Articles

Tax Advisory Department

Tax Advisory Department

Anna Chan

 

There is no doubt that year 2018 was a busy year for Hong Kong tax advisors with the various new developments in Hong Kong tax laws. Now we are in 2019 – how will these new developments have an impact on you?

(1) The introduction of the 3-tiered standard transfer pricing documentation for Hong Kong entities engaging in cross-border related-party transactions

 

annas article

 

Who need to prepare for the reports?

You are likely to subject to reporting if you are an entity with presence in two or more jurisdictions and:-
• Having a total revenue exceeding HK$400 million;
• Having a total assets exceeding HK$300 million;
• Having more than 100 employees;
• Having intra-group related party transaction in one of the following scenarios:-
    o transfer of properties (other than financial assets and intangibles): exceeding HK$220 million;
    o transaction of financial assets: exceeding HK$110 million;
    o transfer of intangibles: exceeding HK$110 million;
    o others: (e.g. service income and royalty income): exceeding HK$44 million.

Even if you are subject to Local File and Master File reporting, you may still be exempted from Country-by-Country reporting if your annual consolidated group revenue does not exceed EUR750 million (i.e., approximately HK$6.8 billion).

 

  Details to be included Filing due dates

Local File

Detailed transactional transfer pricing information such as details of the transactions, amount involved in the transactions and a transfer pricing analysis.

These filings are required for accounting periods beginning on or after 1 April 2018 and must be prepared within 9 months after the end of each accounting period.

Master File

A high-level overview of the group, including documenting the global business operations, transfer pricing policies and global allocation of income.

Country-by-Country Reporting

  • To be filed by the ultimate parent entity of a multinational enterprise (“MNE”) in its tax jurisdiction.

  • Sets out the amounts of revenue, profits and tax paid as well as certain indicators of economic activity such as number of employees, state capital, retained earnings and tangible assets for each jurisdiction in which a MNE operates.

The filing is required for accounting periods beginning on or after 1 January 2018 and must be prepared within 12 months after the end of each accounting period.

 

OLN’s observations

Transfer pricing policy requires holistic review of intra-group transaction and group overhead allocation. Aftermath ratification is usually problematic. It is therefore advisable for multinational corporations to carry out preemptive measures as soon as possible. As this is the first piece of legislation in Hong Kong specifically addressing transfer pricing matters with many uncertainties in the application of the law, it is expected that the Hong Kong Inland Revenue Department (“HKIRD”) would provide further guidance in this area through new or revised Departmental Interpretation and Practice Notes. Taxpayers should continue to monitor the developments in order to assess their transfer pricing documentation obligations.

 

(2) Other key new developments

 

Key Features

OLN’s observations/ comments

The implementation of the two-tiered profits tax rates regime

From the year of assessment 2018/2019 onwards (i.e., commencing on or after 1 April 2018), the profits tax rate for the first HK$2 million of profits of corporation will be at 50% of the corporate tax rate of 16.5% (i.e. 8.25%).

Before the implementation of the two-tiered profits tax rates regime, Hong Kong has already provided a 8.25% concessionary profits tax rate to corporates conducting the following activities in order to strengthen Hong Kong’s position as an international asset and wealth management center and drive demand for the related professional services in Hong Kong:-
- Qualifying corporate treasury centre;
- Qualifying professional reinsurance business;
- Authorized captive insurance business;
- Qualifying aircraft lessor;
- Qualifying aircraft leasing manager.

The two-tiered profits tax rates regime aims to reduce the tax burden on enterprises especially small and medium enterprises and startup enterprises. Taxpayer should be aware that in case of connected entities, only one enterprise would be eligible for the two-tiered rates.

Automatic exchange of financial information in tax matters (“AEOI”)

HKIRD has already started conducting AEOI with 50 jurisdictions including Mainland China, United Kingdom, France, Singapore and Japan from September 2018. It means that HKIRD would have the obligation to provide information where requested by tax authorities of these jurisdictions.

Currently Hong Kong has activated AEOI with 50 jurisdictions which would soon extend 25 more jurisdictions including Switzerland, Cayman Islands and Cyprus [1].

Hong Kong plans to expand the list of AEOI jurisdictions to 126 jurisdictions by being one of the participants of the Convention on Mutual Administrative in Tax Matters. United States, British Virgin Islands are 2 of the jurisdictions that have already joined the Convention but not currently one of the AEOI jurisdictions.

