HONG KONG SAR, CHINA Law and Practice Contributed by: Jeffrey Lee, Jessica Leung and Hilary Leung, Charles Russell Speechlys
determine whether the profits arise in or are derived from Hong Kong, one would need to identify the oper - ations that produced the relevant profits and ascer - tain where those operations took place. The source of profits must be attributed to the operations of the taxpayer that produced them and not to the opera - tions of other members of the taxpayer’s group. Based on the “badges of trade” analysis, in general, onshore disposal gains that are capital in nature are not subject to profits tax, while those that are revenue in nature are subject to profits tax. The Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Ordinance 2023 was enacted on 15 December 2023 to enhance tax certainty in connec - tion with this. Under the Tax Certainty Enhancement Scheme, eligible investor entities that have held at least 15% of the equity interests in the investee enti - ties for at least 24 months before disposal may opt for making a non-taxable claim for their onshore dis - posal gains, and any onshore disposal gains derived by qualified investor entities meeting specified condi - tions will be considered as capital in nature and not chargeable to profits tax. A person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. Rates For corporations, the profits tax rates are 8.25% on the first HKD2 million of assessable profits and 16.5% on any part of assessable profits exceeding HKD2 mil - lion. For unincorporated businesses, the profits tax rates are 7.5% on the first HKD2 million of assess - able profits and 15% on any part of assessable profits exceeding HKD2 million. A tax concession regime was introduced in 2022 for qualifying profits derived from a qualifying shipping commercial principal in Hong Kong (eg, ship agents, ship managers and ship bro - kers). Expenses Generally, all expenses are allowed as deductions to the extent to which they have been wholly, exclusively and necessarily incurred by the taxpayer in generat - ing chargeable profits. These include the following, for example:
• interest on funds borrowed; • rent of buildings or land occupied for the purpose
of producing the profits; • bad and doubtful debts;
• repairs of premises, plant, machinery or articles; • expenditure on environmental protection machin - ery; • protection installation and vehicles, etc, used in producing the profits; • annual contribution to a fund under a recognised occupational retirement scheme; and • donations made to recognised charities. Incentives There are tax incentives in specific areas, such as tax concessions for gains derived from qualified debt instruments and exemption from tax for offshore funds (non-resident individuals, partnerships, trustees of trust estates or corporations) in respect of profits derived from transactions in securities, futures con - tracts, foreign exchange contracts, etc, in Hong Kong, which are carried out by corporations and authorised financial institutions that are licensed or registered under the Securities and Futures Ordinance. To attract families to set up single family offices in Hong Kong, aside from recent launches such as the Network of Family Office Service Providers and the Hong Kong Academy for Wealth Legacy, the Inland Revenue Ordinance was amended, with effect from 19 May 2023, to provide profits tax concessions to certain eligible family-owned investment holding vehi - cles managed by eligible single family offices in Hong Kong and family-owned special purpose entities in respect of certain types of transactions. Subject to certain conditions and restrictions, profits tax is not levied on assessable profits derived from qualifying transactions (such as transactions in shares, stocks, debentures, loan stocks, funds, bonds or notes) and incidental transactions (subject to a 5% threshold) carried out by eligible family-owned investment hold - ing vehicles/family-owned special purpose entities. In the 2024–25 Budget, the Hong Kong government announced its plans to improve the profits tax con - cessions regime and attract more funds and family offices, for example by:
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