With a corporate tax rate of 16.5 per cent, and no tax on sales, dividends or capital gains, Hong Kong is one of the most tax-friendly economies in the world. Foreign investments are not subject to any specific approval process, and the Hong Kong tax regime does not differentiate between foreign and domestic investors, except in relation to the acquisition of residential property. Hong Kong also promotes shariah investment, with the Hong Kong Monetary Authority indicating its aspiration for Hong Kong to be an Islamic finance hub.2 Since 2014, a number of banks have begun offering shariah-compliant funds. Coupled with its close proximity to and connection with Mainland China, Hong Kong is a popular gateway for inward investment into Mainland China by multinational corporations.

Although not an OECD member, Hong Kong is committed to supporting international efforts on base erosion and profit shifting (BEPS) and the Common Reporting Standard (CRS). Public consultation on BEPS ended on 31 December 2016, with legislative amendments planned to be introduced in the near future. In addition, Hong Kong has already passed legislative amendments implementing CRS and automatic exchange of information.

The principal tax legislation in Hong Kong is the Inland Revenue Ordinance (IRO).3


The most common business entities used in Hong Kong are companies, partnerships and trusts.

i Companies

A company incorporated under Hong Kong law may be limited by shares, limited by guarantee or unlimited, with a company limited by shares being the most common corporate form. If a company is limited by shares, the liability of the shareholders is limited to the amount unpaid on their shares. A company limited by shares may either be a public or a private company. Public and private companies mainly differ in their ability to offer their shares to the public for subscription. Private companies must also cap the number of shareholders at 50. Both types of company are required to appoint a company secretary who is a Hong Kong-resident individual, or a company with a registered office or place of business in Hong Kong. However, a private company only needs to have one director, and at least one director must be an individual. Public companies, on the other hand, need at least two directors.


Profits tax is charged on every person carrying on a trade, profession or business in Hong Kong. A ‘person’ under the IRO is defined to include individuals, corporations, partnerships and bodies of persons. Profits tax would be charged on the assessable profits that arose in or were derived from Hong Kong during the basis period. Corporations are taxed at a flat rate of 16.5 per cent on their profits arising in or derived from Hong Kong.

To fulfil her election manifesto, the new Chief Executive of Hong Kong Carrie Lam has indicated in her policy address on 11 October 2017 that Hong Kong will introduce a two-tier profits tax system for enterprises, by reducing the profits tax rate to 8.25 per cent (half of the current rate) on the first HK$2 million of profits. The standard 16.5 per cent would apply to profits in excess of the first HK$2 million. A restriction will be introduced such that each group of enterprises may only nominate one enterprise to benefit from the lower tax rate, as the intended target of the tax benefit is primarily small- and medium-sized enterprises. No further details have been released on the proposal yet. It is uncertain at this stage whether this exemption will apply to both corporations and other forms of business organisations.

ii Partnerships

Under the Partnership Ordinance4 a partnership is established when a group of persons carry on a business in common with a view to profit. Generally, no formalities are required to establish a partnership. However, a written partnership agreement is usually used to govern the relationships between the partners.

Limited liability partnerships are permitted under Hong Kong law. They must be registered with the Companies Registrar under the Limited Partnership Ordinance.5


The assessable profits of a partnership are charged as though the partnership is a single entity.6 A partner’s individual tax liability is calculated by apportioning the partnership’s assessable profits between each of the partners in the ratio in which the profits or losses of the basis period were divided. Thereafter, losses carried forward from previous years are deducted before applying the appropriate tax rate to the assessable profits.

iii Trusts

Trusts are commonly used in Hong Kong as an investment vehicle. A trust comes into existence when one person transfers a specific property to the trustee with the intention that it will be applied for the benefit of another person (i.e., the beneficiary).


A trustee is subject to profits tax on its own profits arising from the provision of trustee services. Due to the separation of legal and beneficial ownership, a trustee will not be personally liable for tax charged on profits of the underlying entities of the trust. To the extent that the trustee itself carries on business, those profits will be subject to tax. A corporate trustee will, therefore, be subject to tax at a rate of 16.5 per cent.


i Tax on profits
Determination of taxable profit

Hong Kong has a territorial system of taxation. Three conditions must be satisfied before a charge to profits tax can arise:

  • a the taxpayer must carry on a trade, profession or business in Hong Kong;
  • b profits to be charged must be from the trade, profession or business carried on by the taxpayer in Hong Kong; and
  • c the profits must be profits arising in or derived from Hong Kong.

