1. Introduction
Hong Kong has long been recognized as a major international maritime and financial hub. Its strategic location, free-port status, common-law system, and strong financial infrastructure have made it a preferred base for ship owners, lessors, and financiers across Asia. However, for many years, Hong Kong’s tax regime for ship leasing activities was less competitive compared to those of Singapore or certain European jurisdictions, which provided targeted tax concessions to attract maritime leasing businesses.
To strengthen Hong Kong’s position and align it with international standards, the government enacted the Inland Revenue (Amendment) (Ship Leasing Tax Concessions) Ordinance 2020, introducing a dedicated and preferential profits tax regime for ship leasing and ship leasing management activities. The new rules, which took effect from the year of assessment 2020/21, form a cornerstone of Hong Kong’s strategy to develop its maritime and ship-finance ecosystem.
According to the Hong Kong Maritime and Port Board (HKMPB), the policy aims to enhance the city’s attractiveness as a comprehensive maritime service centre by offering tax rates as low as 0% for qualifying ship lessors and 8.25% for qualifying ship leasing managers, together with various compliance and substance requirements.
This concessionary regime reflects the government’s broader effort to create a level playing field for ship finance in Asia, while also ensuring consistency with the OECD’s Base Erosion and Profit Shifting (BEPS) standards. The framework not only provides tax certainty for industry participants but also promotes onshore management and economic substance within Hong Kong.
Further interpretation and practical guidance are contained in the Inland Revenue Department’s Departmental Interpretation and Practice Note No. 62 (DIPN 62), which clarifies eligibility criteria, qualifying activities, and tax base computation methods. The document ensures that taxpayers and advisers can apply the concession correctly and avoid unintentional non-compliance.
Overall, the ship leasing tax concession regime represents a strategic initiative to strengthen Hong Kong’s maritime cluster, attract international ship owners and lessors, and diversify the city’s high-value financial services portfolio.
2. Legislative Framework
(Amendment) (Ship Leasing Tax Concessions) Ordinance 2020, which amended the Inland Revenue Ordinance (IRO), Cap.112. This amendment introduced new sections 14P to 14U and Schedule 17FA, setting out the taxation principles, qualifying conditions, and profit tax rates applicable to ship leasing and ship leasing management activities.
The Ordinance defines two key types of qualifying entities:
• Qualifying ship lessor — a corporation carrying on ship leasing business in Hong Kong and satisfying economic substance and operational requirements;
• Qualifying ship leasing manager — a corporation providing management services to ship lessors or ship operators, also meeting local management and control criteria.
According to the Inland Revenue Department’s DIPN 62, qualifying ship lessors enjoy a profits tax rate of 0%, while qualifying ship leasing managers are taxed at a concessionary 8.25%. The DIPN further clarifies the definition of “ship” as any vessel of 500 gross tonnage or more used for international traffic, explicitly excluding fishing boats, pleasure crafts, and military vessels.
This legislative structure aligns Hong Kong’s regime with international norms for maritime taxation while maintaining its distinct approach to profit allocation, substance, and compliance.
3. Qualifying Ship Leasing Activities
A ship leasing activity generally involves acquiring ships and leasing them to operators for use in international transport. The IRD, referencing Schedule 17FA, classifies leases into two categories — operating leases and funding leases.
Under an operating lease, the lessor retains ownership and bears residual risk, while a funding lease functions similarly to a finance lease with eventual transfer of ownership. The tax base and allowable deductions differ between the two models.
Both types of leasing can qualify for concessionary treatment, provided the ships are used for international voyages and the lessor’s central management and control are exercised in Hong Kong. Importantly, qualifying entities must not simultaneously engage in ship operation to maintain tax separation between leasing and operational businesses.
The Hong Kong Maritime and Port Board (HKMPB) emphasizes that the regime’s purpose is to attract high-value, substance-based ship leasing activities. Therefore, entities must demonstrate genuine economic presence — such as local staff, decision-making capacity, and control functions performed in Hong Kong. These requirements support the OECD’s economic substance standards and prevent treaty shopping or artificial arrangements.
4. Tax Concessions and Incentives
The ship leasing regime offers significant profits tax concessions:
• Qualifying ship lessor → 0% profits tax on qualifying income;
• Qualifying ship leasing manager → 8.25% (half of the standard Profits tax rate).
