdiction of the recipient
Existing of another loan agreement: Same as Circular 601, in addition to the relevant loan agreement of which interest is derived, the creditor has another loan agreement or deposit agreement with a third party with similar terms such as the loan amount, interest rate and date of execution
Existing of another agreement regarding ownership or right to use: Same as Circular 601, in addition to the relevant agreement in relation to copyright, patents or technology etc. of which royalty is derived, the recipient of the royalty has another agreement with a third party regarding the ownership or right to use the relevant copyright, patents or technology etc. (this factor remains the same as the one listed in Circular 601)
Our observations and application
The extension of the safe harbour rule provides more certainty to dividend recipients without the need to undergo the assessment based on the unfavourable factors as SAT considers that there should be less risk in treaty abuse.
For example, entities / individuals can now enjoy treaty benefits under the introduction of the “same country rule” or “same treaty benefit rule” as detailed below:-
(1) Same country rule
(2) Same treaty benefit rule
However, the unfavourable factors now have more stringent requirements in place. For example:-
- the percentage of the income to be distributed has now dropped from 60% to 50%;
- the term “obligated” is explicitly defined in Public Notice 9 as “including having contractual obligation or actual payment even if no contractual obligation”; and
- replacing the factor that “the recipient conducts no or very few other business activities” to “do not constitute substantive business activities”.
Entities / individuals with China-sourced passive income should carefully review their existing investment structures to ensure that they could enjoy or continue to enjoy the treaty benefits under Public Notice 9.
OLN provides a full range of tax advisory services. If you have any questions regarding the above or on any tax issues, please contact one of the members of the tax advisory team.
How would the new law on Significant Controllers Register concern you?
The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institution) (Amendment) Ordinance 2018 (the “AML (Amendment) Ordinance”) and the Companies (Amendment) Ordinance 2018 (the “Companies (Amendment) Ordinance”) has come into effect on 1 March 2018.
The SCR regime
The Companies (Amendment) Ordinance imposes a new obligation on HK companies to identify its beneficial ownership and members with significant control and to maintain a Significant Controller Register (“SCR”) which is to be kept together with the company kits and other registers such as the Registers of Members and Directors. If a company fails to comply with any of the requirements under the new SCR regime, the company and each of its responsible persons commit and offence and each will be liable to a fine of HK$25,000 and a further daily fine HK$700 whenever applicable. Please refer to our firm’s article on “The Companies (Amendment) Ordinance 2018” for more details.
There are a few salient points to note in relation to SCR:-
- SCR requirement is not only applicable to limited companies but also to companies limited by shares, companies limited by guarantee or unlimited companies. Only companies listed on the Hong Kong Stock Exchange (but not listed overseas) are exempted.
- SCR is not for public inspection. However, the SCR has to be ready for inspection by law enforcement agencies, including but not limited to the Hong Kong Police Force, the Customs and Excise Department and the Inland Revenue Department (the “IRD”).
- It is not specified in the Companies (Amendment) Ordinance as to whether information contained in the SCR will be surrendered by the law enforcement agencies to tax authorities in other countries. It shall, however, be noted that as part of our tax reform initiatives, Hong Kong has entered into numerous Automatic Exchange of Information agreement (the “AEoI”) with other jurisdiction to exchange information with overseas tax authorities. More AEoIs with others are expected to come. Assuming the UK’s HM Revenue & Customs, which is already an AEoI partner of Hong Kong, requests the IRD to surrender information regarding the ultimate beneficiar(ies) or significant controller(s) of a HK company, IRD may theoretically forward the information gathered from the company’s SCR to the HMRC. To know more about AEoI, please refer to our related article “Is your personal data at stake because of the increased transparency in tax administration through Automatic Exchange of Information (“AEOI”)?”
- The new SCR regime also requests company to have at least one designated representative whose role is to provide assistance to the Companies Registry and the law enforcement agents on SCR related matters. The Companies Registry has made clear that there would be no personal liability associated with acting as a designated representative of an Applicable Company.
AML (Amendment) Ordinance
Apart from imposing the new requirement on Trust or Company Service Providers (the “TCSP”) to obtain a license from the Companies Registry for carrying on their business, the AML (Amendment) Ordinance also extends the obligations to conduct customer due diligence (“CDD”) and to do records-keeping to the legal professional, accounting professional, real estate agents and TCSP licensees.
Since 1 March 2018, enhanced CDD measures shall be implemented by the TCSPs to (1) identify and verify the identity of their customers and their beneficial owners; (2) obtain information on the purpose and the intended nature of the business relationship before establishing business relationship with their customers; and (3) identify and verify the identity of the person purporting to act on behalf of their customers.
Accordingly, companies shall be prepared for more KYC and due diligence from its company secretarial service providers in the future.