Whether a person is carrying on a trade, profession or business in Hong Kong is a question of fact.

Six factors have emerged from case law in determining whether a taxpayer has engaged in trade, which collectively are referred to as the ‘badges of trade’, namely:

  • a the subject matter of the transactions;
  • b the length of ownership;
  • c whether there have been successive or frequent similar transactions;
  • d whether supplementary activities have been performed to make the assets marketable or to attract purchasers;
  • e the reason for the disposal or realisation of the subject matter; and
  • f the taxpayer’s motives.

In addition, the taxpayer’s intention to trade and the existence of a commercial purpose for the transaction are also relevant to such a determination. It is not necessary for all badges of trade to be present before a taxpayer will be found to be trading.

The definition of ‘business’ is much wider than ‘trade’. A company incorporated for the purpose of making profits for its shareholders that puts any of its assets to any gainful use is presumed to be carrying on a business.7 Business can be more passive than trade, with the receipt of share profits and fixed annuities having been held to be business.8 Similarly, the receipt of income by a holding company and the mere activity of depositing have been held to be carrying on a business as well.9 One-off transactions may also fall under the definition of ‘business’ under the IRO. Having a registered office in Hong Kong of itself will not necessarily amount to carrying on a business in Hong Kong.

A ‘profession’ is not defined in the IRO. Case law indicates that it refers to work requiring either purely intellectual skill or manual labour dependent upon purely intellectual skill.10 If a person practices a profession but is an employee, he or she is not considered to be carrying on a profession for the purpose of profits tax.

On the source of profits, the IRO defines ‘profits arising in or derived from Hong Kong’ to include ‘all profits from business transacted in Hong Kong, whether directly or indirectly through an agent’.11 According to Commissioner of Inland Revenue v. Hang Seng Bank Limited,12 the process of determining the source of profit involves examining the gross profit of the transaction and what the taxpayer has done to earn the profit in question. However, the test outlined in this case is not consistently followed in subsequent case law, many of which revert back to an operations test (i.e., an examination of the operations of the taxpayer that contributed to the generation of net profits).

To provide some guidance and clarity in this area, the Hong Kong Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Note (DIPN) No. 21. DIPNs are not legally binding, but are indicative of the IRD’s views on various legal issues. According to DIPN No. 21, transactions must be looked at separately and the profits of each transaction considered on their own. Where the gross profit from an individual transaction arises in different places, they can be apportioned as arising partly in and partly outside Hong Kong. Further, the place where day-to-day investment decisions are undertaken does not generally determine the locality of profits. The absence of an overseas permanent establishment (PE) of a Hong Kong business does not of itself mean that all the profits of that business arise in or are derived from Hong Kong. However, practically, the IRD is less likely to accept an offshore profits claim in the absence of an offshore presence of the taxpayer.

All outgoings and business expenses incurred in the production of profits are deductible in the basis year in which they are incurred. Such expenses include:

  • a interest on borrowings for the purpose of producing profits, and other sums payable in connection with such borrowings, subject to the limitations outlined in Section VII.ii;
  • b rent paid by tenants for buildings or lands occupied for the purpose of producing profits;
  • c foreign tax paid by a Hong Kong taxpayer where they were incurred in the production of profits;
  • d bad debts;
  • e expenditure incurred in the repair of premises, plant, machinery, implements, utensils or articles in the production of profits;
  • f expenditure incurred on the replacement of any implement, utensil or article, provided that no depreciation allowances are made;
  • g expenditure for the registration of trademarks, designs or patents used in the trade, profession or business that produced the assessable profits; and
  • h contributions made by individual taxpayers to mandatory provident funds in Hong Kong.

