Hong Kong is an international city where foreign investors gather and seek business opportunities around Asia. Under the Basic Law, the legal structure that governs Hong Kong, capital is free to convey in and out of the economy which is in line with the foreign regulation under the current government policy.
Hong Kong is very successful in the maritime industry with a comprehensive network of sizable ship-owners, ship management companies and logistics companies providing supporting services such as ship finance, insurance, brokerage, surveying, repairing, arbitration and legal services to the industry. Many internationally renowned ship-owners are operating their shipping business in Hong Kong, controlling or managing about 8% of the world's total tonnage: Hong Kong is among the top ten largest maritime centres in the world.
Moreover, Hong Kong possesses a world-class shipping register. The Hong Kong Shipping Register is reputed for its high quality and excellent services, making the registered tonnage mark upward with a double-digit growth track over the past few years. On the other hand, the Port State Control detention rates for the Hong Kong registered ships remain well below the world averages.
General Hong Kong tax system
Hong Kong offers a non-discriminatory low tax regime which is governed by the "territorial principle" under which Hong Kong only taxes income sourced from within the jurisdiction.
In addition, there is no capital gains tax, no withholding tax on service fees or interest payments, no interest tax, no sales tax, no VAT, no estate duty and no annual net worth tax in Hong Kong.
In view of the above advantages, shipping industries should consider setting up operations, registering and managing their shipping businesses in Hong Kong.
Tax rates
Currently, the Hong Kong Corporate tax rate is 16.5% on assessable profits.
Profits tax scope
Hong Kong Profits Tax is charged on every person (including a company) carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong from such trade, profession or business.
Hong Kong profits tax rules application to ship owners
Based on the specific provisions in the Inland Revenue Ordinance ("IRO") for the shipping business, a profits tax liability would be imposed on a ship owner (defined as a person who is a ship owner or carries on a business of chartering or operating ships in Hong Kong). The IRO provisions also provide that a ship owner is deemed to be carrying on a shipping business in Hong Kong if:
- The ship-owning business is normally controlled or managed in Hong Kong; or
- The owner of the ship is a company incorporated in Hong Kong.
In addition, any ship owner that has its ships calling at any location within the waters of Hong Kong (excluding calls of a casual nature) shall be deemed to be carrying on a shipping business in Hong Kong.
Computation of assessable shipping profits
The assessable profits of a ship owner are calculated according to the following formula.
Assessable profits = Total shipping profits x Hong Kong shipping income / Total worldwide shipping income
Tax incentives
With the purpose of reducing the tax burden on Hong Kong shipping companies, tax incentives are given for the shipping business as follows:
- For ships flying a Hong Kong flag uploading its cargo in Hong Kong and navigating to international waters, the relating freight income is exempt from Hong Kong profits tax;
- For a taxpayer resident in any territory outside Hong Kong but carrying on a shipping business in Hong Kong, it will be tax exempted in Hong Kong if there is reciprocal tax treatment in that country for a Hong Kong resident taxpayer. Such countries include New Zealand and the Republic of Korea.
Hong Kong double tax agreements / arrangement
Hong Kong investors benefit from the reduction of overall taxation resulting from leveraging tax relief through double tax agreements / arrangement.
Hong Kong has so far entered into a comprehensive double tax agreement/arrangement (DTA) with Austria, Belgium, Brunei, Hungary, Indonesia, Ireland, Kuwait, Luxembourg, the Netherlands, the People's Republic of China (PRC), Thailand, the UK and Vietnam. The DTAs with Austria, Brunei, Hungary, Indonesia, Ireland, Kuwait, the Netherlands and the UK have not yet entered into force pending the completion of the ratification procedures of the governments concerned. These DTAs mainly eliminate / reduce withholding tax on dividends, royalties and interest as well as tax payable on capital gains. With the capital gain tax exemption/reduction and elimination / reduction of withholding tax, the DTAs will help boost the use of Hong Kong as a location for a regional holding company or regional headquarters.
Being a major international shipping centre, the Government of HKSAR is aiming to reduce the overall tax burden of ship-owners for those who have registered their ships in Hong Kong by not double taxing income by virtue of the double tax relief arrangements, which extend to those countries that do not have reciprocal exemption in their tax laws.
Apart from the countries with which Hong Kong has entered into comprehensive double tax agreement, Hong Kong has entered in agreement for the avoidance of double taxation with respect to shipping income with Denmark, Germany, Netherlands, Norway, Singapore, Sri-Lanka, the United Kingdom, the United States of America.
Salaries tax rules for ship crew in Hong Kong
Hong Kong salaries tax is imposed on a person who is in receipt of income arising in or derived from Hong Kong from any office, employment and pension.
An exemption clause is provided in the IRO to exempt ship crew from salaries tax if they are absent from Hong Kong for a substantial portion of time during a year of assessment.
The income of a ship crew member is not subject to salaries tax if he or she was present in Hong Kong for no more than:
- A total of 60 days in the basis period (i.e. from 1 April to 31 March of next year) for a year of assessment; and
- A total of 120 days falling partly within each of the basis periods for two consecutive years of assessment.
