On 19 August 2020, the government of the United States (“the US”) announced that the agreement in respect of double taxation relief on income derived from the international operation of ships entered into between the US and Hong Kong (“the Agreement”) has been terminated.
Pursuant to the Agreement, which has been effective since 1989, income derived by the residents of a contracting state (including individuals and corporations) from the international operation of ships shall be exempt from payment of income tax in the other contracting state, provided that certain conditions can be met. The exempted income includes but is not limited to income from rental of ships, containers and related equipment used in the international transport as well as income from the participation in marine transport pools.
For a corporate taxpayer which is a Hong Kong tax resident, it is required to meet, amongst others, either one of the following conditions in order to be entitled to the income tax exemption:
(i) its stock is primarily and regularly traded on an established securities market in Hong Kong, or in another country which grants an equivalent exemption to the US corporations, or the US; or
(ii) more than 50% of the value of the corporation’s stock is owned, directly or indirectly, by individuals who are residents of Hong Kong or of a country which grants an equivalent exemption to the US corporations, or by a corporation organised in a country which grants an equivalent exemption to the US corporations and whose stock is primarily and regularly traded on an established securities market in that country, or in another country which grants an equivalent exemption to the US corporations, or the US.
As a result of the termination of the Agreement, corporations, which are engaged in the operation of international shipment between the US and Hong Kong, may be subject to double taxation in the US and Hong Kong.
Having said the above, it is suggested the relevant corporations to ascertain the tax consequences arising from the termination of the Agreement. In addition, they should conduct a thorough review on their tax positions, such as the tax exposures in the US and Hong Kong, and explore the possible way(s) to mitigate the tax liabilities. Our firm HKWJ Tax Law & Partners Limited can provide the relevant tax assistance, if necessary.