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Frequently Asked Questions & Answers on Completion of Supplementary Form S16 – Qualifying ship agent (applicable for year of assessment 2022/23 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
Section 1 – Basis Period
1.
Q:
Can I report different basis periods for the return and the form?
A:
No. The basis period of both of the return and the form should be the same.
Section 2 – Business Operations
2.
Q:
Other than qualifying ship agency activities, I also carried out other activities during the basis period but those activities did not generate any income. Which box should I tick for section 2.1?
A:
You should tick the first box.
3.
Q:
What is meant by the "safe harbour rule" for section 2.2? How do I know if I meet the rule?
A:
The “safe harbour rule” refers to the meeting of the minimum average percentages, as prescribed in sections 3 and 4 of Schedule 17FB to the Inland Revenue Ordinance (“IRO”), for the ship agency profits and the ship agency assets in order to be a qualifying ship agent that has carried out in Hong Kong activities other than a qualifying ship agency activity. There are two alternative safe harbours: (a) the “1-year safe harbour” in section 14ZE(2); and (b) the “multiple-year safe harbour” in section 14ZE(3).
4.
Q:
I carried out qualifying ship agency activities on behalf of a principal which has dual/multiple roles (e.g. a ship lessor and a ship leasing manager) during the basis period. How should I fill in for section 2.3?
A:
Each principal should only be counted once, irrespective of the number of roles it has. If necessary, please ascertain from the principal on its principal activities being carried out during the basis period and fill in section 2.3 accordingly.
5.
Q:
What is meant by "associated or connected principals"?
6.
Q:
What is meant by “associated corporations”?
A:
| Under section 1(1) of Schedule 17FB to the IRO, a corporation is an associated corporation of another corporation if – | ||
| (a) | the other corporation has control over the corporation; | |
| (b) | the corporation has control over the other corporation; or | |
| (c) | the corporation is under the control of the same person as is the other corporation. | |
7.
Q:
What is meant by “connected persons”?
A:
| Under section 1(1) of Schedule 17FB to the IRO, a person is a connected person of a corporation if the person is – | |||
| (a) | an associated corporation of the corporation; | ||
| (b) | a person (other than a corporation) – | ||
| (i) | over whom the corporation has control; | ||
| (ii) | who has control over the corporation; or | ||
| (iii) | who is under the control of the same person as is the corporation; or | ||
| (c) | a partnership in which the corporation or its associate is a partner. | ||
8.
Q:
I have no information as to whether the associated or connected principals, on behalf of which I carried out specified activities, are associated qualifying ship lessors, associated qualifying ship leasing managers or connected ship operators. How should I fill in for section 2.4?
A:
Please ascertain from the principals as to whether they are associated qualifying ship lessors, associated qualifying ship leasing managers or connected ship operators. You should provide the information to the best of your knowledge.
9.
Q:
I carried out qualifying ship agency activities for an associated qualifying ship leasing manager, which only carried out qualifying ship leasing management activities for independent qualifying ship lessors. Should I include this associated qualifying ship leasing manager in section 2.4?
A:
No.
10.
Q:
I carried out qualifying ship agency activities for a connected ship operator and all the income derived by the operator from its ship operation activities were sums falling within the definition of “relevant sums” in section 23B(12) of the IRO. Should I include this connected ship operator in section 2.4?
A:
No.
11.
Q:
I have no information as to the jurisdictions of tax residence of the principals that transacted with me. How should I fill in for section 2.5?
A:
Please ascertain from the principals on their jurisdictions of tax residence. You should provide the information to the best of your knowledge.
12.
Q:
For the purpose of section 2.5, do I need to state the exact amount of income derived from each of the principals which are not Hong Kong tax residents?
A:
No. You only need to state the names of the three main jurisdictions of tax residence of the principals which are not Hong Kong residents. If there are less than three jurisdictions, just state the name(s) of the relevant jurisdiction(s).
13.
Q:
How should I determine whether a jurisdiction is a "main" one?
A:
You are required to provide the names of three jurisdictions of the principals from where you have received the greatest amount of the income in aggregate during the basis period.
Section 3 – Assessable Profits or Adjusted Loss
14.
Q:
Should I report the items under section 3 of the form on the group consolidated basis?
A:
No. You should report the data of your own business.
15.
Q:
If I have prepared financial statements for a period of more than 12 months (or less than 12 months), how should section 3 be completed? Should the amounts be apportioned or grossed up to show figures for a 12-month period?
A:
It is not necessary to apportion (or gross up) the figures if the financial statements for a period of more (or less) than 12 months have been prepared. Amounts extracted from the Statement of Comprehensive Income/Profit and Loss Account should be used in completing section 3.
16.
Q:
What is the relationship among the assessable profits/(adjusted loss) to report under sections 3.4 to 3.6?
