Hong Kong Taxation: Law and Practice 2012–13 Edition

10. Miscellaneous Matters

Chapter 10 ■ Miscellaneous Matters 10.1 Double Taxation Relief 684 10.2 Exemptions 685 10.3 Retirement Schemes 688 10.3.1 Taxation consequences of retirement schemes 689 10.4 Anti-avoidance Legislation 694 10.4.1 Specific anti-avoidance 694 10.4.2 Sale of loss companies 695 10.4.3 General anti-avoidance provisions 697 10.4.4 Sec. 61 702 10.4.5 Sec. 61A 704 10.4.5.1 Meaning of transaction 705 10.4.5.2 Tax benefit 710 10.4.5.3 Sole or dominant purpose 714 10.4.5.4 Countering the tax benefit 728 10.4.5.5 Case law discussion 731 10.5 Advance Rulings 734 10.5.1 Sch. 10, Part I 735 10.5.2 Sch. 10, Part II 739 10.6 Other Miscellaneous Matters 740 10.6.1 Board of Inland Revenue 740 10.6.2 Tax Reserve Certificates 741 10.6.3 Trusts, trustees and deceased estates 742 10.6.4 Notice of no objection to deregister a private company 743 684 Hong Kong Taxation 10.1 Double Taxation Relief This book is essentially concerned with the application of the taxation laws of Hong Kong to financial transactions. Many transactions, however, take place across national borders and one consequence of this is that the same profit may attract taxation in two or more jurisdictions. Typically, this occurs because the country of residence of the person deriving the profit or income seeks to tax the amount, as does the jurisdiction from which the profit or income is sourced. Most jurisdictions, however, recognise that such double taxation should be mitigated or eliminated and this essentially occurs through one jurisdiction giving up or modifying its rights to tax profits from specified transactions. This relief may be given on a unilateral basis under domestic taxation law, or on a bilateral basis through a DTA. International custom is that the jurisdiction in which an item of profit has its source is generally regarded as having the primary or most legitimate right to tax the profit or income and any other jurisdiction which seeks to tax the amount on the basis of the residence of the person deriving the sum should either exempt the amount from tax or allow a credit for the tax paid in the source jurisdiction. Because of its territorial basis of taxation, Hong Kong traditionally was not particularly concerned about taking steps to eliminate double taxation. In other words, because Hong Kong generally only taxes income or profit from a Hong Kong source, there was generally little need under international custom for it to give up its right to tax any amounts or to give credits for tax suffered elsewhere on the same amount. Nonetheless, although having limited practical application, until 1998 statutory relief was available for tax incurred in certain Commonwealth countries in respect of income which was taxable in Hong Kong. Moreover, there remain various provisions under which some form of relief for foreign tax may be available. These provisions are discussed elsewhere in the book, but the main provisions are as follows: (1) With the introduction of certain Profits Tax provisions under which specified amounts which had a source outside Hong Kong were nonetheless deemed to be taxable, limited relief (by way of deduction) for foreign taxes suffered on such amounts was introduced by Sec. 16(1)(c). This provision is discussed in section 4.5.8. (2) The IRD has accepted that in certain circumstances a deduction for foreign taxes may be available under the general deduction provision of Sec. 16(1). Again, this is discussed in section 4.5.8. (3) Reciprocal exemptions are provided to certain non-resident Chapter 10 Miscellaneous Matters 685 shipping companies and non-resident aircraft-owning businesses pursuant to agreements entered into between Hong Kong and other jurisdictions. These agreements are discussed in sections 4.7.4 and 4.7.6. (4) More recently, Hong Kong has entered into a number of comprehensive DTAs which provide for relief from double taxation and it is expected that more such agreements will be entered into in due course. The effect of such agreements is discussed in Chapter 11. For a more comprehensive discussion of the issue of double taxation in an international context and the means by which it is addressed generally, see Chapter 11. 10.2 Exemptions The IRO contains specific exemptions from each of the taxes in...