As a general rule, capital expenditures are not deductible. However, there are certain exceptions. For example, expenditure on research and development related to a taxpayer’s trade, profession or business is deductible provided that the expenditure is not on land or buildings, and that the payment is to an approved research institute for research and development related to that trade, profession or business or that the payment is to an approved research institute, the object of which is the undertaking of research and development relating to that particular class of trade, profession or business. To promote technological progress in local industries, the purchase of patent rights and rights to know-how are also deductible. In addition, payments for technical education and approved charitable donations may also be deducted from the assessable profits.

Depreciation is allowed for qualifying industrial and commercial buildings, and plant and machinery. For industrial buildings, a taxpayer who has incurred capital expenditure on the construction of an industrial building or structure is allowed a 20 per cent initial deduction of the capital expenditure. Thereafter, a 4 per cent deduction of the original capital expenditure is allowed annually.

A taxpayer with an interest in a commercial building or structure who has incurred construction costs can claim a deduction of 4 per cent annually. No depreciation deduction is available for commercial buildings that are more than 25 years old.

Capital expenditure on plant and machinery is allowed an initial deduction of 60 per cent in the year in which the expenditure is incurred. Thereafter, depending on the type of asset, depreciation is allowed on a reducing-value basis at 10, 20 or 30 per cent.

In her 2017 Policy Address, Hong Kong’s Chief Executive Carrie Lam announced that Hong Kong will introduce a super tax deduction scheme for research and development (R&D) expenditure. Under this new scheme, a 300 per cent tax deduction will be offered for the first HK$2 million of qualifying R&D expenditure and a 200 per cent tax deduction for expenditure in excess of HK$2 million. No further details have been released on the proposal yet, including what constitutes qualifying expenditure.

Capital and income

Hong Kong does not impose tax on capital gains. However, the issue as to whether income constitutes trading profits or non-taxable capital gains arises frequently in relation to the disposal of real property. Relevant factors include the frequency of the transactions, the accounting treatment adopted by the taxpayer, how long the property was held, how the property was financed and developed, and the reason for its sale. Profits obtained from properties acquired, developed and then sold are generally regarded as trading profits.


Hong Kong allows losses to be carried forward indefinitely.


The profits tax rate for companies is 16.5 per cent. If a company is a partner in a partnership, profits tax for its share of assessable profits is also charged at 16.5 per cent. The rate for unincorporated businesses is 15 per cent.


A single tax authority – the IRD – exists in Hong Kong, and is responsible for administering the IRO.

Tax is charged on the assessable profits for the year of assessment. The assessable profits for a business that makes up annual accounts are calculated on the profits of the year of account ending in the year of assessment. Generally, profits tax returns should be filed within one month of the date of issue. However, under the IRD’s Block Extension Scheme, this may be extended depending on the accounting date of the company. If a business objects to a tax assessment issued by the IRD, it has the right to file an objection within one month of the issuance of the assessment with the IRD, which will then render a determination that is subject to appeal to the IRD Board of Review as well as the Hong Kong courts.

Tax grouping

No group loss relief is available to companies that are members of a group in Hong Kong.

ii Other relevant taxes
Stamp duty

Hong Kong imposes stamp duty on instruments of transfer rather than the transaction itself. Instruments relating to the sale and lease of real property are subject to stamp duty, as are instruments relating to the sale of Hong Kong stock. Hong Kong stock is defined to include equity and debt instruments registered on a Hong Kong register. Therefore, if an offshore company maintains its share register in Hong Kong, any transfer of shares will be subject to stamp duty. Stock also includes units in unit trusts that maintain their registers in Hong Kong.

Hong Kong bearer instruments such as promissory notes and bills of exchange are also subject to stamp duty. However, due to the range of exemptions applicable to these instruments, they are rarely subject to stamp duty in practice.


