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Profits Tax - What you need to know as a Ship Operator
- Meaning of “ship operator”
- Contract of a ship operator
- Three main types of charterparties
- Function, risk and asset profile of a ship operator
- Factors for determining whether a person is a ship operator
- Ship operators chargeable to Hong Kong Profits Tax
- Source of shipping income
- Taxable shipping income
- Tax-exempt shipping income
- Substantial activities requirement
- Calculation of assessable profits
- Frequently asked questions
A ship operator is a person carrying on a business of operating ships as an owner operator or a charterer operator, but does not include dealing in ships or agency business in connection with sea transport. In essence, a ship operator provides services for the carriage by sea of passengers and/or goods, including any chartering activities incidental or ancillary to the ship operation business, towage and dredging operations.
A ship operator is a carrier by sea of passengers and/or goods. Generally, a contract of affreightment (COA) is entered into between a ship operator and a shipper, in which the ship operator agrees to carry goods by sea for the shipper in consideration of the payment of freight. A COA may be contained in a charterparty or evidenced by a bill of lading.
Three main types of charterparties
In the maritime industry, there are three main types of charterparties: voyage charterparty, time charterparty and bareboat charterparty.
Voyage charterparty – A contract where the ship owner agrees to carry the charterer’s goods between specified destinations in consideration of the payment of freight on a per tonne or lump-sum basis. Under a voyage charterparty, the ship owner has the whole management and navigational control of the ship, and retains the right to commercially exploit the earning capacity of the ship for its own benefit. The ship owner also bears the commercial risk relating to the ship and goods. A voyage charterparty is generally considered as a COA. The ship owner in a voyage charterparty is likely a ship operator.
Time charterparty – A contract where the ship owner agrees to charter a ship to the charterer for a specified period of time in consideration of the payment of hire. Under a time charterparty, the ship owner provides captain, crew and equipment, and is responsible for the technical operation and navigation of the ship. The charterer obtains the right to commercially exploit the earning capacity of the ship for its own benefit. The ship owner in a time charterparty may be a ship lessor carrying out pure ship leasing activities or a ship operator carrying out time chartering activities in the course of, or incidental or ancillary to, its ship operation business.
Bareboat charterparty – A contract where the ship owner leases a ship to the charterer generally for a specified period of time without providing captain and crew in consideration of the payment of hire. A bareboat charterparty operates as a lease of the ship where possession and control of the ship pass from the ship owner to the charterer. The charterer generally employs captain and crew to manage and navigate the ship. The ship owner in a bareboat charterparty may be a ship lessor carrying out pure ship leasing activities or a ship operator carrying out bareboat chartering activities incidental or ancillary to its ship operation business.
Function, risk and asset profile of a ship operator
Generally, a person would be accepted as a ship operator if:
| (a) |
the person has the capacity to perform the functions, undertake the risks and has possession of plant and equipment of a carrier by sea of passengers and/or goods;
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| (b) |
the person represents to passengers and/or shippers in the ordinary course of the person’s business that the person is a carrier by sea of passengers and/or goods; and
|
| (c) |
the person has not ceased to carry passengers and/or goods by sea.
|
Factors for determining whether a person is a ship operator
To determine whether a person is a ship operator, all relevant facts and circumstances have to be considered, including:
| (a) | whether the person is a party privy to a COA; |
| (b) | whether the person’s risk profile (e.g. cargo claims, delay risk, non-performance risks, freight rate risk, bunker risk) is comparable to that of a carrier by sea of passengers and/or goods; |
| (c) |
whether the person performs functions (e.g. loading, handling, stowage, carriage, custody, care and discharge of such goods) and uses assets (e.g. technical operation of a ship) comparable to those of a carrier by sea of passengers and/or goods; |
| (d) | whether the person engages or employs captain and crew for the operation of ships; |
| (e) |
whether the person is responsible for defraying all or a substantial portion of the expenses of operating ships (e.g. bunker fuel) for the carriage by sea of passengers and/or goods; |
| (f) | whether the person represents to passengers and/or shippers that the person is a carrier by sea of passengers and/or goods; |
| (g) | whether factors in (a) to (f) above are present in the ordinary course of the person’s business in Hong Kong; and |
| (h) | whether the person has not ceased to carry passengers and/or goods by sea. |
Ship operators chargeable to Hong Kong Profits Tax
Profits derived by a ship operator from carrying on a business of operating ships would be assessed in accordance with the provisions in section 23B of the Inland Revenue Ordinance (IRO) if:
