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Company Re-domiciliation Regime
The contents of this page are based on the Companies (Amendment) (No. 2) Bill 2024 which is subject to scrutiny by the Legislative Council. Readers are reminded to be alerted to the latest development upon enactment of the Bill.
Hong Kong is a leading destination for business and investment, renowned for the ease of doing business with the underpinning of a strong tradition of rule of law. To strengthen our position as a global business and financial hub, the Government proposed to introduce an inward company re-domiciliation regime (the Regime) which allows companies domiciled elsewhere to transfer their domicile to Hong Kong.
Under the Regime, non-Hong Kong incorporated companies that have successfully registered as re-domiciled companies under the Companies Ordinance (Cap. 622) (CO) are able to preserve their legal identity and maintain their business continuity. The Companies (Amendment) (No. 2) Bill 2024 (the Amendment Bill) was gazetted on 20 December 2024 to amend the CO and other related ordinances including the Inland Revenue Ordinance (Cap. 112) (IRO) in order to put in place the Regime in Hong Kong.
Hong Kong does not impose tax on the basis of residence or domicile. Under section 14 of the IRO, any persons, including corporations, partnerships, trustees and bodies of persons, carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business.
If a non-Hong Kong incorporated company has carried on a trade, profession or business in Hong Kong before it re-domiciles to Hong Kong and has profits chargeable to tax from such trade, profession or business before its re-domiciliation, it will have profits tax liabilities from such profits. Re-domiciliation will not relieve the company from its profits tax liabilities in respect of the pre-domiciliation period.
If, however, a non-Hong Kong incorporated company has never carried on any trade, profession or business in Hong Kong before it re-domiciles to Hong Kong, no profits tax will be charged on the company for the period before it commences business in Hong Kong.
The legislative amendments to the IRO are not applicable to the situation where a re-domiciled company has carried on the same trade, profession or business in Hong Kong before and after re-domiciliation. They are only applicable to the situation where a re-domiciled company has carried on a trade, profession or business outside Hong Kong before re-domiciliation and commences to carry on the same or another trade, profession or business in Hong Kong after re-domiciliation. The main aspects covered by the legislative amendments to the IRO are as follows─
| (a) | Adding general interpretation provisions under section 2 of the IRO to the effect that references therein to a company “incorporated in Hong Kong” include a re-domiciled company and references to a company “incorporated outside Hong Kong” exclude a re-domiciled company. | ||||
| Generally speaking, under the comprehensive avoidance of double taxation agreements or arrangements (CDTA) signed between the Hong Kong Special Administrative Region (HKSAR) and other jurisdictions, a resident of the HKSAR is defined for the purpose of the CDTA to mean, among others, a company incorporated in the HKSAR or, if the company is incorporated outside the HKSAR, being normally managed or controlled in the HKSAR. By adding the above general interpretation provisions to the IRO, when construing the term “resident of the HKSAR” under the CDTA, a re-domiciled company will also be regarded as a company incorporated in Hong Kong and in turn a resident of the HKSAR. | |||||
| (b) | Introducing new Schedule 17L to the IRO to address matters regarding transitional tax arrangements and elimination of double taxation: | ||||
| Transitional tax arrangements | |||||
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General conditions for deduction of expenses or expenditures |
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| - | Any expense or expenditure incurred in the production of the assessable profits of a re-domiciled company is to be allowed for deduction to the extent that no deduction─ | ||||
| (i) | is allowable in respect of the expense or expenditure for the purposes of profits tax under other provisions of the IRO; and | ||||
| (ii) | has been allowed in respect of the expense or expenditure for a similar tax imposed under the law of a place outside Hong Kong. | ||||
| - | Without limiting the deduction criteria imposed by other provisions under Division 4 of Part 4 of the IRO, the general conditions apply to all expenses or expenditures incurred by re-domiciled companies before re-domiciliation which are deductible for the purposes of profits tax. | ||||
| Other conditions for deduction of specified types of expenses or expenditures | |||||
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- | Without limiting sections 15BA and 15C of the IRO, deduction of trading stock, which was acquired by a re-domiciled company before re-domiciliation and is used for a trade or business in Hong Kong after re-domiciliation, is based on the lower of the cost or net realizable value on the re-domiciliation date (i.e. the date on which a certificate of re-domiciliation is issued to the re-domiciled company under the CO). | |
