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Section 1 of Form S2 requires taxpayers to disclose their transactions with overseas related parties. This is not a new question in Hong Kong Profits Tax Return. Many corporations will interpret the requirements as income earned or expenses paid to non-Hong Kong group entities.

In the 2020 Annual Meeting between the Inland Revenue Department (“IRD”) and the Hong Kong Institute of Certified Public Accountants (“HKICPA”)[1], the IRD has broaden the definition of “transactions”.

In simple terms, besides the income / expenses directly received from / paid to group companies, the IRD would request disclosure of related party location in the following scenarios:-

  1. making payment(s) on behalf of an overseas group company
  2. maintaining current accounts with an overseas group company, even when the balance remained the same

We consider the updated view of the IRD will bring up the tax risk of taxpayers with the below :-

  • Payments made on behalf of overseas group companies without proper recharge
  • Interest-free loan arrangements among Hong Kong and overseas group companies Transfer pricing has been the focus of the IRD recently. A number of enquiry letters or even tax investigation have been basis of calculation of service and financing arrangements between Hong Kong and overseas group companies, particularly when the overseas group companies are located in low / no tax jurisdiction.

On the other hand, interest-free loans are less likely to be an arm’s length arrangement. Significant amount of current accounts with overseas group companies will also trigger the need to prepare Transfer Pricing Master File and Local File in Hong Kong.
Corporations with significant related party transactions are suggested to consult with your tax advisor on your transfer pricing tax risk.

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