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13.5. Other Anti-Avoidance Rules

In addition to the GAAR discussed under Sec. 13.1., there are additional anti-avoidance provisions to target other tax avoidance schemes in relation to transfer pricing and the use of services companies to disguise employer-employee relationships.

Specific General Anti-Avoidance Rules (GAAR) in the IRO

Certain Transactions and Dispositions to be Disregarded

Under Section 61 of the IRO, when an assessor is of opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious or that any disposition is not in fact given effect to, he may disregard any such transaction or disposition and the person concerned shall be assessable accordingly for tax purposes

Transactions Designed to Avoid Liability for Tax

Subsection 61A of the IRO contains the provisions for anti-avoidance in regard to transactions entered into for the sole or dominant purpose of enabling a person to obtain a tax benefit. It provides the following assessment criteria when dealing with such suspected tax avoidance.

  • the manner in which the transaction was entered into or carried out
  • the form and substance of the transaction
  • the result (tax benefit) in relation to the operation of this Ordinance that, but for this section, would have been achieved by the transaction
  • any change in the financial position of the relevant person that has resulted, will result, or may reasonably be expected to result, from the transaction
  • any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant person, being a change that has resulted or may reasonably be expected to result from the transaction
  • whether the transaction has created rights or obligations which would not normally be created between persons dealing with each other at arm's length under a transaction of the kind in question
  • the participation in the transaction of a corporation resident or carrying on business outside Hong Kong, it would be concluded that the person, or one of the persons, who entered into or carried out the transaction, did so for the sole or dominant purpose of enabling the relevant person, either alone or in conjunction with other persons, to obtain a tax benefit

When it applies, the provision provides for an assessment to be made as if the tax avoiding transaction had not been entered into or carried out or another manner considered by the Assistant Commissioner to be appropriate to counteract the tax benefit which would otherwise be obtained.

Utilization of Losses to Avoid Tax

Subsection 61B of the IRO provides that any losses or balance of losses used to set off profits may be disallowed if the Commissioner is satisfied that:

  • profits have been received by or accrued to any corporation during any year of assessment as a direct or indirect result of  a change in the shareholding of the corporation
  • the sole or dominant purpose of the change was for the purpose of utilizing any loss or any balance of any loss sustained in a trade, profession or business carried on by the corporation, in order to reduce or avoid liability on the part of that corporation or any other person for the payment of any tax

Anti-Treaty Shopping

Relevant tax treaties entered into by HK often contain anti-treaty shopping provisions in regard to dividends and interest

Other Anti-Avoidance Rules

Two specific measures were put in place to counter tax abuse by services companies, the two types include:

  • Type I, Disguised Employment: Arrangement in which an individual providing services to their employers, through companies which the employee owns or controls, and with which they have entered into tax efficient employment contracts
  • Type II: Service companies incorporated by the proprietors of unincorporated businesses (partnerships) for the purpose of personal services of the proprietors to the unincorporated business in exchange for the payment of management fees