| (a) |
the business is normally controlled or managed in Hong Kong; or the ship operator is a company incorporated in Hong Kong (i.e. Hong Kong resident ship operator); or |
| (b) |
the ship operator, to whom paragraph (a) does not apply, has ships which call at any location within the waters of Hong Kong (i.e. non-resident ship operator), while calls of causal nature may be disregarded. |
As Hong Kong adopts a territorial system of taxation, only Hong Kong sourced shipping income is taxable. The source of shipping income is based on the location of the activity, not where the payment is made or where contracts are signed, as follows:
| Shipping income | Source | |
| (a) | Carriage income | Place where passengers embarked or goods shipped/loaded. |
| (b) | Towage income | Place where the towage operation is undertaken. |
| (c) | Dredging income | Place where the dredging operation is undertaken. |
The following “relevant sums” (as defined in section 23B(12) of the IRO), which do not include “exempt sums” (see “tax-exempt shipping income” below), derived by a Hong Kong resident or non-resident ship operator are assessable to profits tax:
| (a) |
sums attributable to carriage by sea of passengers and/or goods (relevant carriage), excluding re-embarking passengers (i.e. passengers whose tickets in respect of a voyage do not specify Hong Kong as the place of departure or destination) and/or goods in transit (i.e. goods specified in a bill of lading, brought to Hong Kong by sea solely for the purpose of the onward carriage and in respect of which no freight charges for that onward carriage are payable in Hong Kong), shipped in Hong Kong; | |
| (b) |
in case of a charterparty which does not extend to the whole of the ship, sums attributable to a voyage commencing from the waters of Hong Kong, which are deemed to be attributable to the relevant carriage shipped in Hong Kong; | |
| (c) | sums attributable to a towage operation undertaken within, or commencing from, the waters of Hong Kong; | |
| (d) | sums attributable to a dredging operation undertaken within the waters of Hong Kong; | |
| (e) | charter hire in respect of: | |
| (i) | the operation of a ship navigating solely or mainly within the waters of Hong Kong; or | |
| (ii) | a charterparty where one of the parties to the charterparty is a limited partnership registered in accordance with the Limited Partnerships Ordinance on or before 2 December 1990 and continuing to be so registered after that date and whose principal assets include any ship, or any interest therein, acquired by or on behalf of that partnership on or before that date; and | |
| (f) |
one-half of the charter hire in respect of the operation of a ship navigating between the waters of Hong Kong and river trade waters. | |
There is no distinction between charter hire attributable to a time charterparty and charter hire attributable to a bareboat charterparty.
The following “exempt sums” (as defined in section 23B(12) of the IRO) derived from international operation of ships, which are specifically excluded from the “relevant sums” (see “taxable shipping income” above), are exempt from profits tax:
| (a) |
in relation to a Hong Kong resident or non-resident ship operator, sums derived from the relevant carriage shipped on, or towage operation undertaken by, a Hong Kong registered ship within the waters of Hong Kong and proceeding to sea; or |
| (b) |
in relation to a non-resident ship operator having a reciprocity status (i.e. a ship operator is resident in a territory which exempts Hong Kong resident ship operators from a tax which is of substantially the same nature as Hong Kong profits tax), sums derived from the relevant carriage shipped on, or towage operation undertaken by, a ship within the waters of Hong Kong and proceeding to sea. |
Charter hire, whether attributable to a time charterparty or a bareboat charterparty, derived by a Hong Kong resident or non-resident ship operator from the operation of ships (wherever registered) outside the waters of Hong Kong and the river trade waters, or commencing from Hong Kong and proceeding to sea, is not chargeable to profits tax under section 23B of the IRO.
Substantial activities requirement
To obtain tax exemption in respect of the “exempt sums” (see “tax-exempt shipping income” above), a ship operator must satisfy the substantial activities requirement under section 23B(4AA) of the IRO by ensuring that the activities that produce the “exempt sums” are carried out, or arranged to be carried out, in Hong Kong. That means the ship operator must have an adequate number of qualified full-time employees and incur an adequate amount of operating expenditures to carry out the activities in Hong Kong.
Calculation of assessable profits
The assessable profits of a ship operator are calculated as follows:
| Relevant sums × | Total shipping profits |
| Total shipping income |
Total shipping profits are the worldwide profits derived from the operation of ships, as indicated by the ship operator’s accounts. Where the total shipping profits disclosed in the accounts have been computed on a basis that differs materially from that provided for in Part 4 of the IRO, section 23E of the IRO provides that the profits may be adjusted so that they correspond as nearly as possible to the profits that would be computed under Part 4. Total shipping income is the ship operator’s worldwide income from the operation of ships as indicated by its accounts.