The Inland Revenue Department (IRD) has published its views and practice in respect of the profits tax concessions for ship leasing and ship leasing management businesses. The profits tax concessions were granted with the enactment of the Inland Revenue (Amendment) (Ship Leasing Tax Concessions) Ordinance 2020 in June 2020 and took effect from 1 April 2020.
In this regard, the IRD has issued the Departmental Interpretation and Practice Notes No.62 (DIPN 62) on 7 December 2020 that sets out in detail the various tax concessions available and the applicable conditions. DIPN 62 also provides additional clarification in specific areas, including the following:
- ship leasing activity:
- the meaning of different types of leases and financing agreements, including operating and funding leases, hire purchase agreements and conditional sale agreements; and
- the requirement for a ship leasing activity to be carried out in the ordinary course of the qualifying ship lessor's business carried on in Hong Kong, in respect of which the tax authorities will examine the terms of the lease and financing arrangement and all other relevant circumstances to prevent artificial transactions structured with a view to shifting profits from other tax jurisdictions;
- determining the tax base for a qualifying ship lessor: the operation of the 20% tax base concession in the case of operating leases, the calculation of net finance charges or interest payments for funding leases and the allocation of gross lease or interest payments where terms of the lease and other dealings are negotiated together resulting in non-market payments;
- deduction of notional annual depreciation allowances for ships that are subsequently used in another trade, profession or business to produce chargeable profits;
- consideration of the totality of facts and case law principles in determining whether a ship is a capital asset(the disposal of which is not taxable);
- qualifying ship leasing managers and ship leasing management activities, and the application of the safe harbour rule on qualifying profits;
- losses sustained in the year of assessment by qualifying ship lessors and qualifying ship leasing managers are generally not deductible against the assessable profits for any subsequent year of assessment;
- ensuring a substantial business presence in Hong Kong by qualifying ship lessors and qualifying ship leasing managers under Action 6 of the BEPS Project on tax treaty abuse, determination of central management and control to qualify for the concessions, satisfying the substantial activities requirement (including qualified full-time employees, adequate operating expenditure incurred and others) under Action 5 of the BEPS Project on harmful tax practices;
- anti-avoidance provisions including the arm's length principle, main purpose tests, anti-tax arbitrage, limitation of interest deduction and restriction of a lessee's capital allowances; and
- advance ruling applications and issuance of residence certificates.
The full details of DIPN No.62 are available here.