Hong Kong does not have a consolidated or group taxation regime.
Strictly speaking, there is no comprehensive transfer pricing legislation in Hong Kong. While a few existing provisions in the IRO may be employed by the tax authority to tackle non-arm’s-length transactions, such provisions are primarily aimed at transactions with closely connected non-residents or tax avoidance transactions rather than specific legislation on transfer pricing.
There are two Departmental Interpretation and Practice Notes (DIPNs) issued by the HKIRD to address the transfer pricing issues in Hong Kong. DIPN 45 focuses on the administrative/procedural issues involved in providing double tax relief in a treaty context, such as when such relief is available and what are the procedures for claiming such relief. DIPN 46 outlines the HKIRD’s view on the legislative framework for transfer pricing in Hong Kong (including the statutory provisions in the IRO and the articles in a CDTA that are relevant to transfer pricing) and provides guidance on numerous transfer pricing related issues, such as the application of the arm’s-length principle and the acceptable transfer pricing methodologies, which are largely in line with the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. The DIPN also spells out the documentation that taxpayers should consider retaining to support their transfer pricing arrangements and explains the interaction between the transfer pricing and sourcing rules in Hong Kong.
In general, the HKIRD adopts the arm’s-length principle and will seek to apply the OECD transfer pricing guidelines except where they are incompatible with the express provisions in the IRO.
An advance pricing arrangement (APA) program is available in Hong Kong. The objectives of the APA program are to help taxpayers obtain tax certainty on their complex or significant transfer pricing arrangements and reduce the risk of double taxation arising from related-party transactions. Resident enterprises or non-resident enterprises with a PE in Hong Kong may apply for an APA in respect of their transactions with associated enterprises under a CDTA, provided that certain conditions (including the threshold for an APA application) are met.
Currently, the HKIRD is primarily focused on bilateral APA or multilateral APA applications in respect of cross-border, related-party transactions involving countries that are CDTA partners with Hong Kong.
DIPN 48, issued by the IRD, provides guidance on various aspects of the APA regime, such as the timeframe and threshold for an APA application, the various stages involved in the APA process, an audit involving years covered by a concluded APA, and possible rollback of the transfer pricing methodology agreed under an APA to prior years. The appendices of the DIPN include various sample documents for use in an APA application.
Hong Kong does not have thin capitalisation rules. For restrictions on deduction of interest expenses, see Interest expenses in the Deductions section.
Controlled foreign companies (CFCs)
Hong Kong does not have a CFC regime.