Stamp duty on residential properties

To address the overheated property market, the Government has employed rounds of demand-side management tax measures including the followings:

- Special Stamp Duty (applying to sellers who sell residential properties within 3 years of purchase);


- Buyer’s Stamp Duty (applying to non-Hong Kong Permanent Residents);


- Doubled ad valorem Stamp Duty (of which Hong Kong Permanent Residents (“HKPR”) who do not own any other residential property in Hong Kong at the time of purchasing a residential property are not affected);

the recent tax measure is the New Residential Stamp Duty of which the flat rate of 15% would apply to a HKPR who acquires more than one property under a single instrument, even though that HKPR does not own other residential property at the time of purchase.

Notwithstanding the recent cooling down of the market for residential properties, there is currently no indication from the Government of the possible relaxation of the tax measures.

However, there is no doubt that the Government would continue to monitor the market for residential properties and would introduce tax measures in response to the market.

Tax measures in response to the population ageing

The Government has continuously introduced tax measures in response to the population ageing including the following:


- Starting from 1 April 2019, taxpayers can claim deductions for purchasing eligible health insurance products for themselves or their specified relatives[2] under the Voluntary Health Scheme up to HK$8,000 per insured person;


- The Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions) (Amendment) Bill 2018 has been introduced to seek to introduce tax deductions for deferred annuity premiums and Mandatory Provident Fund Tax Deductible with the maximum tax deductible limit for a taxpayer to be HK$60,000 per year.

It is expected that the Government would continue to introduce tax measures to alleviate the long-term pressure on the public healthcare system and to encourage savings for the retirement.

Continuous expansion of the treaty network

Hong Kong has recently signed a Comprehensive Double Taxation Agreement (“CDTA”) with Finland which is the 40th CDTA signed by Hong Kong and the first one signed with a Nordic country.

Hong Kong has continuously expanding the treaty network to bring a greater degree of certainty on taxation liabilities for those who engage in cross-border business activities and help promote bilateral trade and investment activities.

There are currently 13 CDTA negotiation in progress, including Germany and Macao SAR.

 

Taxpayers should continue to monitor the development in the various areas of tax laws and take appropriate steps to manage the tax risks.

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.

 

[1] On the basis of bilateral competent authority agreements or a multilateral competent authority agreement under the Convention on Mutual Administrative Assistance in Tax Matters.

[2] The taxpayer’s spouse and children, and the taxpayer’s or his/her spouse’s grandparents, parents and siblings.

By Anna Chan and Victor Ng

831日,中国全国人大常委会审议并通过了新的个人所得税法(以下简称《新个人所得税法》)。除了相对瞩目的税收居民定义的修改外(详情请参阅我们的文章“China is Reforming its Individual Income Tax Rules – Are You Ready?”),以下两项修改也很值得关注,特别对高净值资产人士而言

 

1. 反避税规则被写入《新个人所得税法》

《新个人所得税法》将于201911日起施行。新税法中新增的第八条[1] 赋予税务机关广泛的权力,在认为有避税情况时进行纳税调整。所谓的「避税情况」亦甚为广泛,例如税务机关认為是不符合独立交易原则、且无正当理由之业务往来,又或者是纳税人所操控之机构设于低税制地区欠缺合理经营需要

 

2. 捐赠财产将被视同转让财产并需缴纳个人所得税

另外,《新个人所得税法》关联之《实施条例修订草案征求意见稿》[2] 建议引入從前未有之「馈赠税」,該意见稿第十六条明确列出「个人发生非货币性资产交换,以及将财产用于捐赠、偿债、赞助、投资等用途的,应当视同转让财产并缴纳个人所得税,但国务院财政、税务主管部门另有规定的除外。」

此外, 第六条第(八)项列出 「财产转让所得,是指个人转让有价证券、股权、合伙企业中的财产份额、不动产、土地使用权、机器设备、车船以及其他财产取得的所得。」

如果我们对第十六条进行一般性的解读,这条涵盖了所有以馈赠形式作出的转让(税率为20%),大辐增加了当局目前的税收范围。

 

3. 相关新修改对高净值资产人士的税务含义

相关的新税法实施后及《实施条例修订草案》获得通过后,将会对高净值资产人士目前常用的税务安排(即在海外特别设立公司持有资产仅为避税目的而无任何实质经营,及将资产以零对价放入家族信托),带来严重冲击及增加税务成本。

这是因为在新修改生效后:

  1. 税务机关可能对持有资产仅为避税目的而无任何实质经营的海外公司进行纳税调整;
  2. 在《实施条例修订草案》的第十六条实施后,当局可以视相关的馈赠为财产转让。根据《新个人所得税法》,财产转让的个人所得税率为百分之二十而相关税项将由捐赠者(即转让方)承担;及
  3. 當局有权认为高净值资产人士将资产零对价放入家族信托的行为不符合独立交易原则,因而进行纳税调整。

 