A:
For section 3.4, you should report your total assessable profits/(adjusted loss) from all sources of activities, and the amount should match with that reported on the return and your tax computation. However, in ascertaining your assessable profits/(adjusted loss), the profits/(loss), to the extent specified in section 14ZD(3) of the IRO, derived from qualifying ship agency activities for connected ship operators which carried out any activity in the operation of a ship should be excluded by virtue of section 14ZD(2) of the IRO. For section 3.5, you should report the assessable profits/(adjusted loss) only in relation to the concessionary trading receipts from the qualifying ship agency activities, which are chargeable at concessionary tax rates under section 14ZD(1) of the IRO. For section 3.6, you should report the assessable profits/(adjusted loss) which do not fall into the scope of the concessionary trading receipts reported for section 3.5. The amount reported under section 3.4 should be the sum of each amount reported under sections 3.5 and 3.6.
Section 4 – Activities Producing Qualifying Profits Chargeable At Concessionary Tax Rate ("Relevant Activities")
17.
Q:
What is meant by "Qualifying Profits"?
A:
It refers to the profits from the qualifying ship agency activities of a qualifying ship agent, which are qualified for concessionary tax rates under section 14ZD(1) (as read together with section 14ZD(2)) of the IRO..
18.
Q:
I carried out more than one Relevant Activities during the year, but some of them have ceased now. What should I tick for section 4.1?
A:
You should tick the boxes for all the Relevant Activities that you carried out during the basis period even though some of them have ceased after the basis period.
19.
Q:
For section 4.2, what is the difference between the Relevant Activities carried out by the employees of associated person(s) in the first box and the Relevant Activities carried out by the taxpayer's associated person(s) in the second box?
A:
For the scenario in the first box, it generally refers to the situation that the employees of the associated person(s) are assigned/seconded to work for the taxpayer. For the scenario in the second box, it involves the engagement of the service of the associated person(s) at a fee charged to the taxpayer on an arm’s length basis. Please refer to the examples in Note 19 and Note 20 of the form for details.
20.
Q:
If the associated person does not have Business Registration Number, how should I fill in for section 4.3?
A:
Please provide the name of the associated person and state “NA” for the Business Registration Number.
21.
Q:
How should I report if the full-time employee who carried out the Relevant Activities has dual/multiple roles or capacities in the company?
A:
As long as the employee was a full-time staff who carried out the Relevant Activities, then no matter the number of roles or capacities he/she had in the company, he/she should still be counted as a full-time staff. Regarding the requirement for and the basis of counting the average number of the full-time employees, please refer to Note 21 and Note 23 of the form for details.
22.
Q:
What do employees with the "necessary qualifications" refer to?
A:
It refers to the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic /professional qualifications /with relevant working experiences in relation to the Relevant Activities.
23.
Q:
All of my employees or the employees of the associated person in Hong Kong who carried out the Relevant Activities were employed on a part-time basis, what should I fill in for section 4.4?
A:
If all of the employees are under part-time employment, they should not be counted for the purpose of section 4.4. However, an employee who worked partly for your company and partly for other companies in the same group in Hong Kong should be treated as a full-time employee.
24.
Q:
What type of employee should I report as “Others” in section 4.4?
A:
You should report the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic /professional qualifications in relation to the Relevant Activities.
25.
Q:
What is meant by “operating expenditure incurred in Hong Kong for the Relevant Activities” in section 4.5? Do I need to provide a breakdown of the expenditure?
A:
It refers to the operating expenses that were incurred in Hong Kong for the production of the qualifying profits from the qualifying ship agency activities. There is no need to provide a breakdown of the expenditure. Regarding the requirement for the total amount of the operating expenditure, please refer to Note 24 of the form for details.
26.
Q:
Regarding “operating expenditure incurred in Hong Kong for the Relevant Activities”, Note 25 of the form stated that “the amount of operating expenditure reported should include the remunerations borne by the Taxpayer in respect of the employees of the associated person(s) who carried out the Relevant Activities, and/or the service fee incurred by the Taxpayer for the Relevant Activities carried out by the associated person(s)”.
Suppose a taxpayer is recharged by an associated person in one lump sum which includes cost of management support, office and administrative charges, and staff remuneration etc. for both Relevant Activities and other activities. But the taxpayer has difficulty to allocate the expenditure incurred in Hong Kong for the Relevant Activities specifically. What cost allocation method would be accepted by the IRD for the purpose of reporting under this section?
A:
The taxpayer may consider to allocate the cost attributable to the Relevant Activities and other activities respectively by reference to a basis as to reasonably reflect the contributions by the employees to the carrying out of the Relevant Activities, e.g. by income or working time. Please note that for any activity which does not generate income to the taxpayer, it should not be allocated with any of the operating expenditure.
Section 5 – Other Information
27.
Q:
What is meant by the term “central management and control”?
A:
It refers to the highest level of control of the business of a company. The “central management and control” requirement is the same as the one for concessions for qualifying ship lessors and qualifying ship leasing managers. For details, please refer to paragraphs 79 to 83 of the Departmental Interpretation & Practice Notes No. 62.