Beyond these rates, a special rule that limits the tax base to 20% of the gross rentals for lessors under operating leases. This effectively reduces the taxable income component, providing additional tax efficiency while keeping compliance simple.
Depreciation allowances, normally available for capital assets, are disallowed for vessels under qualifying leases to avoid double benefits. Instead, the 20% tax base concession serves as an equivalent incentive.
The regime now includes expanded interest deduction rules, allowing lessors to deduct financing costs associated with ship acquisition, provided the funding arrangement meets arm’s-length and local-source requirements. PwC also discusses new loss treatment provisions — losses from qualifying ship leasing activities may be carried forward but cannot offset non-qualifying income.
Together, these incentives ensure that Hong Kong remains competitive for ship finance while protecting tax integrity.
5. Anti-Avoidance and Compliance Measures
To maintain credibility under international tax frameworks, Hong Kong embedded anti-avoidance provisions within the concession regime. These include transfer pricing rules, substantial activity requirements, and anti-abuse tests aligned with BEPS 2.0.
The IRD will apply rigorous substance reviews to ensure entities claiming concessions are genuinely conducting ship leasing business from Hong Kong.
The qualifying lessors and managers must maintain operational control, sufficient office space, and locally-based staff with leasing expertise. Additionally, the safe-harbour rule allows temporary non-compliance (e.g., during restructuring) if corrective actions are taken promptly.
The IRD also monitors cross-border financing structures to detect base-erosion risks. Where artificial arrangements exist to shift income or deduct expenses improperly, the Commissioner of Inland Revenue has broad powers to deny concessionary treatment.
6. Enhancement and Future Developments
The Hong Kong government continues to refine the ship leasing regime to maintain its regional edge. The Hong Kong bulletin, dated July 2025 outlines proposed enhancements effective from the year of assessment 2025/26, including:
• A new 15% concessionary rate for certain BEPS-compliant maritime service providers;
• Extended tax deduction for ship acquisition and financing costs;
• Simplified eligibility criteria for ship leasing managers;
• Recognition of “green ship” investment incentives.
These refinements are intended to attract a broader range of maritime finance and service entities, solidifying Hong Kong’s role as a one-stop maritime business platform.
The HKMPB further notes that the double taxation relief network—covering over 45 jurisdictions—amplifies these concessions by reducing withholding taxes on cross-border lease payments, making Hong Kong a more attractive domicile for ship owners.
7. Comparison with Regional Regimes
Compared to Singapore, Hong Kong’s regime offers a 0% profits tax rate for lessors, which is even more generous than Singapore’s 10% under its Finance and Treasury Centre scheme. However, Singapore’s regime applies more flexible substance rules and covers a wider range of financial assets beyond ships.
Hong Kong’s model focuses specifically on pure ship leasing rather than general financial leasing, ensuring clarity and targeted support for the maritime industry.
Meanwhile, Hong Kong benefits from proximity to Mainland China’s ship financing market and access to a deep capital pool through the Hong Kong Stock Exchange and local banking sector, giving it a complementary advantage in structuring leasing transactions.
8. Practical Considerations for Businesses
For corporations seeking to benefit from the concessions, compliance is critical. According to DIPN 62, applicants must:
• Prove Hong Kong incorporation or local management and control;
• Maintain substantial economic presence (staff, office, and operations);
• Keep proper accounting and leasing records;
• File a separate profits tax return for qualifying activities;
• Seek advance ruling where uncertainty exists.
It is recommended that companies conduct a substance self-assessment to evaluate readiness before applying for concessions. PwC adds that businesses should consider group restructuring to separate ship leasing from other commercial operations for clarity and compliance.
By following these best practices, firms can optimize tax benefits while ensuring smooth interaction with the IRD.
9. Conclusion
The Ship Leasing Tax Concession regime has established Hong Kong as a globally competitive centre for maritime leasing and finance. It balances attractive tax incentives—including a 0% rate for lessors—with strict economic substance and compliance requirements, ensuring both integrity and transparency.
With ongoing enhancements in 2025/26 and strong support from institutions like the HKMPB and the IRD, Hong Kong is poised to consolidate its position as Asia’s leading hub for ship leasing, management, and financing activities.
The combined efforts of regulatory clarity, fiscal incentives, and industry engagement are steering the city toward becoming a true maritime finance powerhouse in the global shipping landscape.