Owing to the fact that whether profits tax is chargeable under domestic law depends on whether the source of profits is in Hong Kong, the concept of a PE has little relevance in Hong Kong outside of the tax treaty context. Where a foreign investor is a tax resident of a jurisdiction with which Hong Kong has a comprehensive double tax agreement (DTA), the IRD has indicated that it will consider OECD principles in the attribution of profits to a PE and for transfer pricing purposes (i.e., by examining primarily the risks and functions undertaken by the PE in question).13


In general, and as a matter of policy, Hong Kong does not offer tax incentives. However, this principle has been relaxed in recent years with the result that four industries currently enjoy lower statutory tax rates.

i General
Corporate treasury centres (CTCs)

In addition to the general allowance for deductions discussed in Section III.i, the IRO allows the deduction of interest payable on money borrowed by a corporation carrying on an intragroup financing business in Hong Kong as long as the following conditions are satisfied:

  • a the deduction claimed is in respect of interest payable by a corporation (i.e., the borrower) on money borrowed from a non-Hong Kong associated corporation (i.e., the lender) in the ordinary course of an intragroup financing business;
  • b the lender is, in respect of the interest, subject to a similar tax (i.e., such tax has been paid or will be paid) in a territory outside Hong Kong at a rate that is not lower than the Hong Kong’s profits tax rate (i.e., 16.5 per cent); and
  • c the lender’s right to use and enjoy that interest is not constrained by a contractual or legal obligation to pass that interest to any other person, unless the obligation arises as a result of a transaction between the lender and a person other than the borrower dealing with each other at arm’s length.

In addition, there is a reduction in the profits tax rate to 8.25 per cent for qualifying CTCs, which are dedicated CTCs, multifunction CTCs and CTCs by determination. A dedicated CTC is one that carries out one or more corporate treasury activities that stands alone. It would generally be prohibited from carrying out other activities. Multifunction CTCs can engage in a certain level of income-generating activities but still qualify for the profits tax concession on qualifying profits. A CTC by determination is a CTC that does not meet the conditions of either a dedicated CTC or a multifunction CTC, but may obtain a determination from the IRD stating that it is a qualifying CTC. Qualifying profits include lending transactions, corporate treasury services and corporate treasury transactions with non-Hong Kong associated corporations.

These CTC incentives became effective from 1 April 2016.

Captive insurers

Captive insurers enjoy a 50 per cent reduction in profits tax on their business of insuring offshore risks, thereby also reducing the effective corporate tax rate to 8.25 per cent.

Open-ended fund companies

The Hong Kong government has proposed to extend the profits tax exemption currently enjoyed by publicly offered open-ended fund companies and certain offshore funds, to onshore privately offered open-ended fund companies (Private OFCs). This proposal is currently being considered by the Hong Kong Legislative Council.

In order to enjoy the exemption, a Private OFC must satisfy the following conditions:

  • a be resident in Hong Kong, with its central management and control located in Hong Kong;
  • b not be closely held, namely not owned by only a few individuals or corporate investors;
  • c all transactions generating profits must be carried out or arranged by corporations or authorised financial institutions licensed or registered under the Securities and Futures Ordinance; and
  • d only invest in permissible asset classes, which should largely involve securities and futures contracts, with a 10 per cent de minis limit for investing in non-permissible asset classes.

The proposal includes the following specific requirements for the second condition of ‘not closely held’:

  • a Private OFCs must have at least nine investors, not including the originator or its associates (the minimum number of investors reduces to four where there is a ‘qualifying investor’).
  • b For those Private OFCs with at least one ‘qualifying investor’ (certain types of institutional investors) having more than HK$200 million participation interest, there must be at least five investors including the qualifying investor.
  • c Investors other than qualifying investors must have a more than HK$20 million participating interest and such interest must not exceed 50 per cent.
  • d The participating interest of the originator and its associates must not exceed 30 per cent.
  • e The fund documents must include specific terms stating that interests in Private OFC will not be closely held and the intended categories of investors. Nothing in the fund document should be used to limit the investors to any specific individual or company, or deter any other reasonable investor.

If a Private OFC fails to meet the ‘not closely held’ condition, a proposed safe harbour rule will permit it to apply to the commissioner of Inland Revenue for tax exemption if:

  • a its activities and investments are being wound down and it has notified its members of the decision to wind down its activities and investments; or
  • b there are temporary and out-of-control circumstances.

For the last condition, the fund may apply for exemption if the 10 per cent threshold is exceeded owing to circumstances (such as market fluctuations) that significantly reduce the value of the Private OFC’s assets and were not reasonably foreseeable.

Aircraft lessors and managers

Through legislative amendments passed in July 2017, Hong Kong now offers a tax concession to qualifying aircraft lessors and aircraft leasing managers.

