Hong Kong Profits Tax and Foreign Trust Reporting

Hong Kong describes profits tax for trustees and Hong Kong-source business profits. The IRS also describes U.S. reporting rules for U.S. persons connected to foreign trusts.

Hong Kong's profits tax scope

Hong Kong's Inland Revenue Department describes profits tax as applying to persons who carry on a trade, profession or business in Hong Kong. Its stated list includes trustees, and the charge covers profits arising in or derived from Hong Kong from that activity, excluding profits from selling capital assets. The department says the rule makes no distinction between residents and non-residents.^[1]

Hong Kong profits tax liability depends on the business activity and the source of its profits, rather than the trustee's residence alone. The department describes whether business is carried on in Hong Kong and whether profits derive from Hong Kong as questions of fact. It also states that profits arising abroad are not taxed under this charge even when remitted to Hong Kong.^[1]

A trustee's residence by itself does not decide whether Hong Kong profits tax applies. Hong Kong law looks at whether trustees carry on business in Hong Kong and where the resulting profits are sourced. It has no separate residence test for trusts or trustees.^[1]

Source rules and assessable profits

The department defines assessable profits as net profits for the basis period that arise in or derive from Hong Kong, computed under Part IV of the Inland Revenue Ordinance. Net losses may also be recognized in the definition. Profits or losses from selling capital assets are excluded from that calculation.^[1]

The department identifies several amounts that legislation treats as Hong Kong trading receipts. These include payments for use of certain intellectual property in Hong Kong and movable property used there. Some payments for use outside Hong Kong also count when the amounts are deductible in computing another person's assessable profits.^[1]

For non-residents, the department says Hong Kong-source profits from a trade, profession or business carried on there remain chargeable whether the non-resident receives the profits directly or an agent receives them. Where true profits cannot readily be determined, the department says they may be computed using a fair percentage of Hong Kong turnover.^[1]

Profits tax is charged on assessable profits for each year of assessment. Because the final profits are not known until the relevant period ends, the department describes a provisional charge, followed by an assessment when the profits are established. Provisional tax paid is then applied against the liability under that assessment.^[1]

Returns and account information

Hong Kong filing duties for particular business arrangements include quarterly returns by resident consignees selling for non-resident consignors. Those returns show gross proceeds and accompany payment to the Commissioner based on the stated proportion of proceeds.^[1]

Hong Kong's automatic exchange of financial account information rules separately require financial institutions to identify certain accounts through due diligence. This covers accounts held by tax residents of reportable jurisdictions and accounts of passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions. Required information is collected and furnished to the Inland Revenue Department annually.^[2]

The Hong Kong department describes tax residence for this reporting framework as liability to tax because of residence in a jurisdiction. For individuals, it says the determination generally considers physical presence or stay. For companies, it refers to incorporation or the place where central management and control is exercised.^[2]

The department says account holders may be asked to provide self-certification of personal details, including tax residence, so financial institutions can identify reportable accounts. Hong Kong conducts automatic exchanges with a reportable jurisdiction only when an arrangement with that jurisdiction provides the basis for exchange.^[2]

How U.S. reporting rules relate

The IRS defines a U.S. person to include a U.S. citizen. It says U.S. persons who create a foreign trust, transact with one, are treated as its owner under grantor trust rules, or receive distributions may have U.S. tax consequences and information reporting duties. Hong Kong's treatment of business profits does not by itself determine those U.S. obligations.^[5]

The IRS identifies Form 3520 for certain U.S. person transactions with a foreign trust, including creating or transferring money or property to a trust and receiving distributions, loans, or uncompensated use of trust property. The IRS also says an owner under grantor trust rules may have to report trust income on the owner's U.S. income tax return.^[5]

For a foreign trust with a U.S. owner under grantor trust rules, the IRS says the trust must file Form 3520-A and furnish annual statements to U.S. owners and beneficiaries. If the trust does not file, the U.S. owner must attach a substitute Form 3520-A to a timely Form 3520 and furnish the required statements.^[5]

The IRS describes Form 3520 as an annual return for specified foreign trust transactions and certain foreign gifts. Its instructions explain the reporting details for a U.S. person who receives a distribution from a foreign trust, including reporting it as a distribution in Part III.^[6]

Questions and answers

Does Hong Kong use trustee residence as the main test for profits tax?

Hong Kong includes trustees among persons chargeable to profits tax when they carry on business in Hong Kong. The rule makes no distinction between residents and non-residents, and whether business is carried on in Hong Kong and where profits arise are questions of fact.^[1]

Does Hong Kong impose an annual filing duty on every trust?

Hong Kong profits tax rules set particular filing duties, such as quarterly returns by resident consignees selling for non-resident consignors, rather than a general annual filing duty for every trust.^[1]

What U.S. return can apply when a U.S. citizen receives a foreign trust distribution?

The IRS instructions say a U.S. person receiving a distribution from a foreign trust reports it in Part III of Form 3520. The IRS identifies U.S. citizens as U.S. persons.^[6]

When does the IRS describe Form 3520-A as relevant?

The IRS says a foreign trust with a U.S. owner under grantor trust rules must file Form 3520-A and provide annual statements. If it does not file, the U.S. owner attaches a substitute form to a timely Form 3520.^[5]

Related glossary terms

Section 679: Section 679 addresses certain transfers by U.S. persons to foreign trusts. It treats some property transfers as ownership when the trust has a U.S. beneficiary.
Common Reporting Standard: The Common Reporting Standard sets rules for exchanging financial account information, covering reporting institutions, covered accounts and due diligence.
Participating foreign financial institution: The IRS describes a participating foreign financial institution as an FFI that reports U.S. account holders who are specified U.S. persons under FATCA.