What can OLN do for you?
OLN can help by reviewing your companies’ structure and identifying the significant controllers of your companies to ensure compliance with the new SCR regime. Please feel free to contact our Anna Chan at email@example.com or our Victor Ng at firstname.lastname@example.org.
Does the Hong Kong 2018/2019 Budget have any impact on you and your business?
The Financial Secretary of Hong Kong (“FS”), Mr. Paul Chan Mo-po, announced his budget for 2018/19 yesterday, providing a blueprint for the long-term development of Hong Kong. As explained by FS, the main objectives to be achieved are (1) to diversify Hong Kong’s economy; (2) to invest for the future; and (3) to share with the people of Hong Kong at large the fruitful economic achievements of Hong Kong for the past few years.
Some of the key features are outlined below:-
|Key features||OLN’s observations/ comments|
|Innovation and Technology||
We welcome the government’s recognition for and the setting aside of funds for the development of innovation and technology, which shall be a driving force for the Hong Kong’s economy.
We believe that with properly formulated policies, the start-ups and enterprises in the industry will have more funding and incentive to undergo more research and development and make Hong Kong a more competitive region for healthcare technologies and on artificial intelligence and robotics technologies.
We hope to see more favourable tax treatments to be in place so that the intellectual property rights resulting from the research and development would stay in Hong Kong and further diversify the economy.
Please refer to our article “How to Catch the Candies for Start-ups in Innovation and Technology under the Budget 2018-2019” for a more detailed discussion.
Whilst we appreciate the government and the industry’s effort in attracting more visitors to Hong Kong (especially those high value-added overnight visitors), we await to any concrete plans or measures to resolve some of the key issues facing hotel and tourism development in Hong Kong, for example, human capital, infrastructure, tourism attractions and activities.
Trading and Logistics Industry
We are happy to see the government’s continuous emphasis and effort on expanding Hong Kong’s tax treaty networks, as evidenced by the many DTAs or double tax agreements concerning aviation and shipping income over the past few years.
We expect to see Hong Kong to conclude and sign more DTAs with countries along the Belt and Road to provide a more favourable tax environment for Hong Kong enterprises doing business in those countries.
Business and Professional Services
We strongly believe that Hong Kong enterprises, especially those in the finance, accounting, legal, engineering, management and architecture sectors can substantially benefit from Belt and Road initiatives and opportunities.
We hope to see more tax treaties and investments agreements to be concluded and signed by Hong Kong and those countries along the Belt and Road. Hong Kong enterprises can play a major role in those initiatives. We also expect to see more companies to be set up by foreign investors in Hong Kong who wish to benefit from those initiatives.
||Please refer to our observations/ comments above.|
|Caring and Sharing|
Abolishing the MPF “offsetting” arrangement
||Hong Kong employers shall keep an eye on the continuous development on this topic as it might potentially increase their labour costs and evaluate the impact sooner rather than later.|
|Reducing Tax Burdens on Individuals||
Please refer to our article “Are you getting your slice of the “generous” tax measures as outlined in the 2018/2019 Hong Kong Budget?” for a detailed discussion of the various tax measures.
Tax Concessions for Eligible Energy Efficient Building Installations
The Government will enhance tax concessions for capital expenditure incurred by enterprises in procuring eligible energy efficient building installations and renewable energy devices by allowing tax deduction to be claimed in full in one year instead of the current time frame of five years.
|We welcome the incentivized measure on “green operation” and urge the government to provide more incentives to encourage the Hong Kong business sector to have a “green operation”, including, for example, by providing extra tax deduction or allowances.|
OLN has tax advisors who have dual qualification in both accounting and law. We are happy to assist on any matters as mentioned above.
How to Catch the Candies for Start-ups in Innovation and Technology under the Budget 2018/2019
In recent years, the Hong Kong Government has shown a determination to promote the development of start-ups in Hong Kong. One of the notable measures could be seen in the Chief Executive’s 2017 Policy Address (CE 2017 Policy), where the Hong Kong Government proposed a new two-tiered profit tax regime for enterprises. Under the new regime, the profit tax rate for the first $2 million of profits of enterprises will be lowered to 8.25%, which is half of the standard profits tax rate of 16.5%. The said reform is now part of the Inland Revenue (Amendment) (No. 7) Bill 2017 that was gazetted on 29 December 2017 and is pending the Second Reading at the Legislative Council.
In the Budget 2018-2019, the Hong Kong Government further recognized the innovation and technology (I&T) as one of the major driving forces of the global economic development. With a surplus of $138 billion in 2017-2018, the Hong Kong Government made a bold commitment and earmarked more than $50 billion to support I&T development both in Hong Kong and the greater Guangdong-Hong Kong-Macau Bay Area with Hong Kong taking on a central role. Below we will look at some of the upcoming opportunities available for I&T start-ups to kick-start their businesses.
