Upon re-domiciliation, the company will generally be regarded as a company incorporated in Hong Kong. The re-domiciled company will preserve its legal identity. None of the company's properties, rights, obligations, liabilities, contractual or legal processes will be transferred, novated or assigned a result of the re-domiciliation.
The Amendment Ordinance amends, among other ordinances, the Inland Revenue Ordinance (Cap. 112) (IRO) to address specific tax issues relating to re-domiciled companies. This alert summarises the tax aspects of the Amendment Ordinance and the key tax implications of a re-domiciled companyi.
Profits tax implications
In general, re-domiciliation should not affect the profits tax liabilities of a re-domiciled company, as Hong Kong does not impose profits tax on the basis of residence or domicile. Under the IRO, a company is chargeable to profits tax on its profits arising in or derived from Hong Kong from any trade, profession or business carried on in Hong Kong.
Therefore, for a foreign company which has already been carrying on a business in Hong Kong, re-domiciliation to Hong Kong will not change its profits tax liabilities in Hong Kong. For a foreign company which has never carried on any business in Hong Kong before it re-domiciles to Hong Kong, it will only be chargeable to profits tax if it commences business in Hong Kong and has profits arising in or derived from Hong Kong from such business.
To provide certainty on the profits tax implications of a re-domiciled company which begins to carry on a business in Hong Kong after re-domiciliation, the Amendment Ordinance amends the IRO by adding a new Schedule 17L to provide for matters relating to (i) transitional tax arrangements; (ii) elimination of double taxation; and (iii) insurance businesses.
Transitional tax arrangements
The table below summarises the transitional tax arrangements relating to expenses or expenditures incurred by a re-domiciled company before the date of re-domiciliation, which generally apply only when the following criteria have been met:
- The re-domiciled company has not carried on any business in Hong Kong before the date of re-domiciliation
- No deduction or relief has been claimed in respect of the relevant expense or expenditure in and outside Hong Kong
- The asset or right to which the relevant expense or expenditure relates is used for a business carried on in Hong Kong on or after the date of re-domiciliation.
| Type of expense or expenditure |
Tax treatment |
| General expense or expenditure |
The expense or expenditure will be deductible to the extent that it was incurred in the production of profits chargeable to profits tax (subject to the deduction rules under the IRO). |
| Cost of trading stock |
The cost will be the lower of (i) the cost incurred in acquiring the trading stock or (ii) the net realisable value of the trading stock on the re-domiciliation date. |
| Expenditure on registration of intellectual property (IP) rights or building refurbishment |
The expenditure will be deemed to have been incurred in the year of assessment in which the re-domiciled company begins to use the relevant asset or right for a business carried on in Hong Kong. |
| Expenditure in relation to research and development (R&D) activity |
The expenditure will be deemed to have been incurred in the year of assessment in which the relevant activity first becomes, or first becomes also, an R&D activity related to a business carried on in Hong Kong. |
| Expenditure on purchase of certain IP rights, provision of prescribed fixed assets or environmental protection facilities |
The expenditure will be deemed to have been incurred in the year of assessment in which the re-domiciled company begins to use the relevant asset or right for a business carried on in Hong Kong.
The amount deemed to have been incurred will be the lower of (i) the actual expenditure minus the accumulated amortisation and impairment losses in respect of the relevant asset or right up to the re-domiciliation date or (ii) the market value of the relevant asset or right as at the re-domiciliation date.
|
| Expenditure on machinery and plant |
For the purpose of calculating depreciation allowances, the expenditure will be deemed to have been incurred in the year of assessment in which the re-domiciled company begins to use the relevant asset for a business carried on in Hong Kong.
In general, the amount deemed to have been incurred will be the lower of (i) the actual cost minus the notional annual allowance which would have been made if the relevant asset had been used for producing profits chargeable to profits tax after its acquisition or (ii) the market value of the relevant asset as at the re-domiciliation date.
If the relevant asset is acquired under a hire purchase agreement, the amount deemed to have been incurred will be the amount calculated above, multiplied by the ratio of the capital portion of instalments paid up to the end of the basis period for the re-domiciliation year divided by the capital portion of all instalments payable under the hire purchase agreement.
|
Elimination of double taxation
To eliminate double taxation, the Amendment Ordinance provides for unilateral tax credits for re-domiciled companies. Specifically, if (i) a re-domiciled company has paid tax in its original domicile, which is substantially the same nature as Hong Kong profits tax, in respect of its unrealised income because of the re-domiciliation (i.e., exit tax upon exit from the original domicile) and (ii) the actual income are taxed in Hong Kong after re-domiciliation, then subject to certain other conditions, tax credits will be available to the re-domiciled company, regardless of whether Hong Kong has signed a double taxation agreement with the original domicile.
