What are the circumstances in which corporations doing business in Hong Kong are exempted from the property or profit tax?


In this blog we will explore that under what circumstances a corporation or group of people owning a land and / or business in Hong Kong is exempted from the property and profits tax under Hong Kong tax law. Then we will be seeing, when property tax is applicable to the resident of Hong Kong in actual and the obligation of property owners in term of completing the tax returns. We will be starting with an example.

Considering an example, the assessment of property tax for the assessment year 2014 to 15 has to be calculated according to the procedure given below:

Mr. Wong

Property C

Assessment year 2014 to 15 (revised)

Basic period: 1 April 2014 to 31 March 2015

 

Assessable value (12 * $ 15,000)                                                    $ 180,000

Less: rates paid by Mr. Wong                                                       $ (4,000)

Bad debt                                                                     $ (45,000)

                                                                                        -------------

                                                                            $ 131,000

Less: Statutory deductions (20 % * $ 131,000)                                   $ (26,200)

                                                                                      -------------

Net assessable value                                                                       $ 104,800

                                                                                      --------------

Property tax thereon (15 % * $ 104,800)                                                $ 15,720

Net Assessable Value

Under the Section 5 (1A) (b) (ii) of Hong Kong tax law, a statutory deduction for outgoings and repairs of 20 % is to be deducted from the assessment if the assessment value is positive after deduction of rates (if applicable) and bet debts that are eligible (if applicable) to reach at net assessable value. Under the property tax no other deduction of any type is allowed.

In a case D 46/12 it was observed that, a deduction was claimed by T for the purpose of government tax, management fees and repairs under property tax for Hong Kong holding company formation or any other purposes. It was the stance of T that, under Section 5, 20 % statutory deduction is only applicable to landlords that are of ordinary class. So according to him it would be unfair to apply such deductions on landlords like him, whose properties were situated in buildings which had gone through major repairs. The appeal of T was dismissed by board of revenue as the Inland Revenue department have right to follow the statutory provisions of 20 % allowance.

Property Tax or Profit Tax

 

In case of profit tax, it would be implemented on the rental income from buildings and lands if the income is carried on by recipient that is received as a consequence of business or trade.

 

The amounts as discussed below, to the carrying on of a business or trade:

 
  • Under Section 2 (1), it is considered to be a business for letting or subletting a property for making a Hong Kong holding company formation to commence its business or for any other purposes.
  • Subletting of property by any other person of any establishment by not company itself specifically; or any part of any site that is held by him under a tenancy or lease that is other than from HKSAR Government.
  • If any site is occupied by a person who is mere licensee, then the rental income that is derived by that person by allowing other person to use the sites is not allowed to property tax or profits tax. This is due to the reason that property is not held by him under tenancy or lease. Seeing an example, a quarter is provided by employer to employee. As there was no tenancy agreement between employee and employer, the employee was considered as mere licensee. If the room of quarter is subleased by employee that was provided to him by his employer. The income that was obtained by him as a result of subleasing the room of quarter is not subjected to tax on property or profits.   
  • Letting of sites together with license, plant and machinery etc. This is a matter of fact that whether such a business is conducted by an owner. In a case R 3/81 it was observed that, a property was leased by owner to his / her tenant for the operation of a ballroom. The equipment and furniture to operate the ballroom along with license for ballroom was provided by owner in addition to the sites. It was held by board that, the rental income from subleasing and business carried out by owner was allowed to profits tax. In a case Kwong Kwan-nang it was observed that the items like furniture and fittings, leasing of cinema together with plant, equipment and use of license for cinema was held to amount to a business. And it was not only the passive receipt of rental.
 

In the situation discussed above, all the recipients of rent other than those discussed in second category may have been required to pay tax on property. Although the consideration leasing is allowed to tax on profits.

 
  • Exemption for Corporations under Section 5(2)(a)

  •  
    • For the application in disallowance from tax on property can be granted to a corporation carrying on a trade, writing business or profession in Hong Kong given that:
     
    • Under Section 5 (2) (a), the property that is occupied or used to produce the chargeable profits.
     
    • Profits obtained from the concerned property are part of the profits of trade etc. and carried out by the company (i.e. allowed to profits tax).
 

After the allowance of an exemption, CIR must be notified by the corporation within the 30 days after change of ownership or in case any other conditions that effected the exemption under Section 5 (2) (c). Any property tax that is paid against the profit tax that is payable can be set-off by a corporation if no exemption has been asked given that any one of two conditions for exemption from such property tax is satisfied under Section 25.