Developing the Hong Kong-Shenzhen Innovation and Technology Park
- $20 billion will be spent on developing the first phase of the Hong Kong-Shenzhen Innovation and Technology Park (HKSIT Park) in the Lok Ma Chau Loop.
- The HKSIT Park will be administered by a subsidiary of the Hong Kong Science and Technology Park Corporation (HKSTPC).
- The HKSIT Park will provide ample office and research and development (R&D) space for I&T enterprises
- We anticipate that the HKSIT Park will adopt similar funding schemes and incubation programmes currently in place at the Hong Kong Science and Technology Park (Science Park) to attract I&T talents and entrepreneurs.
Illustration of the Lok Ma Chau Loop.
Expanding the Innovation and Technology Fund
- $10 billion will be injected into the Innovation and Technology Fund (ITF), which provides various forms of funding schemes to encourage Hong Kong companies to develop their technological capabilities and introduce business innovations.
- The ITF offers a wide range of I&T programmes that are available to start-ups, including the following:-
- the Enterprise Support Scheme, which offers up to $10 million funding support for each approved project with further financial assistance to hire up to 2 additional staff;
- the Technological Start-up Support Scheme for Universities, which provides funding up to $1.2 million per enterprise per year (up to three years) to universities to support their professors and students in starting technology businesses and commercialising R&D results;
- the Patent Application Grant which provides funding support (up to $250,000 per application) for local enterprises which do not previously own any patent in any jurisdiction, among others, to apply for patents of their own technological inventions;
- the University-Industry Collaboration Programme, which provides funding support for R&D studentship at local companies (up to $270,000 over three years per studentship), R&D collaboration projects between universities and private companies (up to 50% of the project costs), and industry-oriented R&D projects in the natural science or engineering fields (up to 50% of the project costs);
- the Research and Development Cash Rebate Scheme, which provides cash rebate equivalent to 40% of the R&D expenditures to projects under the ITF or projects fully funded by the enterprise and conducted by designated local public research institutions;
- the Technology Voucher Programme, which provides funding support to local enterprises for up to $200,000 per enterprise for technology consultancy, software purchase and subscription and project auditing needs. The eligibility requirements for this program has recently been relaxed; and
- the Innovation and Technology Venture Fund, which is used to co-invest with partner venture capital funds in local I&T start-ups incorporated no more than 7 years prior to the application with a total number of employees (including those employed by subsidiaries) being less than 250.
Establishing Technology Research Clusters
- $10 billion will be set aside to support the establishment of two research clusters on healthcare technologies and on artificial intelligence and robotics technologies.
- It remains to be seen how the funding will be split between hardware and software development in these fields.
Science Park and Cyberport
- $10 billion will be allocated to Science Park, with about $3 billion to be used for developing physical infrastructure and facilities while about $7 billion will be spent on strengthening tenant support and enhancing the existing incubation programmes, etc.
- $200 million will be allocated to Cyberport to enhance support for start-ups and promote digital technology environment development. This will enable Cyberport to launch a new marketing support scheme for start-ups and increase the financial support under its incubation programme by 50 percent.
- A further $100 million will be allocated to Cyberport to develop the Cyberport Arcade as an e-sports and digital entertainment cluster.
Tax incentives for R&D
- At present, tax deduction for domestic R&D expenditure is 100 percent under s. 16B of the Inland Revenue Ordinance (Cap 112).
- In conjunction with the ongoing profit tax reform, the Government is proposing further tax deduction for domestic R&D expenditure (300 percent tax deduction for the first $2 million qualifying R&D expenditure and 200 percent tax deduction for the remainder) incurred by local enterprises. Drafting of the legislation is underway.
Other Industry-specific Support
- For the construction industry, an initial $1 billion in funding is proposed to be used set up a new Construction Innovation and Technology Fund to encourage enterprises and practitioners in the construction industry to upgrade their technological capabilities, both in terms of knowledge and equipment.
- An $1 billion increase in funding to the CreateSmart Initiative (CSI) is proposed to encourage development of the creative industries, with one of the focuses being to assist start-ups. The funding is anticipated to help expand CSI’s incubation and business collaboration programs that are currently in place.
With a surge in I&T funding support, FinTech and other I&T start-up enterprises in Hong Kong are well positioned to both contribute to and benefit from Hong Kong’s strife to become a regional and international I&T hub. While the current trend lasts, start-ups are encouraged to grasp the opportunity to bring their business to the next level.
How OLN Can Help
At OLN, we offer one-stop services for fintech and other start-up enterprises. If you require any assistance in corporate and commercial advisory, tax planning, intellectual property protection or regulatory issues, please feel free to contact our partner, Anna Chan.