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- | The following expenditures which were incurred by a re-domiciled company before re-domiciliation─ | |
| (i) | sum expended for the registration of a trade mark or design, the registration or grant of a patent or plant variety right under section 16(1)(g) of the IRO; | ||
| (ii) | expenditure on the renovation or refurbishment of a building or structure within the meaning of section 16F of the IRO; or | ||
| (iii) | R&D expenditure related to an R&D activity for the purposes of section 16B of the IRO, | ||
| are taken to have been incurred by the re-domiciled company in the basis period of the year of assessment in which the re-domiciled company begins to use the respective asset or right for any trade, profession or business in Hong Kong (Hong Kong business), or the relevant activity becomes an R&D activity related to the Hong Kong business. | |||
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- | The following expenditures which were incurred by a re-domiciled company before re-domiciliation─ | |
| (i) | expenditure on the purchase of any patent rights or rights to any know-how within the meaning of section 16E(4) of the IRO; or | ||
| (ii) | specified capital expenditure within the meaning of section 16EA, 16G or 16H of the IRO, | ||
| are taken to have been incurred by the re-domiciled company in the basis period of the year of assessment in which the re-domiciled company begins to use the specified asset or right for the Hong Kong business, and the deductible amount is (A) or (B) below, whichever is the lower─ | |||
| (A) | the aggregate of the actual amount of specified expenditure minus the accumulated amortization and impairment losses in respect of the specified asset or right up to the re-domiciliation date; | ||
| (B) | the market value of the specified asset or right as at the re-domiciliation date. | ||
| Depreciation allowance for machinery or plant | ||||||
| - | A re-domiciled company is entitled to claim depreciation allowances in respect of the machinery or plant if it─ | |||||
| (i) | has incurred capital expenditure on the provision of machinery or plant in relation to a trade, profession or business carried on outside Hong Kong before the re-domiciliation date; and | |||||
| (ii) | uses the machinery or plant for any Hong Kong business on or after the re-domiciliation date. | |||||
| - | The capital expenditure on the provision of machinery or plant incurred by the re-domiciled company before the re-domiciliation date is taken to have been incurred for producing profits chargeable to tax under Part 4 of the IRO by the re-domiciled company in the basis period for the year of assessment in which the re-domiciled company begins to use the machinery or plant for the Hong Kong business. | |||||
| - | The amount of the capital expenditure for calculating depreciation allowances under section 37, 37A or 39B of the IRO is determined as follows─ | |||||
| Is the machinery or plant acquired under a hire purchase agreement? | Amount of the capital expenditure | |||||
| No | (C) or (D) below, whichever is the lower─ | |||||
| (C) | the actual cost of the machinery or plant minus the notional amount of the annual allowance which would have been made under section 37(2) or 39B(2) if the machinery or plant had been used by the re-domiciled company for producing profits chargeable to tax after its acquisition; | |||||
| (D) | the market value of the machinery or plant as at the re-domiciliation date. | |||||
| Yes | For the year of assessment of the re-domiciliation year (i.e. the year of assessment in which the re-domiciliation date falls): | |||||
| - | an amount which is determined in accordance with the following formula: | |||||
| E | x G | |||||
| F | ||||||
| where: | E | means the capital portion of the instalment payments made by the re-domiciled company up to the end of the basis period for the re-domiciliation year; | ||||
| F | means the capital portion of all the instalment payments required to be made by the re-domiciled company under the hire purchase agreement; and | |||||
| G | means the lower of the above (C) or (D). | |||||
| For any year of assessment after the re-domiciliation year: | ||||||
| - | an amount which is determined in accordance with the following formula: | |||||
| H | x J | |||||
| I | ||||||
| where: | H | means the capital portion of the instalment payments made by the re-domiciled company in the basis period for the year of assessment; | ||||
| I | means the capital portion of all the instalment payments required to be made by the re-domiciled company under the hire purchase agreement; and | |||||
| J | means the lower of the above (C) or (D). | |||||
| Insurance business | |||||
