The US State Department announced, on August 19 the termination or suspension of several US agreements with Hong Kong, including termination of the 1989 US-Hong Kong Shipping Agreement, which generally provides a reciprocal exemption from income taxes on income earned from international shipping by US and Hong Kong shipping businesses. The official text has not yet been made available; however, we understand that it may be effective on January 1, 2021. The Hong Kong government also issued a press release in connection with this termination. The termination announcement occurred pursuant to President Trump's Executive Order 13936, issued on July 14, 2020.
The termination may have a significant US income tax impact on shipping businesses that previously relied on the Agreement to provide an exemption from US income taxes, as well as a Hong Kong profits tax impact for US businesses that also relied on the Agreement for an exemption from those taxes, as indicated by the Hong Kong government's press release. In some cases, third-country shipping businesses with Hong Kong owners or pools, alliances, and joint ventures with a Hong Kong connection may also be impacted by the termination.
Shipping businesses with a Hong Kong connection that historically have claimed a US federal income tax exemption based on a reliance on the Shipping Agreement should review their structures and business activities to determine if an exemption continues to exist. Quantification of potential US income tax exposure and possible restructuring should be considered, where feasible.