Newfair’s Tax Planning in Hong Kong

Hong Kong is often referred to as a tax haven, primarily due to its territorial tax system: profits sourced within the Special Administrative Region (SAR) are taxed, while those sourced outside the SAR are exempt. According to Section 14(1) of the Inland Revenue Ordinance:

Except as otherwise provided in this Ordinance, any person carrying on a trade, profession, or business in Hong Kong is chargeable to profits tax on profits arising in or derived from Hong Kong from such trade, profession, or business (excluding profits from the sale of capital assets) for each year of assessment.

However, in recent years, the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD) have repeatedly criticized this tax system for facilitating corporate tax avoidance. Last year, the EU placed Hong Kong on its grey list of tax havens, demanding that the SAR government impose economic substance requirements for offshore income tax exemptions. In response, the Hong Kong government pledged to amend its tax laws in line with EU requirements, though as of May 29, 2022, no progress had been made.

In practice, the Hong Kong Inland Revenue Department (IRD) has tightened its stance on recognizing offshore income. Essentially, even the slightest local element in a business operation could lead the IRD to classify the income as locally sourced and therefore taxable. It has become increasingly difficult for companies to enjoy offshore tax exemptions. We strongly advise businesses not to claim offshore income tax exemptions without the guidance of professional tax consultants. In international tax planning, it is often better to pay taxes strategically than to avoid them entirely.

That said, on April 20, 2022, the Court of First Instance of the High Court of Hong Kong ruled in favor of the taxpayer, Newfair Holdings Limited (Newfair), in the case of Newfair Holdings Limited v Commissioner of Inland Revenue. Newfair successfully claimed offshore income tax exemptions. While the IRD may appeal the decision, the case provides valuable insights for companies seeking to plan for offshore tax exemptions in Hong Kong.