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Frequently Asked Questions & Answers on Completion of Supplementary Form S11 – Qualifying ship lessor (applicable for year of assessment 2020/21 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
Section 1 – Basis Period
1.
Q:
Can I report different basis periods for the return and the form?
A:
No. The basis period of both of the return and the form should be the same.
Section 2 – Business Operations
2.
Q:
Should I count the total number of ships of the group for section 2.1?
A:
No. You only need to count the number of ships that were used by your company in qualifying ship leasing activities in the basis period.
3.
Q:
What is the relationship among the number of ships to report under sections 2.1, 2.4 and 2.5?
A:
For section 2.1, you should report the number of all the ships used in qualifying ship leasing activities, whether the ships were leased (including those leased under sale and leaseback arrangements) or sub-leased under operating leases or funding leases. For section 2.4, you should only report those ships used for sub-leasing, which have been included in section 2.1. For section 2.5, you should only report those ships leased under sale and leaseback arrangements, which have been included in section 2.1.
4.
Q:
I incurred capital expenditure to acquire a ship, but I had leased the ship to a Hong Kong ship operator before and claimed depreciation allowances in respect of the ship. Which box should I tick for section 2.3?
A:
You should only tick the first box but leave the three sub-boxes blank. In such situation, even if you are a qualifying ship lessor, your assessable profits will not be computed by reference to the 20% tax base concession.
5.
Q:
How should I tick for section 2.3 if different scenarios described in this section apply to different ships owned by me for use under operating leases?
A:
You should tick all the boxes and sub-boxes applicable to any of your ships.
6.
Q:
I incurred capital expenditure to acquire a ship from a seller and leased the ship back to the seller (lessee) under an operating lease. Which box should I tick for section 2.3?
A:
If the exceptions in Note 7 of the form do not apply, you should tick the first box and the third sub-box. If the exceptions in Note 7 of the form apply, you should tick the first box but leave the three sub-boxes blank.
7.
Q:
I have no information as to the jurisdiction of tax residence of the lessees that transacted with me. How should I fill in for section 2.6?
A:
You should provide the information to the best of your knowledge. Please ascertain from the lessees on their jurisdictions of tax residence.
8.
Q:
For the purpose of section 2.6, do I need to state the exact amount of lease payments, finance charges or interest earned from each of the lessees which are not Hong Kong tax residents?
A:
No. You only need to state the name of the three main jurisdictions of tax residence of the lessee which are not Hong Kong residents. If there are less than three jurisdictions, just state the name of the relevant jurisdiction(s).
9.
Q:
How should I determine whether a jurisdiction is a “main” one?
A:
You are required to provide the name of three jurisdictions of the lessees from where you have received the greatest amount of the lease payments and finance charges or interest in aggregate during the basis period.
Section 3 – Assessable Profits or Adjusted Loss
10.
Q:
Should I report the items under section 3 of the form on the group consolidated basis?
A:
No. You should report the data of your own business.
11.
Q:
If I have prepared financial statements for a period of more than 12 months (or less than 12 months), how should section 3 be completed? Should the amounts be apportioned or grossed up to show figures for a 12-month period?
A:
It is not necessary to apportion (or gross up) the figures if the financial statements for a period of more (or less) than 12 months have been prepared. Amounts extracted from the Statement of Comprehensive Income/Profit and Loss Account should be used in completing section 3.
12.
Q:
Can I include the cost of the ship for section 3.4?
A:
No. You should not include any cost of the ship which is capital in nature.
13.
Q:
I recorded all outgoings and expenses in one ledger account without the respective amount incurred for operating leases and finance leases. How should I fill in for sections 3.4 and 3.7?
A:
You should ascertain from your accounting records the respective amount of outgoings and expenses incurred for operating leases and finance leases. If the 20% tax base concession applies, the amount of outgoings and expenses incurred for operating leases is required for computing and reporting the amount of “net lease payments” under section 3.5.
14.
Q:
What should I fill in for section 3.5 if the 20% tax base concession does not apply to my case?
A:
Please state "0" for this section.
15.
Q:
I disposed of a ship which was not used at all after acquisition, even though it was originally intended for ship leasing activities. Can I treat the gain on disposal of the ship as capital in nature and report it for section 3.8?
A:
No. Section 3.8 should only be used to report the capital gain in respect of a ship that has been used for carrying out a qualifying ship leasing activity for a continuous period of at least three years immediately prior to its disposal. If your ship was not used at all before disposal, the gain on disposal is not capital in nature under section 14P(7) of the Inland Revenue Ordinance (“IRO”).
16.
Q:
What is the relationship among the assessable profits/ (adjusted loss) to report under sections 3.9 to 3.11?