Qualifying aircraft lessors enjoy an 8.25 per cent tax rate on their assessable profits. In addition, the assessable amount of leasing income of a qualifying aircraft lessor is deemed to be 20 per cent of the gross leasing income less deductible expenditure. Effectively, the profits tax payable on the assessable profits of a qualifying aircraft lessor is reduced to 1.65 per cent of its net profit (ignoring depreciation). An 8.25 per cent profits tax rate also applies to the assessable profits of aircraft leasing managers providing management services (which also include aircraft financing activities) to qualifying aircraft lessors. These tax concessions apply to all profits derived on or after 1 April 2017.

Any aircraft lessor or manager who wishes to take advantage of the regime must make a written election with the IRD. The election is irrevocable.

To qualify for the reduced profits tax rate, the aircraft lessor or manager must satisfy the following conditions:

  • a the lessor or manager must have its central management and control in Hong Kong;
  • b the entity must not carry on any aircraft leasing or management activities from a permanent establishment outside Hong Kong;
  • c the aircraft lessor must not carry on any activities other than aircraft leasing activities; and
  • d an aircraft leasing manager must ensure that at least 75 per cent of its profits are derived from the aircraft leasing management business, and at least 75 per cent of its assets are deployed for such business.

If an aircraft lessor or manager fails to satisfy any of the conditions above, it will automatically be disqualified and cannot opt back into the regime. No grace period is allowed.


i Withholding on outward-bound payments (domestic law)

Hong Kong has no withholding tax. However, sums paid as royalties to non-residents for the right to use intellectual property are subject to a tax similar to withholding tax. The withholding tax rate is 4.95 per cent if the recipient is a corporation and 16.5 per cent if the two parties are associates. However, even if the recipient is an associate, as long as no person carrying on a trade, profession or business in Hong Kong has at any time held an interest in the ownership of such intellectual property, the normal 4.95 per cent rate would apply. For payments to unincorporated businesses, the rates are 4.5 and 15 per cent respectively.

There is no withholding tax on interest or dividends.

ii Domestic law exclusions or exemptions from withholding on outward-bound payments

There are no exclusions or exemptions applicable.

iii Double tax treaties

Traditionally, as Hong Kong adopts a territorial basis for taxation, Hong Kong residents generally do not suffer from double taxation. However, in recent years, Hong Kong has negotiated and entered into numerous DTAs with its trading partners, recognising that DTAs provide certainty to investors on the taxing rights of the contracting parties, helping investors to better assess their potential tax liabilities and providing an added incentive to do business in Hong Kong.14

Jurisdictions with which Hong Kong has concluded comprehensive DTAs include Austria, Belgium, Belarus, Brunei, Canada, the Czech Republic, France, Guernsey, Hungary, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Luxembourg, Mainland China, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Pakistan, Portugal, Qatar, Romania, Russia, Saudi Arabia, South Africa, Spain, Switzerland, Thailand, the United Arab Emirates, the United Kingdom and Vietnam.

iv Taxation on receipt

Dividends from a company subject to Hong Kong profits tax are not included in profits. No part of the profits or losses of a trade, profession or business carried on by a person subject to profits tax is included in ascertaining profits on which any other person is subject to profits tax.


i Thin capitalisation

There are no thin capitalisation rules in Hong Kong.

ii Deduction of finance costs

Interest payable upon money borrowed by a person for the purpose of producing assessable profits is deductible, subject to certain restrictions. In general, interest will be deductible if borrowed from a foreign or domestic financial institution or if borrowed from a person subject to tax in Hong Kong on the interest received. Generally (aside from the CTC rules discussed in Section V.i), interest paid to a corporation outside of Hong Kong will not be deductible.

In addition, legal fees, procuration fees, stamp duties and other expenses in connection with the borrowed money are also deductible.

