An advance ruling in Hong Kong is a type of tax ruling that provides taxpayers with certainty regarding the tax treatment of their proposed transactions or arrangements, such as the eligibility of an offshore non-taxable claim on income and whether a gain from sale of an asset is capital in nature and hence non-taxable in Hong Kong.

It might also be used to determine the correct tax rate applicable to a particular transaction, and may cover a wide range of transactions including corporate restructurings, share transfers, and the sale and purchase of assets.

Advance rulings are issued by the Inland Revenue Department (IRD) of Hong Kong.

Why would you want an advance ruling?

For most entrepreneurs, potential tax liabilities and tax risks that may arise within the company, are a concern when doing business.

One of the most controversial tax issues between the IRD and Hong Kong taxpayers relates to the source of income determination for Hong Kong profits tax purposes.

Often a lot of manpower and time is spent on handling the IRD’s source of income enquiries, which sometimes even result into tax audit investigations, a process which could last several years.

However, an advance ruling provides certainty to taxpayers as the tax treatment has been agreed in advance. This helps to reduce the tax risks companies may face and helps to avoid disputes and misunderstandings.

The Foreign Sourced Income Exemption (FSIE) regime in Hong Kong, effective since 1 January 2023, allows taxpayers to obtain an advance ruling to determine if they meet the Economic Substance Requirements and/or whether their income is subject to corporate tax under the FSIE regime.

Types of advance rulings

The IRD generally provides advance rulings for most of the tax issues. In particular, taxpayers are eligible to apply for such rulings in advance when it concerns certainty regarding:

Taxpayers are eligible to apply for such rulings in advance when it concerns certainty regarding:

• the source of income;
• whether or not a person (including a corporation) is carrying on business in Hong Kong;
• applications of the general anti-avoidance provisions in the relevant circumstances;
• the tax liability of a non-resident person;
• the treatment of tax losses;
• find more cases on the IRD website.

The difference between advance rulings and a tax assessment objection

Objections to a tax assessment can only be made after a taxpayer has received the assessment from the IRD. It is important to take note of the timeframe for submitting an objection, as the IRD provides only a limited window for making an objection.

An advance ruling, however, provides certainty regarding the tax treatment beforehand. Applications should be submitted early in the year the ruling applies to, as this increases the chances of the ruling taking effect in the same year.

Taking this into consideration, it is important for taxpayers to be aware of the importance of submitting their advance ruling application in a timely fashion. Doing so will help ensure that any potential tax liabilities are minimised and the taxpayer is not disadvantaged in any way.

How to obtain an advance ruling in Hong Kong

To obtain an advance ruling from the IRD, taxpayers must submit a specific application form and all relevant information and documents. In particular, taxpayers are requested to address how the relevant laws/provisions are applied to their tax case, state the proposed ruling with the relevant grounds and draft a ruling for the IRD.

In addition, the IRD levies a fee of at least HKD 15,000 – HKD 45,000, depending on the type of ruling sought. It is important to note that this fee is non-refundable, so taxpayers must ensure that the documents provided are complete and accurate.

Once the application has been submitted, it usually takes about 6 weeks for the IRD to respond with a ruling, which taxpayers should take into account when planning their tax affairs.

It is important for taxpayers to be mindful when supplying information and documents to the IRD, in order to avoid any unfavourable effects on their tax position.

HKWJ Tax Law can help

With an advance ruling, taxpayers are able to confidently plan their transactions with the assurance that the tax treatment has been agreed in advance, which helps to avoid disputes and misunderstandings.

Even though the fees may seem high, the certainty of the outcome and the time saved by avoiding the need to renegotiate a transaction due to an unexpected tax bill make the cost worthwhile.

In particular, the newly introduced FSIE regime potentially has tax implications/impacts on many taxpayers. In order to know in advance whether the foreign sourced passive income can still be non-taxable in Hong Kong under the new regime, say due to exclusion from the charging scope or meeting the specified exception conditions, as well as to reduce the tax compliance burden, the taxpayers may consider to apply for an advance ruling with the IRD. In case unfortunately a negative ruling is made by the IRD, the taxpayers can consider to conduct business restructuring/modification earlier for maintaining the income tax efficiencies.

Our experienced tax lawyers at HKWJ Tax Law & Partners have successfully obtained positive advance rulings for clients of different industries and company sizes on various tax issues. They are able to assist in strategically supplying relevant information, documents, applicable tax rules and favourable grounds for the tax case to the IRD for the positive ruling.

Trust in our expertise and professionalism to secure your company’s future. Contact us today to schedule a consultation via the form below.