In Hong Kong, a person can apply for an advance ruling to the Inland Revenue Department (IRD) on how the Inland Revenue Ordinance applies to the person or the arrangement specified in the application. The advance ruling provides the taxpayer with a degree of tax certainty on the proposed transaction and minimize future dispute with the IRD.

The application fees charged by the IRD are HK$45,000 for a ruling on territorial source principle and HK$15,000 for a ruling on other tax matters.

Benefits for an advance ruling

Entrepreneurs frequently find the potential tax liabilities and risks associated with their business operations to be a source of anxiety. One of the most contentious tax issues among the taxpayers and the IRD is to determine the source of income for the purpose of calculating Hong Kong Profits Tax.

Dealing with the IRD's inquiries on the source of income often involves significant time and resources, and occasionally leads to tax audit investigation that can span multiple years. An advance ruling offers taxpayers a degree of certainty by establishing the tax treatment upfront. This approach mitigates tax risks for companies and helps prevent potential future disputes with the IRD.

Furthermore, as the Foreign-sourced Income Exemption Regime has recently been enacted, multinational enterprise (“MNE”) entities may find the needs to obtain an advance ruling to ascertain their compliance with the Economic Substance Requirement in relation to their foreign-sourced interest, dividend, disposal gain on IP and non-IP assets and IP income.

Advance Ruling Application form

The Advance Ruling Application form can be found in the below IRD’s website link:-

IR1297 (Advance Ruling Application):

https://www.ird.gov.hk/eng/paf/download_pdf1.htm?ir1297/IR1297

Examples of advance ruling in Hong Kong

- Carrying on a trade, profession or business in Hong Kong

- Source of profits

- Permanent establishment

- Treatment of losses upon restructuring and change in shareholding

- Foreign sourced income exemption (FSIE)

- Tax concessions for family-owned investment holding vehicles

Foreign sourced income exemption (FSIE)

Foreign sourced income exemption (FSIE) is a newly enacted regime under Hong Kong Profits Tax. Many taxpayers have concerns on the FSIE impact on their offshore income / profits under Hong Kong Profits Tax.

The procedure for Advance Ruling Application on FSIE Regime is simplified and rather straightforward.

Advance Ruling Case No.70 (FSIE): https://www.ird.gov.hk/eng/ppr/advance70.htm

Advance Ruling Case No.74 (FSIE): https://www.ird.gov.hk/eng/ppr/advance74.htm

Advance Ruling case examples

The IRD has published more advance ruling case examples:-  

Advance Ruling Case No.67 (Waiver of loans) : https://www.ird.gov.hk/eng/ppr/advance67.htm

Advance Ruling Case No.72 (FSIE): https://www.ird.gov.hk/eng/ppr/advance72.htm

Our services

The IRD will ask for substantial amount of information and documents for an advance ruling application. Our experienced tax experts can help to secure a favorable advance ruling for our clients by strategically presenting information and supporting documents, quoting the relevant tax regulations and providing compelling arguments to the IRD.