Hong Kong SAR
Base Erosion and Profit Shifting (BEPS)
Hong Kong SAR has enacted domestic tax legislation to implement the following minimum standards under the BEPS Action Plan: (i) introducing a TP regulatory regime and a mandatory three-tiered TP documentation requirement in Hong Kong SAR, (ii) implementing a statutory APA regime in Hong Kong SAR, and (iii) removing the ring-fencing features in certain concessionary tax regimes in Hong Kong SAR.
Multilateral Instrument (MLI)
Hong Kong SAR, as represented by Chinese mainland, was one of the signatories to the MLI. In implementing the MLI, Hong Kong SAR has taken a pragmatic approach by (i) opting in the provisions of the MLI that represent the BEPS minimum standards (e.g. the principal purpose test for preventing treaty abuse and the requirement for allowing a minimum three-year period for a person to present its case for Mutual Agreement Procedure) and (ii) opting out most of the other provisions that are not mandatory, for instance, those provisions addressing hybrid mismatches and artificial avoidance of PE. The provisions of the MLI will have effect in Hong Kong SAR with respect to a covered tax treaty on 1 April 2023 (for taxes withheld at source) or 1 April 2024 (for other taxes) at the earliest, the exact dates of which are subject to the completion of the legislative and other relevant procedures of the MLI by Hong Kong SAR's tax treaty partners.
Automatic exchange of financial account information (AEOI) / Common Reporting Standard (CRS) regime
Under the AEOI/CRS regime in Hong Kong SAR, reportable financial institutions are required to identify the reportable financial accounts held by (i) tax residents of reportable jurisdictions or (ii) passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions in accordance with the specified due diligence procedures, collect the required information of those reportable accounts, and furnish such information to the HKIRD. Such information will be exchanged on an annual basis. Hong Kong SAR will only conduct AEOI with a reportable jurisdiction when an arrangement is in place with the reportable jurisdiction concerned to provide the basis for exchange.
There are 126 reportable jurisdictions effective from 1 January 2020. As of October 2022, Hong Kong SAR has activated exchange relationships for CRS purposes with 79 jurisdictions based on either a bilateral or multilateral competent authority agreement for CRS.
Tax information exchange agreements (TIEAs)
Currently, Hong Kong SAR has entered into seven TIEAs with different jurisdictions as shown in the following table:
All of the above TIEAs are ratified and effective.
In addition to the signing of the Hong Kong SAR-United States TIEA, Hong Kong SAR signed a Model 2 intergovernmental agreement (IGA) with the United States in November 2014 to facilitate compliance with the Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong SAR.
Foreign investment restrictions
In general, Hong Kong SAR does not impose restriction to foreign investors to make investments in Hong Kong SAR, and wholly foreign owned companies are allowed. The only exception is the restriction on foreign ownership of Hong Kong SAR’s licensed television/sound broadcasters, of which the collective foreign ownership ceiling is 49% of the voting power. In addition, an approval from the Communications Authority must be obtained for holding, acquisition, or exercise of voting control by a foreign investor of more than 5% of a licensee.
Hong Kong SAR does not have any foreign exchange control. There is no restriction on entry or repatriation of capital or remittance of profits from investments. Funds can be freely remitted to persons outside Hong Kong SAR by various means (e.g. dividends, interest, royalties, service fees, branch profits).
Choice of business entity
The principal forms through which a business can be conducted in Hong Kong SAR are as follows:
- Company incorporated in Hong Kong SAR (either private or public via listing on the Stock Exchange of Hong Kong SAR).
- Branch of a foreign company.
- Representative or liaison office of a foreign company.
- Joint venture (can be set up either as a company or partnership).
- Sole proprietorship.
Of the above, privately incorporated companies and branches of foreign companies are most commonly used by foreign investors, as limited liability is usually desirable.
Intellectual property (IP) regulations
The Intellectual Property Department is responsible for monitoring the IP regime and ensuring the protection and enforcement of IP rights in Hong Kong SAR. The Department is also responsible for investigating complaints against infringements and has extensive powers of search and seizure. Registration (where applicable) and protection of patents, copyrights, trademarks, designs, plant varieties, and the layout design of integrated circuits are each governed by a separate ordinance.
Merger and acquisition (M&A) activities
There are no specific restrictions on M&A activities in Hong Kong SAR. The following tax considerations are relevant in the M&A context:
- Dividends or other forms of distribution of profits (e.g. distribution of branch profits to the head office) are generally not taxable. However, offshore dividends may be deemed to be sourced from and taxable in Hong Kong SAR under the refined FSIE regime.
- Capital gains arising from an M&A transaction are not taxable in the hands of the transferor (unless deemed taxable under the refined FSIE regime), whereas amortisation of goodwill in the transferee’s accounts is not tax deductible due to its capital nature.
- Gains derived from the transfer of revenue items in an asset deal will be subject to profits tax.
- For a share deal, stamp duty is payable on the transfer of Hong Kong shares at 0.2%, unless an exemption applies; for an asset deal, stamp duty is payable on conveyance of immovable property in Hong Kong SAR at various rates up to 7.5%, depending on the type of immovable property transferred and the date of the transfer (see Stamp duty in the Other taxes section).
- There is no special tax concession/incentive relating to M&A transactions.
- Tax losses in the acquired company can generally be carried forward indefinitely to set off against future assessable profits. However, there are specific anti-avoidance provisions in the IRO that prevent the transfer of shares of a company with accumulated tax losses to owners of a profitable company for the sole or dominant purpose of utilising the tax losses (i.e. offsetting the tax losses against the profits generated from other trade, profession, or business of the transferee).
- For court-free amalgamations that took effect before 11 June 2021, the HKIRD handled such cases based on the interim guidance published on its website. In addition to the utilisation of tax losses, the guidance also covers issues such as the profits tax treatment of fixed assets and trading stock transferred, and the profits tax return filing positions of the amalgamating and the amalgamated companies in the year of amalgamation, etc.
- For a qualifying amalgamation that takes effect on or after 11 June 2021, the amalgamated company may make an irrevocable written election within one month after the date of the amalgamation to apply the special tax treatments (unless a further period for election is allowed). Except for the utilisation of tax losses and the treatments for trading stock succeeded from an amalgamating company, the special tax treatments generally follow the interim guidance published on the HKIRD’s website.