Tax Liability Insurance (TLI) is an innovative strategy to transfer potential tax liabilities from a taxpayer to an insurer. It is increasingly used by taxpayers as an alternative to traditional tax risk mitigation strategies. In Hong Kong, taxpayers face risks when seeking to rely on the territorial principle of taxation, by which offshore profits are not chargeable to Hong Kong tax. In this article, BMS’s Martijn de Lange discusses these risks and explains how TLI may help to mitigate against them.
Hong Kong’s territorial system for business profits
Unlike most advanced jurisdictions, Hong Kong does not tax worldwide business profits based on residence. Instead, it has a territorial tax system. Section 14 of the Inland Revenue Ordinance (IRO) charges a person to tax if it: (i) carries on a trade, profession or business in Hong Kong (Business Test); and (ii) derives Hong Kong source profits from such trade, profession or business (Source Test). Both the Business Test and the Source Test must be met for a charge to tax to arise.