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6.7. Special Classes of Taxpayer/Income and their Treatment

Financial institutions

Banks & Deposit-Taking Companies

Banks and deposit-taking companies are taxed on interest income that might otherwise be regarded as having an offshore source, if such interest arises through or from the carrying on of their businesses in Hong Kong.

Insurance and Re-Insurance Businesses

Insurance

The taxable profits of a life insurance business are deemed to be 5% of the premiums from a life insurance business in Hong Kong, but the company may make an irrevocable election to be assessed on a formula based on actuarial reports.

The taxable profits of a company from an insurance business other than life insurance are calculated by including in taxable profits the following:

  • Gross premiums from such insurance business in Hong Kong
  • Interest derived from Hong Kong
  • Other income from Hong Kong
  • Balancing charges on the disposal of fixed assets,
  • Reserve for unexpired risks outstanding at the beginning of the profit period
  • Recoveries of losses by reinsurance

Deductions are allowed for the following:

  • Insurance premiums refunded
  • Premiums paid on re-insurance
  • A reserve for unexpired risks at a percentage adopted by the company and applied to its worldwide operations at the end of the profit period
  • Actual losses
  • Agency expenses in Hong Kong
  • Depreciation allowances on fixed assets and balancing allowances upon their disposal
  • A fair proportion of head office expenses

Captive Insurance

Effective tax years beginning 1 April 2013, a concessionary tax rate of 8.25% (50% concession on the standard tax rate) is applicable to profits from the business of insuring offshore risks, subject to the following conditions:

  • The taxpayer must be an authorized captive insurer as defined in the Insurance Companies Ordinance;
  • The taxpayer must carry on the business of insurance of offshore risks as an authorized captive insurer;
  • The taxpayer must elect in writing that the tax concession applies to its business
  • The tax concession is introduced to attract captive insurers to establish their presence in Hong Kong

  

Re-Insurance

The assessable profits derived from the business of re-insurance of offshore risks by a professional re-insurance company authorized in Hong Kong, are subject to a concessionary tax rate of 50% of the normal Hong Kong profits tax rate.

Corporate Treasury Centers

Effective 1 April 2016, a concessionary tax rate (50% concession on the standard tax rate) applies to qualifying Corporate Treasury Centers (CTC). A corporation is considered as a qualifying CTC, if:

  • It is a dedicated CTC that has carried out one or more corporate treasury activities in Hong Kong, and has not carried out any other activities in Hong Kong;
  • It is a CTC which has satisfied either a 1-year or multiple-year safe harbor rule (percentage of corporate treasury profits/assets is at least 75% of total profits/assets for year(s) of assessment); or
  • The Commissioner has exercised his discretion to determine that it is a qualifying CTC.

Financial institutions are specified as ineligible to be a qualifying CTC.

  

Shipping Businesses

In general, the income of international operations of companies that charter or operate ships is exempt from Hong Kong profits tax, unless they are operating in Hong Kong water, in which case they are subject to Hong Kong profits tax. Profits attributable to Hong Kong of such shipping companies are calculated using the ratio of the company’s worldwide shipping profits to the total worldwide shipping income. This ratio is then applied to the following income types:

  • Income received from passengers or goods shipped in Hong Kong
  • Income from any towage undertaken within or commencing from within the waters of Hong Kong,
  • Income from any Hong Kong dredging operation
  • Income from certain types of charter hire connected with navigation in Hong Kong waters

However, if a ship is registered under the Merchant Shipping Ordinance of Hong Kong, income from the international carriage of passengers or goods shipped in Hong Kong or from other operations and proceeding to sea is not chargeable to profits tax.

A taxpayer resident in any territory outside Hong Kong, but deemed to be carrying on a business as a ship owner in Hong Kong, is entitled to tax exemption in Hong Kong if the ship owner’s home territory offers reciprocal tax exemption, which can be unilateral or as a result of the provisions of a double taxation agreement with Hong Kong.

Aircraft Business

The assessable profits subject to Hong Kong profits tax of a company that carries on a business of chartering or operating aircraft are calculated using the ratio of the company’s worldwide aircraft profits to the total worldwide aircraft income. This ratio is then applied to the following income types:

  • Income received from passengers embarking in Hong Kong
  • Income from the shipping of goods in Hong Kong
  • Income from certain types of international charter hire that are attributable to Hong Kong

Under a number of international air transport agreements, the government has agreed to include income arising abroad for taxation in Hong Kong when that income is exempted in the other jurisdiction under the agreement. Likewise, profits meeting the conditions of the double taxation agreements are exempt from profits tax in Hong Kong.

Aircraft leasing activities

From 7 July 2017, tax concessions are available on aircraft financing and leasing activities.

Accordingly, qualifying aircraft leasing and leasing management activities are subject to corporate profits tax at the rate of 8.25% (i.e. 50% of the standard corporate tax rate), subject to certain conditions.

Further, a 20% tax base concession is provided. In terms of which, taxable net lease payments are calculated at 20% of gross lease payments reduced by deductible expenses, (excluding tax depreciation) subject to certain conditions. The tax concession applies to income received or accrued on or after 1 April 2017.

Sale of Good on Consignment

The sale of goods on consignment from Hong Kong on behalf of a non-resident is typically subject to a tax of 1% of the income without any deductions. If the non-resident can produce satisfactory accounts to show that it would have paid less profit tax than consignment tax, then the normal Hong Kong profits tax rate would apply.