 

In a case of Harley Development Inc. it was observed that, in consideration of a once-and-for all premium having worth of $ 119 million, the lease was granted by taxpayer Company for 30 years to HSBC. The sum to profits tax was assessed by the Inland Revenue department but finally it was agreed that these sum to profit tax was not allowable to salary tax probably due to the reason that it was capital in nature, so sum was assessed for property tax. Under the Section 5 (2) (a), the company applied for judicial review and main reason behind it, was that sum should be exempt from property tax. It was observed from the case that a sum having capital nature and thus exempted from tax on profits that allowed to property tax.

  

In a case D 84/04 it was observed that, a telecommunication company was granted the access by a club to use its sites to install the equipment for the sake of doing business in Hong Kong in the field of communication technologies. The considerations that were received by the club as a result of leasing its premises were allowed to property tax, as the club was part of a corporation. Under Section 24 (1), the club was exempted from the profits tax. It was ruled by board of revenue department that the exemption was not allowed for the club under Section 5 (2) and it was chargeable to profits tax.

  

Partnerships and Sole Proprietors

 

From the profits tax payable, the property tax payable or paid can be deducted if:

 
  • Under Section 5 (2) (a), the property that is occupied or used to produce the chargeable profits.
  • Profits obtained from the concerned property that may be used for making a Hong Kong limited company formation is part of the profits of business or profession and trade etc.
 

The excess will be refunded in the case if paid property tax exceeds the liability of profit tax.

 

The Section 25 allows setting-off, not to be exempted. It is still required by the owner to pay tax on property first and then to claim a refund or set-off.

 

Discussing an example to understand such situation, a company named as J Ltd. It was incorporating its business in Japan. A warehouse was purchased by that company in Hong Kong and an unrelated property agent was appointed by that company to look for the tenants and to collect the rent from those tenants on behalf of the company. In respect of the leasing total rental income of worth $ 2,000,000 was received by the company during the year ended 31 March 2016. There were no other business activities of J Ltd. in Hong Kong but under Section 2, it was seen of carrying a business in Hong Kong. This consideration was due to the fact that company had let a non-moveable property in Hong Kong for rental income. For the assessment year 2015 to 16 J. Ltd. was liable to pay the tax on profits in respect of its warehouse in Hong Kong. It was not realized by J. Ltd. that it can claim the exemption from the property tax under Section 5 (2) (a), so it paid the property tax of amount $ 240,000 i.e. (80 % * 15 % * $ 2,000,000) for the assessment year 2015 to 16.

 

It was incurred by J. Ltd. that its allowable business expenses were $ 800,000 that also included the commission which paid to property agent for the year ended 31 March 2016. For the assessment year 2015 to 16 J. Ltd. was payable to profits tax of $ 198,000 i.e. (16.5 % * ($ 2,000,000 - $ 800,000)). Set-off of property tax that was paid against the tax on profits payable under Section 25 can be claimed by J Ltd. such that refund of an amount of $ 42,000 (i.e. $ 240,000 - $ 198,000) can be claimed by it.

 

Responsibilities of Property Owners 

 

It is required by a property owner to:

 
  • Complete the return on tax, Form 61 for properties that is owned solely for sole proprietorship HK; Form 57 for properties that is not owned solely by an individual and Form 58 for properties that is owned by a body of persons or corporation and may be used for Hong Kong limited company formation under Section 51 (1). Person have to return it to Inland Revenue department within the time limit decided by respective board and stipulated into the tax return. The time limit is usually one month from the issuing of the return.
  • Notify in writing to CIR within 4 months after the end of concerned assessment year that he is chargeable to property tax if a return is not received by him for that assessment year under Section 51 (2).
  • To notify the Inland Revenue department in writing the change of ownership within one month after transfer or sale of his property is effected under Section 51 (6).     
  • To notify the CIR in writing of his change address of the certain of change within one month if he his allowable to property tax under Section 51 (8).    
  • Keep enough records of rent received, such as duplicate of rent receipts and lease agreements for a period of 7 years or more to enable his liability for tax to be ascertained readily unless:
  • The rent records are specific to a corporation and the corporation has been dissolved in accordance with Section 51 D.
  • It has been specified by CIR that there are requirements to preserve the records of rent.
  

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