| - | The supplementary provisions for section 23 (life insurance business) or section 23AAA (non-life long term insurance business) of the IRO under Schedule 17L to the IRO are applicable to the company as mentioned below that is a re-domiciled insurer within the meaning of section 3BA or 3BB of the Insurance Ordinance (Cap. 41) if the following conditions are satisfied─ | ||||
| Non-HK insurer that was not a designated insurer immediately before the date on which it becomes a re-domiciled insurer (the critical date) |
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| Non-Hong Kong incorporated company that was not an authorized insurer before the critical date | |||||
| - | The deficit or surplus as at the date immediately before the critical date that is attributable to the life or non-life long term insurance business carried on by the re-domiciled insurer outside Hong Kong (hereafter referred to as “specified deficit” or “specified surplus”) has to be taken into account in ascertaining the adjusted surplus of the re-domiciled insurer deemed to arise in the critical basis period (i.e. the basis period in which the critical date falls) as follows─ | |||||
| (i) | if a report is made under section 23(2) in respect of a period ending immediately before the critical basis period─
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| (ii) | if no report has been made─
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Elimination of double taxation |
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| - | If a re-domiciled company has paid tax in its place of incorporation which is of substantially the same nature as profits tax (specified tax) in respect of its unrealized income or profit (specified income) because of company re-domiciliation, and after re-domiciliation, profits tax under Part 4 of the IRO is also payable on the actual income or profit derived by the re-domiciled company, unilateral tax credits are available to the company for elimination of double taxation in the re-domiciliation year or any subsequent year of assessment. | |
| - | The amount of the actual income or profit for a particular year of assessment must not exceed the specified income (relevant income). In addition, the amount of the tax credit for a particular year of assessment is capped at the lower of the specified tax paid or the profits tax payable on the relevant income. | |
| - | Any excess amount of the specified tax paid over the cap of the tax credit will be allowed for deduction in ascertaining the assessable profits of the re-domiciled company for the particular year of assessment. | |
Example 1
Company A carried on a business in its place of incorporation (Jurisdiction A) and acquired a batch of financial instruments at a cost of $1,000,000 for trading purpose before re-domiciled to Hong Kong.
The financial instruments remained unsold and were valued at $1,100,000 as at the re-domiciliation date and Company A has been charged to corporate income tax of Jurisdiction A in respect of the unrealized profits of $100,000 at a tax rate of 20%. The corporate income tax of Jurisdiction A is of substantially the same nature as Hong Kong profits tax.
After re-domiciled to Hong Kong, the same batch of financial instruments was disposed of by Company A at $1,200,000 in the re-domiciliation year (Year 1).
Though the actual profits derived by Company A from the disposal of the financial instruments in Year 1 are $200,000, the amount of the relevant income for the purpose of calculating the amount of the tax credit allowed to Company A is capped at $100,000.
The amount of the tax credit allowed to Company A for Year 1:
| (a) | Specified tax paid: $100,000 x 20% = $20,000 |
| (b) | Profits tax payable: $100,000 x 16.5% = $16,500 |
- The amount of the tax credit is capped at $16,500.
- The excess amount of $3,500 ($20,000 − $16,500) is allowed to be deducted in ascertaining the assessable profits of Company A for Year 1.
Example 2
Same as Example 1, but Company A sold out 60% of the financial instruments in the re-domiciliation year (Year 1) and the remaining stock in the subsequent year of assessment (Year 2) at $700,000 and $600,000 respectively.
The amount of the relevant income:
| Year 1 | |
| (a) | Specified income: ($1,100,000 - $1,000,000) x 60% = $60,000 |
| (b) | Actual profits: $700,000 – ($1,000,000 x 60%) = $100,000 |
- The amount of the relevant income is capped at $60,000.
| Year 2 | |
| (a) | Specified income: ($1,100,000 - $1,000,000) x 40% = $40,000 |
| (b) | Actual profits: $600,000 – ($1,000,000 x 40%) = $200,000 |
- The amount of the relevant income is capped at $40,000.
The amount of the tax credit allowed to Company A:
| Year 1 | |
| (a) | Specified tax paid: $60,000 x 20% = $12,000 |
| (b) | Profits tax payable: $60,000 x 16.5% = $9,900 |
- The amount of the tax credit is capped at $9,900.
- The excess amount of $2,100 ($12,000 − $9,900) is allowed to be deducted in ascertaining the assessable profits of Company A for Year 1.
| Year 2 | |
| (a) | Specified tax paid: $40,000 x 20% = $8,000 |
| (b) | Profits tax payable: $40,000 x 16.5% = $6,600 |
- The amount of the tax credit is capped at $6,600.
- The excess amount of $1,400 ($8,000 − $6,600) is allowed to be deducted in ascertaining the assessable profits of Company A for Year 2.