4. 即时行动

我行认为虽然现阶段《实施条例修订草案》还没得以实施和颁布,惟相关的条例可能会有追溯力(例如,跟《新个人所得税法》同时于201911日起生效)。再者,基于上文提到的《新个人所得税法》第八条带来各种在税收层面上的不确定性,我们建议有意设立信托管理资产的客户201911日(即《新个人所得税法》的施行日)前尽早成立信托,将相关税务风险减至最低。这解释了为什么在新修改生效之前,中国有这么多高净值资产人士设立信托。

另外,以信托形式管理资产仍可实现递延税项(Deferred Taxation)、资产保护(Asset Protection)及继承计划(Succession Planning)等好处和目的。因此,虽然在新修订生效后可能要为馈赠资产缴付税项,以信托形式管理资产依然是利多于弊

我们拥有丰富的税务知识和成立信托的经验,可协助加强您的税务筹划结构。请咨询我们的团队以获得进一步的协助。

声明:

以上内容不构成高李严律师行出具的任何正式法律意见。如您希望进一步就相关问题进行法律咨询或寻求专业法律分析及意见 ,请与本行律师联系。

 

[1]第八条有下列情形之一的,税务机关有权按照合理方法进行纳税调整:

(一)个人与其关联方之间的业务往来不符合独立交易原则而减少本人或者其关联方应纳税额,且无正当理由

(二)居民个人控制的,或者居民个人和居民企业共同控制的设立在实际税负明显偏低的国家(地区)的企业,无合理经营需要,对应当归属于居民个人的利润不作分配或者减少分配;

(三)个人实施其他不具有合理商业目的的安排而获取不当税收利益。

税务机关依照前款规定作出纳税调整,需要补征税款的,应当补征税款,并依法加收利息。

[2]国家税务总局在20181020日公布了《中华人民共和国个人所得税法实施条例(修订草案征求意见稿)》(简称“实施条例修订草案),该“实施条例修订草案旨在向社会公开征求意见,并未获通过立法。

 

By Anna Chan

With Hong Kong being a signatory to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (“MCAA on AEOI”) and the Convention on Mutual Administrative Assistance in Tax Matters (“Convention”) entering into force in Hong Kong, Hong Kong has started exchanging financial account information with 41 jurisdictions commencing from 1 September 2018, including United Kingdom, France, Germany, Australia, Canada, Singapore and Japan.

This means the information of account holders who are subject to taxation as a resident in other jurisdictions other than Hong Kong including interest income, dividend income, gross proceeds from the sale of financial assets would be provided to the tax authorities of the other jurisdictions under the Automatic Exchange of Financial Account Information (“AEOI”) regime. Please refer to our Article “Is your personal data at stake because of the increased transparency in tax administration through Automatic Exchange of Information?” for a detailed discussion of the AEOI regime.

How it works?

(1) The Hong Kong Inland Revenue Department (“IRD”) has established a dedicated platform, i.e., the AEOI Portal, for reporting financial institutions (“FIs”) to electronically submit notifications and furnish Financial Account Information Returns for reporting the required information of reportable accounts.

(2) The IRD will exchange the financial account information collected from the reporting FIs with relevant jurisdictions via the Common Transmission System established by the OECD.

OLN’s observation

In the past Hong Kong had relied on a bilateral approach which involves signing bilateral Competent Authority Agreements (“CAA”) for AEOI with other jurisdictions that already have a comprehensive avoidance of double taxation (“CDTA”) or a tax information exchange agreement (“TIEA”) with Hong Kong. As at 13 September 2018, Hong Kong had 40 CDTAs and 7 TIEA, and signed 16 bilateral CAAs for AEOI. Hong Kong’s move of being a signatories to MCAA on AEOI and having the Convention entering into force in Hong Kong has demonstrated Hong Kong’s commitment to enlarging the scope of the exchange of tax information in the international community and to comply with the OECD’s requirement to have the first exchange of AEOI with a wide network of partners by September 2018.

With the continuous trend of the exchange of tax information between the tax authorities, taxpayers, in particular for the taxpayers that have presence in various jurisdictions, should carefully assess their tax obligations to ensure compliant with the tax laws of the relevant jurisdictions.

OLN is equipped to advise clients on tax issues arising from various jurisdictions. If you have any questions regarding the above or on any tax issues, please contact one of the members of the tax advisory team.

by Anna Chan

The State Administration of Taxation of China (“SAT”) recently released Public Notice [2018] 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 [2009] No. 601 (“Circular 601”) and Public Notice [2012] 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

 Screen Shot 2018 08 15 at 09.19.38             

(2) Same treaty benefit rule

Screen Shot 2018 08 15 at 09.07.54            

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?

By Anna Chan and Victor Ng

 

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 anna.chan@oln-law.com or our Victor Ng at victor.ng@oln-law.com

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