Tax Certainty Enhancement Scheme (TCES): Understanding the 2024 Update
The Tax Certainty Enhancement Scheme (TCES) aims to provide businesses with a clear set of rules to determine whether a profit is capital or revenue in nature. TCES applies to Onshore Disposal Gains and is effective starting 1 January 2024.
What is the TCES?
In the past, the Inland Revenue Department (IRD) would determine whether a sale of equities was revenue or capital in nature through the badges of trade analysis, on a case-by-case basis. This left room for interpretation and therefore uncertainty for businesses in planning their tax obligations.
In order to "enhance tax certainty" (i.e. remove room for interpretation), the TCES was introduced. The bill means that any gain incurred by a company selling onshore equities will be taxed, unless the equities has been held for at least 24 months representing a min of 15% of the shares of the company. Let’s examine the new bill and why it was introduced.
What type of profit is usually subject to tax?
Profits that are capital in nature are not taxed in Hong Kong, whereas revenue profits are subject to the profits tax. To determine whether a transaction is a “trading” transaction and thus revenue in nature, historically, the IRD will apply the "badges of trade" analysis:
Nature and quantity of the trade
Intention at the time of acquisition
Length of ownership
Frequency of similar transactions
Additional work to increase the asset's value
Reason behind the sale
There is also a "'seventh' badge of trade" that may be considered, which stems from the Lee Yee Shing Jacky And Another v Commissioner Of Inland Revenue case. It takes additional factors into consideration, such as whether the individual has registered a business. This goes to show that the decision of whether a trade is a capital or revenue in nature is subjective and must be determined on a case-by-case basis using the “badges” above as parameters.
A company in the advertising industry may own equities in other companies. Is the gain earned from selling such equities capital (non-taxable) or revenue (taxable) in nature? It depends on the outcome of the badges of trade analysis; the intention behind the purchase of the equities, the frequency of these trades and so forth.
Is your equity sales profit subject to tax?
Should I leverage the TCES?
Onshore Disposal Gains are regarded as capital in nature and will not be taxed if eligible under the TCES. The following criteria have to be met to be eligible:
The investor is a legal person or arrangement that prepares financial statements (Exclusions).
The equity interest carries rights to profits, capital, or reserves of the investee entity and is accounted for (Exclusions).
The equity has been held for at least 24 months and represents a minimum of 15% of equity interests.
Taxpayers can decide whether to apply for the TCES; it is not mandatory. If they choose not to apply under the TCES, determining the nature of the Onshore Disposal Gains will continue to be based on the "badges of trade."
If you are unsure, feel free to contact us, and we will assist you as best we can.
Revamp Your Tax Strategy
In addition to equity sales, if your business also has income from abroad (such as dividends, interest, and investment sales), you will need to pay attention to the new FSIE bill.
Dedicate time to restructure your tax plan and leverage the benefits of the new TCES. That way, you will not be taken by surprise when filing taxes.
Has your business been affected by the recent changes to the TCES bill? We can help you with tax structuring to get clarity on the taxes you will pay.
Has your business been affected by the recent changes to the TCES bill?
