Publish Date
Feb 18, 2025
Asia Tax Update
On 20 December 2024, the Hong Kong government published the Companies (Amendment) (No. 2) Bill 2024 (the Bill) in the Government Gazette to implement the inward company re-domiciliation regime (the Regime). This marks a significant milestone in its efforts to attract more foreign companies and investment to Hong Kong. The Bill was introduced to the Legislative Council for its first reading in early January 2025, with the government aiming to pass it into law by the first quarter of 2025.
The introduction of the Regime is part of Hong Kong’s strategy to enhance its competitiveness as a business hub and attract more foreign companies (from the British Virgin Islands, Cayman Islands, Bermuda, etc.) to transfer their existing operations to or set up operations in Hong Kong. The Regime aims to provide a simple and cost-efficient procedure for non-Hong Kong incorporated companies to re-domicile to Hong Kong, allowing them to maintain their legal identity and business continuity, subject to certain conditions being satisfied. The Regime is expected to take retrospective effect from the beginning of the year, but the exact effective date will be announced later.
Under the Regime, non-Hong Kong incorporated companies are allowed to re-domicile to Hong Kong and become ‘re-domiciled companies’. Eligible companies for re-domiciliation include both private and public companies limited by shares, as well as private and public unlimited companies with share capital. There are no economic substance requirements under the Regime (i.e., companies of any size or operating business may apply to re-domicile to Hong Kong).
Key requirements for re-domiciliation include the following:
It is important to note that a legal opinion is required to confirm compliance with some of the requirements, such as the laws of the original place of incorporation/domicile and the solvency test, etc. Note that the Regime does not allow outward re-domiciliation from Hong Kong or changes to the company type during the re-domiciliation process.
Under the Regime, a re-domiciled company will generally be regarded as a company incorporated in Hong Kong effective from the date of re-domiciliation. Additionally, the government has proposed a definition of ‘Hong Kong resident’, which includes any company incorporated in Hong Kong for the purposes of legislation. Accordingly, it is anticipated that a re-domiciled company should be considered a Hong Kong resident for double tax treaty and BEPS Pillar Two purposes.
In light of additional reporting, disclosure, and economic substance requirements introduced by many of the commonly used offshore jurisdictions in recent years, resulting in increased administrative costs in managing these companies in the offshore jurisdictions, the Regime provides a viable, more cost effective and attractive option for these offshore companies to re-domicile to Hong Kong.
In addition, for the purposes of claiming tax treaty relief to reduce withholding tax on passive income (e.g., dividends, interest, royalties and capital gains), most jurisdictions would require the income recipient, i.e., tax treaty claimant, to have sufficient economic substance and satisfy beneficial ownership tests in the recipient’s jurisdiction. With the increasing widening of Hong Kong’s tax treaty network with other jurisdictions and the ability to create real economic substance in Hong Kong at a relatively low(er) costs, the Regime would potentially allow these income recipients to reduce their withholding tax costs on passive income after re-domiciling to Hong Kong, subject to satisfaction of the domestic tax laws of the payer jurisdictions and other tax treaty relief requirements.
Hong Kong tax legislation is based on the territorial source principle (i.e., taxing profits arising in or derived from Hong Kong). Merely re-domiciling the company to Hong Kong would not in itself change the company’s Hong Kong profits tax position in general.
Specifically, a non-Hong Kong incorporated company that has not conducted business in Hong Kong before re-domiciliation will not be subject to profits tax on pre-re-domiciliation profits. On the other hand, if a non-Hong Kong incorporated company has conducted business in Hong Kong before re-domiciliation, the company will continue to be subject to tax on its Hong Kong-sourced and trading profits derived before re-domiciliation. The re-domiciliation will not impact its profits tax liabilities incurred pre-re-domiciliation.
In this regard, to the extent the non-Hong Kong incorporated company has not properly reported its Hong Kong-sourced and trading profits for Hong Kong profits tax purposes before the re-domiciliation, there will be on balance a heightened risk of the Hong Kong Inland Revenue Department (IRD) investigating the tax position of the pre-re-domiciliation period. Therefore, companies are advised to review their historical tax position to assess any potential Hong Kong profits tax risk; and if so, consider whether there are actions that should be taken to prior to the re-domiciliation to minimise the corresponding tax risks.
There are also transitional tax arrangements being put in place for expenditures incurred by a re-domiciled company, including pre-re-domiciliation expenses, trading stock, intellectual properties, and capital expenditures. For example, expenses incurred before re-domiciliation may be deductible if no deduction or relief was previously allowed in Hong Kong or elsewhere.
Unilateral tax credits are available for re-domiciled companies that have paid tax in their place of incorporation on unrealized profits as a result of re-domiciliation, and where Hong Kong profits tax is also paid on the same profit after re-domiciliation.
It is also important to note that no Hong Kong stamp duty liabilities will arise from the re-domiciliation process itself, irrespective of whether the shares of the pre-re-domiciled company are registered in Hong Kong. However, subsequent share transfers of the re-domiciled company will be subject to stamp duty in Hong Kong.
Additionally, companies with direct or indirect investment in a company incorporated in a foreign jurisdiction should assess whether such re-domiciliation would be treated as a deemed direct or indirect transfer of the foreign investee company under the tax laws or regulations of the foreign jurisdiction, or otherwise trigger withholding tax costs on any deemed capital gain arising in the foreign jurisdiction.
Further, companies wishing to benefit from tax treaty relief should assess the eligibility and ensure they satisfy the relevant tax treaty relief requirements under the domestic tax laws and double tax treaty following their re-domiciliation to Hong Kong.
Our team at A&M is dedicated to providing comprehensive support to guide you through the re-domiciliation process in Hong Kong. From pre-re-domiciliation planning to post-re-domiciliation compliance, we offer a range of services designed to ensure a seamless transition, minimize tax risks, and maximize tax benefits.
Please reach out to the authors mentioned above if you have any questions or would like to discuss any aspects of the Regime.
https://www.alvarezandmarsal.com/insights/inward-company-re-domiciliation-regime-hong-kong