Are you getting your slice of the “generous” tax measures as outlined in the 2018/2019 Hong Kong Budget?Thursday, 01 March 2018 18:52
Are you getting your slice of the “generous” tax measures as outlined in the 2018/2019 Hong Kong Budget?
With a forecast budget surplus of HK$138 billion for 2017/2018 (cf. HK$92.8 billion for 2016/2017), Financial Secretary Paul Chan Mo-po introduced tax measures for both businesses and individuals which are relatively more generous comparing to those of last year but can you enjoy the “candies” of the Budget? We set out two hypothetical scenarios in this article to illustrate how much you can save.
Key Tax Measures
reducing profits tax, salaries tax and tax under personal assessment by 75% for the Year of Assessment (“YoA”) 2017/2018 subject to a cap of HK$30,000 (cf. HK$20,000 for YoA 2016/2017).
waiving government rates for four quarters of 2018/2019 subject to a cap of HK$2,500 per quarter (cf. HK$1,000 per quarter for YoA 2017/2018).
expanding the tax bands for salaries tax as detailed below:-
|Current tax bands and tax rates for YoA 2017/2018||Proposed tax bands and tax rates for YoA 2018/2019|
|Chargeable Income (HK$)||Marginal Tax Rate||Chargeable Income (HK$)||Marginal Tax Rate|
|Standard Rate: 15%||Standard Rate: 15%|
Increasing the tax allowances / allowable deductions as detailed below:-
|Allowances/ allowable deductions||Current amount for YoA 2017/2018(HK$)||Proposed amount for YoA 2018/2019(HK$)|
|Additional Child Allowance (for child born during the year)||$100,000||$120,000|
|Dependent Parent or Grandparent Allowance- Aged between 55 to 59- Aged 60 or above|
|Additional Dependent Parent or Grandparent Allowance- Aged between 55 to 59- Aged 60 or above|
|Cap for the Elderly Residential Care Expenses||$92,000||$100,000|
|Personal Disability Allowance||N/A||$75,000|
|Cap for the premium of the Voluntary Health Insurance Scheme ||N/A||$8,000|
Are the tax measures really generous?
Illustration example 1
A single person with total income of HK$800,000 would have a tax saving of HK$4,500.
|YoA 2017/2018 (HK$)||YoA 2018/2019 (HK$)|
|Net Chargeable Income||$668,000||$668,000|
|Final tax liability (lower of (i) and (ii))||$100,060||$95,560|
|Less reduction on salaries tax||$30,000||$30,000 |
|Final tax payable||$70,060||$65,560(saving $4,500)|
Illustration example 2
A couple with only one of them working earning HK$1,000,000 in total, with one dependent child (both in other year) and one dependent parent above age 60 not residing with them would have a tax saving of HK$8,580.
|YoA 2017/2018 (HK$)||YoA 2018/2019 (HK$)|
|- Married Person||($264,000)||($264,000)|
|- Dependent Parent||($46,000)||($50,000)|
|Net Chargeable Income||$590,000||$566,000|
|Final tax liability (lower of (i) and (ii))||$86,800||$78,220|
|Less reduction on salaries tax||$30,000||$30,000 |
|Final tax payable||$56,800||$48,220(saving $8,580)|
1. The maximum tax saving arising by an individual taxpayer from the changes in the tax bands and the marginal tax rates would be HK$4,500 as illustrated below:-
|Total chargeable income (HK$)||Total Tax liability under current law (HK$)||Total Tax liability under proposed law (HK$)||Aggregate Tax Saving (HK$)|
2. Higher income individuals (except those being taxed at the flat standard rate) will benefit more from the expansion of the tax bands and the increase in the various allowances / deductions.
3. As the flat standard rate remains unchanged, high income earners who are taxed at the flat standard rate would merely benefit from the reduction on salaries tax of HK$30,000.
4. As a comparison, currently the personal tax rates in Singapore range from 0% to 22% and income above SG$320,000 (approximately HK$1.89 million) would be subject to the top marginal tax rate of 22%. As the personal tax rates of Hong Kong taxpayers would be capped at the flat standard rate of 15% (without taking into account of the allowances / deductions available in both tax jurisdictions), personal tax rates in Hong Kong for high income earners are more preferential than that in Singapore.
For a detailed discussion or any enquiry, please contact one of our members of the Tax Advisory team.
OLN has tax advisors who have dual qualification in both accounting and law. We are happy to assist on any tax-related matter.
 Pending for the implementation of the Voluntary Health Insurance Scheme.
 Assuming that the same reduction on salaries tax would also be available for in the YoA 2018/2019.
 Assuming that the same reduction on salaries tax would also be available for in the YoA 2018/2019.