The amount of tax credit will be capped at the lower of (a) the foreign tax paid or (b) the Hong Kong profits tax payable on the relevant income. In addition, any excess amount of foreign tax paid over the Hong Kong profits tax payable for that year will be deductible against the assessable profits of the re-domiciled company for the particular year of assessment.
Insurance businesses
Supplementary provisions have been added to sections 23 and 23AAA of the IRO under the Amendment Ordinance to provide for how companies carrying on life insurance business or non-life insurance long term business are assessed on their taxable profits after they have re-domiciled to Hong Kong. The new rules should only affect the companies that have elected to be taxed under the "adjusted surplus" method and have not carried on their life and/or non-life long term insurance business in or from Hong Kong before re-domiciliation.
Stamp duty implications
The Amendment Ordinance contains a provision stating that, for tax purposes, a re-domiciliation does not have the effect of transferring any assets of the re-domiciled company or changing the beneficial ownership of any of those assets. The provision makes it clear that no stamp duty liabilities should arise from the re-domiciliation process.
It should be noted that, upon re-domiciliation, any subsequent transfer of shares in a re-domiciled company will be required to be registered in Hong Kong. Accordingly, the shares of a re-domiciled company will fall within the definition of "Hong Kong stock" under the Stamp Duty Ordinance (Cap. 117) and hence the transfer of such shares will be subject to stamp duty.
Other implications - tax residency of a re-domiciled company
Under the Amendment Ordinance, a general interpretation provision has been added to the IRO to the effect that references therein to a company incorporated in Hong Kong includes a re-domiciled company.
In most comprehensive double taxation agreements (CDTAs) signed by Hong Kong, a Hong Kong resident is defined to mean, among others, "a company incorporated in Hong Kong" (a term that is not defined in the CDTAs). The Government, and by extension the Inland Revenue Department (IRD), has indicated that, when it applies the CDTAs, a re-domiciled company will be regarded as, from the date of re-domiciliation, a company incorporated in Hong Kong and hence a Hong Kong resident by virtue of the new general interpretation provision. Accordingly, upon application, a re-domiciled company will be issued a Certificate of Resident Status. Therefore, subject to the relevant treaty partner's agreement to the foregoing interpretation of "a company incorporated in Hong Kong" and other relevant conditions being met, a re-domiciled company may be entitled to treaty benefits under an existing or future CDTA signed by Hong Kong.
It should also be noted that under the proposed legislation to implement the Global Anti-Base Erosion (GloBE) rules and the Hong Kong minimum top-up tax (HKMTT) under BEPS 2.0, i.e., the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024 ("Bill"), a definition of Hong Kong resident entity is introduced to ensure that entities incorporated in Hong Kong can be regarded as located in Hong Kong for the purposes of the GloBE rules and HKMTT. As a re-domiciled company will be regarded as a company incorporated in Hong Kong under the Amendment Ordinance, such company may also be regarded as a Hong Kong resident entity and hence located in Hong Kong for the purposes of the GloBE and/or HKMTT rules.
Key takeaways
The Regime, which does not impose any economic substance requirements for re-domiciliation, offers a relatively simple and cost-effective mechanism for foreign companies wishing to reduce compliance burden and costs in the original jurisdiction (or in multiple jurisdictions) to migrate to Hong Kong while maintaining legal identities and ensuring business continuity. The availability of tax deductions for expenses incurred before re-domiciliation and unilateral tax credits during the transitional period and potential access to Hong Kong's wide and growing tax treaty network provide further incentives for foreign companies to consider re-domiciling to Hong Kong.
Companies within in-scope multinational enterprises for BEPS 2.0 purposes wishing to re-domicile to Hong Kong should carefully assess the potential tax implications upon re-domiciliation under the GloBE/HKMTT rules once the Bill has been passed.
The Regime is open for application starting today (23 May 2025). Businesses that are interested in the Regime may refer to the Companies Registry's websiteii for application details and the administrative guidance published on the IRD's websiteiii (as updated from time to time) regarding the tax aspects of the Regime.
For further information, please reach out to our lawyers set out under "Contact Us" or your usual Baker & McKenzie contact.
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Click here to download the PDF version of the alert.
i For more information on the application eligibility, documentary requirements and corporate law aspects of the Regime, please refer to our other client alerts which can be accessed in the following links:
Hong Kong: Proposed re-domiciliation regime
Hong Kong: New Re-domiciliation regime comes into effect
ii https://www.cr.gov.hk/en/legislation/co2025/redomiciliation/overview.htm
iii https://www.ird.gov.hk/eng/tax/bus_redomiciliation.htm
