Based on the above arrangement which suggests that the various conditions for enjoying the ship leasing tax concession are met, the IRD ruled that the applicant is a “qualifying ship lessor” and its assessable profits from qualifying ship leasing activities are eligible for the concessionary tax rate of 0%. The ruling applies for 5 years of assessment from 2024/25.

While the fact pattern of this case is relatively straightforward, the case offers several practical insights for taxpayers wishing to enjoy the ship leasing tax concession:

• The ruling mentions that the applicant does not have any branch, place of business nor employee outside Hong Kong. In practice, when assessing whether a taxpayer has sufficient business substance in Hong Kong for the purposes of the tax concession, the IRD may perform a comparison of the taxpayer’s business substance relating to the ship leasing business in and outside Hong Kong.  The absence of or limited substance relating to the ship leasing business outside Hong Kong may serve as a positive factor to support that the necessary substance to carry out the ship leasing business is in Hong Kong. Taxpayers wishing to benefit from the tax concession should take into consideration this comparative approach when evaluating their eligibility.
• The ruling does not specify whether the full-time qualified employees carrying out the activities producing the ship leasing profits of the applicant are employed by the applicant or another group company.  In practice, it is common for the entities wishing to enjoy the tax concession to be special purpose vehicles (SPVs) set up within the ship leasing group for holding and leasing out the vessels. These SPVs are unlikely to have its own employees so will need to rely on the qualified personnel employed by other group companies for the purposes of meeting the substantial activities requirement.
  The Departmental Interpretation and Practice Notes (DIPN) No. 62  indicates that outsourcing of core income generating activities to an associated person in Hong Kong is permitted for the purposes of satisfying the substantial activities requirement, subject to certain requirements.  In such cases, the ship leasing groups would need to consider issues such as putting in place a proper outsourcing arrangement, charging arm’s length fees for the services rendered by the group companies and keeping sufficient documentation.
• This ruling only concerns the application of the tax concession for ship lessors. Similar tax concession is available to ship leasing managers in Hong Kong if the specified conditions are met. Ship leasing groups with a group entity functioning as a ship leasing manager should explore whether they are eligible for the ship leasing manager tax concession as well.
• Separately, MNE groups that are in-scope of BEPS Pillar Two and engaging in ship leasing business should take note of the international shipping income exclusion under the GloBE rules. These business groups should carefully assess how the ship leasing tax concession in Hong Kong interacts with the international shipping income exclusion under the Hong Kong minimum top-up tax (HKMTT) regime and consider whether actions are required to optimise the overall tax outcome from both the Hong Kong profits tax and HKMTT perspectives.

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1 Advance Ruling Case No.78 can be accessed via this link: https://www.ird.gov.hk/eng/ppr/advance78.htm