IRD clarified various profits tax and stamp duty issues in recently published minutes of its 2024 annual meeting with the HKICPA

The tax treatments clarified included:

(i) foreign mergers under universal succession where Hong Kong branches of foreign companies were involved would be similar to a qualifying amalgamation carried out under the Companies Ordinance of Hong Kong, if the anti-avoidance provisions contained in section 61A and 61B of the Inland Revenue Ordinance (IRO) were not invoked;

(ii) provision of long service payment (LSP) made as a result of the abolition of the offsetting of employers’ contributions to mandatory provident funds (MPF) or other retirement schemes against LSP payable to employees would be tax deductible, regardless of which one of the two equally acceptable accounting treatments endorsed by the Hong Kong Institute of Certified Public Accountants (HKICPA) was adopted;

(iii) except for unilateral tax credit in limited situations, foreign tax credit (FTC) would only be granted in Hong Kong if a taxpayer was chargeable to tax overseas in accordance with the terms of a comprehensive avoidance of double taxation agreement (CDTA). As such, taxes paid overseas on service income in a CDTA-jurisdiction that was also taxable in Hong Kong would not be creditable in Hong Kong, if the taxpayer had no permanent establishment (PE) in the overseas CDTA-jurisdiction. Where there was a PE, the limit of the FTC would need to be calculated on an actual rather than a deemed profit basis;

(iv) the term “brought into account for tax purposes” under the tax certainty enhancement scheme (TCES) was intended to mean equity interests that were trading stock would be ineligible for the TCES;

(v) notwithstanding the complicated accounting treatment for sale and leaseback arrangements under Hong Kong Financial Reporting Standard 16 (HKFRS 16), the tax consideration would still be whether the income recognized in, or expense charged to the profit and loss account represented a non-taxable/non-deductible capital item or a taxable/deductible revenue item; and

(vi) distribution of Hong Kong stocks or immovable properties of a general or limited partnership upon the termination of the partnership on a pro-rata basis to its partners, with reference to their respective capital accounts contributions to the partnership would not attract stamp duty in Hong Kong.

The views expressed by the Inland Revenue Department (IRD) on the issues however only represent how the IRD would interpret the various provisions of the IRO as applied to the given facts.

While such views provide some guidance on how the provisions would generally be construed, the application of the provisions to certain other factual situations could be different.

Clients who have any questions on how the provisions would apply to their situations should contact their tax executives.