A:
For section 3.9, you should report your total assessable profits/ (adjusted loss) from all sources of activities, and the amount should match with that reported on the return and your tax computation. For section 3.10, you should report the assessable profits/ (adjusted loss) only in relation to the concessionary trading receipts from the qualifying ship leasing activities, which are chargeable at concessionary tax rate under section 14P(1) of the IRO. For section 3.11, you should report the assessable profits/ (adjusted loss) which do not fall into the scope of the concessionary trading receipts reported for section 3.10. The amount reported under section 3.9 should be the sum of each amount reported under sections 3.10 and 3.11.
Section 4 – Activities Producing Qualifying Profits Chargeable At Concessionary Tax Rate ("Relevant Activities")
17.
Q:
What is meant by "Qualifying Profits"?
A:
It refers to the profits from the qualifying ship leasing activities as prescribed under section 14O(5) of the IRO. For details, please refer to paragraphs 24 to 26 of the Departmental Interpretation & Practice Notes No. 62.
18.
Q:
I carried out more than one Relevant Activities during the year, but some of them have ceased now. What should I tick for section 4.1?
A:
You should tick the boxes for all the Relevant Activities that you carried out during the basis period even though some of them have ceased after the basis period.
19.
Q:
For section 4.2, what is the difference between the Relevant Activities carried out by the employees of associated person(s) in the first box and the Relevant Activities carried out by the taxpayer's associated person(s) in the second box?
A:
For the scenario in the first box, it generally refers to the situation that the employees of the associated person(s) are assigned / seconded to work for the taxpayer. For the scenario in the second box, it involves the engagement of the service of the associated person(s) at a fee charged to the taxpayer on an arm’s length basis. Please refer to the examples in Note 19 and Note 20 of the form for details.
20.
Q:
If the associated person does not have Business Registration Number, how should I fill in for section 4.3?
A:
Please provide the name of the associated person and state “NA” for the Business Registration Number.
21.
Q:
How should a taxpayer report if the full-time employee who carried out the Relevant Activities has dual / multiple roles or capacities in the company?
A:
As long as the employee was a full-time staff who carried out the Relevant Activities, then no matter the number of roles or capacities he/she had in the company, he/she should still be counted as a full-time staff. Regarding the requirement for and the basis of counting the average number of the full-time employees, please refer Note 21 and Note 23 of the form for details.
22.
Q:
What do employees with the “necessary qualifications” refer to?
A:
It refers to the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications / with relevant working experiences in relation to the Relevant Activities.
23.
Q:
All of my employees or the employees of the associated person in Hong Kong who carried out the Relevant Activities were employed on a part-time basis, what should I fill in for section 4.4?
A:
If all of the employees are under part-time employment, they should not be counted for the purpose of section 4.4. However, an employee who worked partly for your company and partly for other companies in the same group in Hong Kong should be treated as a full-time employee.
24.
Q:
What type of employee should I report as “Others” in section 4.4?
A:
You should report the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications in relation to the Relevant Activities.
25.
Q:
What is meant by “operating expenditure incurred in Hong Kong for the Relevant Activities” in section 4.5? Do I need to provide a breakdown of the expenditure?
A:
It refers to the operating expenses that were incurred in Hong Kong for the production of the qualifying profits from the qualifying ship leasing activities. For details, please refer to paragraphs 92 to 94 of the Departmental Interpretation & Practice Notes No. 62. There is no need to provide a breakdown of the expenditure. Regarding the requirement for the total amount of the operating expenditure, please refer Note 24 of the form for details.
26.
Q:
Regarding “operating expenditure incurred in Hong Kong for the Relevant Activities”, Note 25 of the form stated that “the amount of operating expenditure reported should include the remunerations borne by the Taxpayer in respect of the employees of the associated person(s) who carried out the Relevant Activities, and/ or the service fee incurred by the Taxpayer for the Relevant Activities carried out by the associated person(s)”.
Suppose a taxpayer is recharged by an associated person in one lump sum which includes cost of management support, office and administrative charges, and staff remuneration etc. for both Relevant Activities and other activities. But the taxpayer has difficulty to allocate the expenditure incurred in Hong Kong for the Relevant Activities specifically. What cost allocation method would be accepted by the IRD for the purpose of reporting under this section?
A:
The taxpayer may consider to allocate the cost attributable to the Relevant Activities and other activities respectively by reference to a basis as to reasonably reflect the contributions by the employees to the carrying out of the Relevant Activities, e.g. by income or working time. Please note that for any activity which does not generate income to the taxpayer, it should not be allocated with any of the operating expenditure.
Section 5 – Other Information
27.
Q:
What is meant by the term “central management and control”?
A:
It refers to the highest level of control of the business of a company. For details, please refer to paragraphs 79 to 83 of the Departmental Interpretation & Practice Notes No. 62.