New tax concessions and deeming provisions on shipping business – Can you benefit from these concessions?

The Inland Revenue (Amendment) (Ship Leasing Tax Concessions) Ordinance 2020 (“Amendment Ordinance”) was gazetted on 19 June 2020 to provide tax concessions to qualifying ship lessors and qualifying ship leasing managers conducting business in Hong Kong.

Exemptions and concession

The tax exemptions introduced in the Amendment Ordinance include:
  1. For ship lessors – profits derived from qualifying ship leasing activities in relation to operating leases and funding leases.
  2. For qualifying ship leasing managers – profits derived from qualifying ship leasing management business conducted in Hong Kong for associated corporations.
  3. Gains derived from the disposal of ships used in qualifying ship leasing activities for a continuous period of not less than 3 years.
In addition, it provides a half-rate tax concession (i.e. 8.25% based on the current profits tax rate of 16.5%) on profits derived by ship leasing managers in respect of their qualifying ship leasing management activities carried out in Hong Kong other than for associated corporations.

The exemption applies to ships including barges or lighters; air-cushion vehicles and dynamically supported crafts but excludes junks, vessels propelled by oars and vessels solely for military use.  For qualifying ship leasing activities, the ship being leased must be over 500 gross tonnage and navigate solely or mainly outside Hong Kong waters.  

Substantiality of Hong Kong presence and activity and safe harbour rules

To qualify for the exemption, the central management and control of the ship lessors and ship leasing managers must be in Hong Kong and the qualifying ship leasing and ship leasing management activities that generate the qualifying profit should be carried out in Hong Kong.  The Ordinance has introduced certain threshold requirements on the minimum number of full-time employees and annual operating expenditure in Hong Kong to ensure that the “substantiality of presence and activity” is met.

Ship leasing managers are allowed to carry out activities other than the qualifying ship leasing management activities provided that they satisfy the 1-year or the multiple-year safe harbour rules.

An irrevocable election must be made in writing in order to enjoy the exemption or concession.

Deeming provisions

It is important to note that the Amendment Ordinance introduced certain deeming provisions to deem sums derived from the carrying on in Hong Kong of the following businesses as taxable:
  • business of granting a right to use a ship to another person (ship business), even if the ship is used outside Hong Kong; or
  • business of managing a corporation carrying on a ship business or of managing a ship business, even if the ship concerned is used outside Hong Kong.
Profits derived by a ship business which used to be exempt from tax under s23B of the Inland Revenue Ordinance may potentially be taxed under the deeming provisions. 

The Amendment Ordinance also contains certain anti-avoidance provisions on issues including the arm’s length principles on pricing among associates, treatment of losses, arrangement to obtain tax benefit.

Next steps

The Amendment Ordinance takes retrospective effect from 1 April 2020.  Due to the  uncertainties in certain areas, further clarifications and guidelines from the Inland Revenue Department on the implementation details are required.  While awaiting further guidelines and Departmental Interpretation & Practice Notes to be issued by the Inland Revenue Department, corporations currently engaging in ship businesses are highly recommended to seek appropriate tax advice to review its current portfolio of businesses and mode of operations to ascertain the potential implications under the Amendment Ordinance.