Borrowing expenses that are of a capital nature are not deductible. In making this determination, the relevant consideration is the purpose of the loan, namely whether money was borrowed for capital expenditure purposes. For example, where interest was paid on money borrowed for the purpose of acquiring a redevelopment site, intended ultimately to generate rental income, the interest expenses was of a capital nature and deduction should not be allowed.15

iii Restrictions on payments

A company must not make a distribution except out of profits available for the purpose, where ‘distribution’ is defined to include every form of distribution of a company’s assets to its members.16 Profits available for distribution are the company’s accumulated realised profits less accumulated realised losses.

iv Return of capital

Return of capital is permitted under the CO for a company limited by shares through a reduction of share capital.17 This is generally used when changes in a company’s business result in excessive capital in the company. A reduction of capital is tax neutral in Hong Kong.


i Acquisition

As Hong Kong does not impose tax on the sale of capital assets, capital gains on the sale of shares are not taxable. It is a question of fact as to whether shares are capital or trading assets. As discussed previously, instruments of transfer of Hong Kong stock are subject to stamp duty.

ii Reorganisation

The CO introduced a court-free amalgamation scheme on 3 March 2014 for intragroup mergers. Under this scheme, two or more Hong Kong-incorporated, wholly owned companies within the same group could amalgamate and continue as one. However, neither the CO nor the IRO itself currently contain provisions on the tax consequences of such amalgamation. These rules are under development.

iii Exit

There is no exit tax for Hong Kong.


i General anti-avoidance

Anti-avoidance measures under the IRO include the following:

  • a Use of artificial or fictitious transactions under Section 61 of the IRO.18 A fictitious transaction is one that was never intended to be carried out by those who were ostensibly parties to it.19 An artificial transaction includes transactions that have been carried out but are commercially unrealistic.20 Commercially realistic transactions with incidental tax benefits could not be struck down under this provision.
  • b Implementation of transactions with the sole or dominant purpose of producing a tax benefit under Section 61A of the IRO. This section aims to strike down blatant or contrived tax-avoidance schemes. If a transaction is found to have the sole or dominant purpose of obtaining a tax benefit, then the transaction as a whole or a part of it will be disregarded.
  • c Sale of loss companies under Section 61B of the IRO. If a change in the shareholding of a company has been effected, and the sole or dominant purpose of the change in shareholding was to use a tax loss to obtain a tax benefit, then the set-off of a loss may be disallowed.
ii Controlled foreign corporations (CFCs)

Hong Kong has no controlled foreign corporation legislation.

iii Transfer pricing

Section 20 of the IRO addresses tax avoidance from transfer pricing. When a non-resident carries on business in close connection with a Hong Kong resident with whom he or she is closely connected, and the course of such business is arranged such that it produces no profit or less than the ordinary profit to the resident person, the business done by the non-resident will be deemed to be carried on in Hong Kong. Therefore, the profits derived by the non-resident will be chargeable to profits tax in the name of the Hong Kong resident.

Other relevant provisions within the IRO also allow the IRD to impose transfer pricing adjustments where the transfer pricing does not follow the arm’s-length principle, such as Section 16 on deductibility of expenditures and Section 61A on transactions designed to avoid tax liability.

According to DIPN No. 46 on transfer pricing, the IRD has indicated that Hong Kong will apply the principles in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration insofar as they are compatible with the IRO. The IRD may also impose transfer pricing adjustments under double taxation arrangements between Hong Kong and other jurisdictions.

It is expected that more detailed legislative provisions in relation to transfer pricing will be introduced in the near future.

iv Tax clearances and rulings

Under Section 88A of the IRO, the IRD is empowered to make advance rulings upon an application made by a person. An advance ruling may relate to how any provision of the IRO applies to the applicant or to the arrangement described in the application. However, it must not relate to the imposition or remission of a penalty, the correctness of a return supplied by a person, the prosecution of a person or the recovery of any debt owing by any person.21 The IRD will not entertain applications for arrangements that are hypothetical or speculative, and a ruling will only be given for a seriously contemplated arrangement.

Where a ruling has been made, such ruling applies to the arrangement for the period specified in the ruling. Each ruling is confined to its specific terms and cannot be relied on as a precedent for similar arrangements in the future.

Advance ruling applications are subject to a charge calculated on the basis of cost recovery.


