Hong Kong SAR
Hong Kong SAR does not have a consolidated or group taxation regime.
Transfer pricing (TP)
Legislation to implement a TP regulatory regime and TP documentation requirements was enacted in July 2018. The key TP measures and the respective effective dates are as follows:
The TP regulatory regime
There are two sets of TP rules. Under TP Rule 1, the HKIRD can impose TP adjustments on domestic or cross-border related-party transactions that are not entered into on an arm’s-length basis and that result in a potential Hong Kong tax advantage, with exemptions for certain specified domestic transactions. Under TP Rule 2, the Authorised Organisation for Economic Co-operation and Development (OECD) Approach and the separate enterprises principle will be adopted for profit attribution to a PE of a non-Hong Kong resident in Hong Kong SAR (see the Branch income section for more information).
TP Rule 1 applies to years of assessment beginning on or after 1 April 2018, whereas TP Rule 2 applies to years of assessment beginning on or after 1 April 2019. There is a grandfathering provision under which transactions entered into or effected before 13 July 2018 (i.e. the enactment date of the new TP law) will not be subject to the above TP rules. The HKIRD published Departmental Interpretation and Practice Notes (DIPNs) 59 and 60 in July 2019 to provide further guidance on the interpretation and application of TP Rule 1 and Rule 2, respectively.
In general, the HKIRD will apply the TP rules in the way that is best consistent with the OECD’s Transfer Pricing Guidelines and the commentary on the business profits article and associated enterprise article of the OECD Model Tax Convention.
The TP documentation requirement
There is a mandatory 'three-tiered' TP documentation requirement consisting of Master File, Local File, and Country-by-Country (CbC) report.
For Master File and Local File, there are certain exemption thresholds based on the business size and the volume of different types of related-party transactions such that a Hong Kong enterprise is not required to prepare the Maser File and the Local File if it meets either the business size threshold or all the volume-based, related-party transactions thresholds. Master File and Local File are required for accounting periods beginning from 1 April 2018 and have to be prepared within nine months after the accounting period end to which the files relate.
For CbC reports, please see the description of the CbC reporting regime below.
The HKIRD published DIPNs 58 in July 2019 to provide further guidance on the three-tiered TP documentation requirements, while DIPNs 46 on TP guidelines, which was issued back in 2009, serves as a reference in situations where the new TP Rules 1 and 2 are not applicable.
Country-by-country (CbC) reporting regime
Key features of the CbC reporting regime in Hong Kong SAR are summarised as follows:
- The Hong Kong ultimate parent entity of a multinational enterprise group with annual consolidated group revenues of 750 million euros (EUR) (i.e. about HKD 6.8 billion) or above (i.e. a reportable group) will be required to file a CbC report in Hong Kong SAR.
- A Hong Kong entity of a reportable group that is not the group’s ultimate parent entity will also be required to file a CbC report in Hong Kong SAR if the ultimate parent entity is not required to file a CbC report in its own jurisdiction of tax residence or if Hong Kong SAR is not able to obtain the CbC report from that jurisdiction.
- The CbC report filing requirement will apply retrospectively to accounting periods beginning on or after 1 January 2018.
- Generally speaking, the deadline for filing a CbC report is within 12 months after the end of the accounting period to which the report relates. Where surrogate parent filing applies and a later deadline for filing CbC reports is prescribed in the laws or regulations of the jurisdiction of tax residence of the surrogate parent entity, the later deadline will be taken as the filing deadline in relation to the CbC report concerned.
The advance pricing arrangement (APA) regime
A statutory APA programme has been introduced since the year of assessment 2018/19. The objectives of the APA programme are to help taxpayers obtain tax certainty on their complex or significant TP arrangements and reduce the risk of double taxation arising from related-party transactions. Any Hong Kong resident enterprise or a non-resident enterprise with a PE in Hong Kong SAR, chargeable to Hong Kong profits tax and having related-party transactions, may apply for an APA, provided that certain conditions (including the threshold for an APA application) are met. Under the statutory APA regime, enterprises can apply for unilateral, bilateral, or multilateral APA.
Prior to the year of assessment 2018/19, the HKIRD accepts APA application as part of the advance ruling application. DIPN 48 was issued by the HKIRD and provides guidance on the APA application, 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 TP methodology agreed under an APA to prior years. The appendices of the DIPN include various sample documents for use in an APA application. It is expected that the HKIRD will revise certain guidance in DIPN 48 as a result of the recent introduction of the statutory APA regime in Hong Kong SAR.
Hong Kong SAR 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 SAR does not have a CFC regime.