As discussed in Section II.i, Hong Kong will introduce a two-tier profits tax system for enterprises, by reducing the profits tax rate to 8.25 per cent on the first HK$2 million of profit. The standard 16.5 per cent would apply to profits in excess of the first HK$2 million. The introduction of a two-tier profits tax system will likely bring about significant complexity to the tax system in Hong Kong, both in terms of provisions for implementation of the system and provisions for anti-avoidance.

Back in 2016, Hong Kong adopted the OECD CRS by way of an amendment to the IRO. Starting from 1 January 2017, all Hong Kong financial institutions are required to comply with the due diligence and reporting obligations under the legislation. In terms of automatic exchange of information, Hong Kong has initially opted to enter into bilateral treaties with its exchange partners. However, by June 2017, Hong Kong had expanded the list of reportable jurisdictions significantly from less than 10 to 75. Given the number of information exchange partners, the Hong Kong government has stated that entering into bilateral treaties has ‘become increasingly impractical given the continued expansion in the scope and network exchanges in the international community’. As such, the Hong Kong Legislative Council is now considering an amendment of the IRO to pave the way for Hong Kong to enter into the international multilateral treaty for automatic exchange of information – the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Hong Kong also launched a public consultation on BEPS on 26 October 2016. The consultation paper focuses on transfer pricing guidelines, spontaneous exchange of information on tax rulings, country-by-country reporting and cross-border dispute resolution mechanisms. It is anticipated that a legislative amendment will be introduced in the near future.

As discussed in Section V.i, a tax incentive regime for aircraft lessors and aircraft leasing managers was introduced in 2017 to promote the Hong Kong aircraft leasing industry.


Hong Kong prides itself on maintaining a simple tax system with a low effective tax rate, a principle that was enshrined in the Basic Law,22 the quasi-constitutional document governing the operation of the Hong Kong Special Administrative Region. In general, the government continues to satisfy this objective, but the system’s complexity has increased significantly in recent years, largely as a result of international pressure. Tax treaties, once unknown to Hong Kong, have become part of the tax landscape and, while providing some taxpayers with additional certainty, have introduced additional complications. Similarly, concepts such as transfer pricing and exchange of information were once unknown, but have now become or are in the process of becoming part of domestic law.

Notwithstanding such development, Hong Kong retains an enviable competitive position with respect to taxes, as complexity has increased in most other jurisdictions at an even faster pace. Moreover, the absence of any sales taxes, significant duties, withholding taxes on dividends and interest, or tax on capital gains makes it an attractive investment location, particularly as a gateway to Mainland China, with which Hong Kong enjoys a privileged relationship.

1 Steven Sieker is a partner and Wenwen Chai is an associate at Baker McKenzie.

2 www.chinadailyasia.com/asiaweekly/2015-02/27/content_15232242.html.

3 Inland Revenue Ordinance (Chapter 112 of the laws of Hong Kong).

4 Partnership Ordinance (Chapter 38 of the laws of Hong Kong).

5 Limited Partnership Ordinance (Chapter 37 of the laws of Hong Kong).

6 Section 22(1), IRO.

7 American Leaf Blending Co Sdn Bhd v. Director General of Inland Revenue (Malaysia) 1978 STC 561.

8 IRC v. Korean Syndicate Ltd (1921) 3 KB 258; South Behar Railway Co Ltd v. IRC (1925) AC 476.

9 D15/87 Inland Revenue Board of Review Decisions Vol 2, 373.

10 IRC v. Maxse (1919) 1 KB 647.

11 Section 2, IRO.

12 Commissioner of Inland Revenue v. Hang Seng Bank Limited (1990) 1 HKRC.

13 DIPN 46.

14 IRD, www.ird.gov.hk/eng/pol/dta.htm.

15 Wharf Properties Limited v Commissioner of Inland Revenue [1997] AC 505.

16 Sections 297(1) and 290, Companies Ordinance (CO) (Chapter 622).

17 Section 210, Companies Ordinance (Chapter 622).

18 Section 61, IRO.

19 Commissioner of Inland Revenue v. Douglas Henry Howe (1977) 1 HKTC 936.

20 Cheung Wah Keung v. Commissioner of Inland Revenue (2003) HKRC.

21 Section 1, Part 1 of Schedule 10, Inland Revenue Ordinance.

22 Article 108, Basic Law.