Leasing Law & Tax 2015/16

Transcription

1 Article Leasing Law & Tax 2015/16 By Dean Young 1 Dean Young Hong Kong dean.young@ mayerbrownjsm.com This article first appeared in Leasing Law & Tax 2015/16. From 1 st July 1997, Hong Kong has been known as the Hong Kong Special Administrative Region of the People's Republic of China. From this date, the Basic Law came into effect and the government has administered Hong Kong in accordance with the Basic Law, which has effectively become Hong Kong's constitution. The Basic Law embodies the principle of "one country, two systems". This expression means that the socialist system and policies of the PRC will not be practised in Hong Kong. The Basic Law specifically provides that Hong Kong's capitalist system and way of life shall remain unchanged for 50 years from 1 st July Hong Kong's legal system has always been a common law system. This means that the law is not codified into written codes like some continental European countries, but instead is formulated by a mixture of legislation (called ordinances), case law, custom and juristic opinion. There are no ordinances which expressly cater for leasing. Instead the laws governing the leasing industry in Hong Kong are, like English and other Commonwealth laws, found only after much searching through these sources of law. Obviously of importance to lessors and lessees are those ordinances which impose duties and liabilities. Environmental protection legislation places strict duties on owners and operators of land and premises to avoid polluting Hong Kong's water, land and air, and also imposes noise restrictions. Hiding behind the corporate veil is ineffective, as directors and officers have been added to the list of offenders. This means that, where an offence under the relevant ordinance has been committed by a company, then the persons who were directors and officers of the company at the time will be guilty of an offence too. Although the likelihood of a lender or lessor assuming liability for a customer's environmental problems remains remote in Hong Kong, mortgagees and lessors are advised to take considerable care before repossessing leased assets which are capable of polluting or are hazardous to safety. The degree of control exercised, even when not in possession, may also determine whether mortgagees and lessors have inadvertently become "shadow directors" of the polluting party.

2 Care should be taken not to over-monitor a lessee's business, undertake too many inspections, or take control of expenditure (particularly in relation to repairs and maintenance) as these may be considered tantamount to directing the lessee. Hong Kong has stepped up its efforts to reduce vehicle pollution, and vehicle lessors, particularly of public light buses and taxis, should keep an eye on the regulations which require increasingly stringent emission controls. Car, fuel and electricity suppliers now have to comply with lower levels of sulphur dioxide, nitrogen dioxide and respirable particulates in both fuel emissions and electricity works. In this connection, the Motor Vehicle Idling (Fixed Penalty) Ordinance prohibits all idling vehicle engines in Hong Kong unless an exemption applies. Environmental damage from fuel and oil spills from ships is a concern of every ship lessor. Although the risks are passed on, the owners and lessors of cruise ships, passenger ferries and other vessels in excess of 1,000 gross tons have to ensure that a certificate of insurance is in place to cover the registered owner for pollution damage up to the limits of liability set out in the Bunker Oil Pollution (Liability and Compensation) Ordinance. In addition to environmental laws, like most developed nations, Hong Kong continues to update its factory and building-related legislation in Hong Kong aimed at protecting the health and safety of workers and visitors in the workplace. In a case decided in 2011 the Court of Final Appeal affirmed that a lessee, in occupying premises, may be liable for injury/damage caused by an independent contractor to one of its employees, even where the contractor is competent, the work is not hazardous, and the lessee lends equipment that is not deficient or dangerous. A lessee is deemed to know what will happen if equipment is used in an unsafe method. Therefore, lessees should (a) be very careful to oversee safe operating procedures of their contractors; (b) ensure contractors have adequate liability insurance covering both Article parties; and/or (c) ensure relevant indemnities or hold harmless clauses are in place between themselves and the contractor. In a case decided in mid-2014 the proprietor of a factory was fined HK$185,000 for violation of the Factories and Industrial Undertakings Ordinance and the Boilers and Pressure Vessels Ordinance, following the fatal explosion of a steam boiler at the factory. A lessee, as an employer, must ensure that legally compliant safety measures are in place and strictly monitored. In the aviation sector, safety in the workplace has become an international issue, and Hong Kong is no exception. The recommendations of the International Civil Aviation Organisation have been adopted into law by Hong Kong in the form of the Air Navigation (Dangerous Goods) Regulations, and so lessees of aircraft must now take care in relation to carrying dangerous goods, as well as informing passengers as to the categories of disallowed items that may be taken on board. Recently, the International Civil Aviation Organisation has issued recommendations in relation to carrying portable electronic devices containing lithium metal batteries. Also of importance to lessors and lessees are those ordinances which restrict the enforceability of certain contractual terms found in standard leases. The Sale of Goods Ordinance provides that a number of terms will be implied each time goods are sold. As "goods" would include equipment being sold at the end of a lease, Hong Kong lessors will impliedly pass good title to that equipment, which must be of merchantable quality. This means that the equipment must be fit for the purpose for which it is sold and must match its description. Equipment which is of "merchantable quality" means that the equipment has to be free from defects (including minor defects), safe and durable. It is possible to exclude liability from loss or damage in the event that these terms are breached, but the exclusions must be reasonable in the circumstances. Guidance as to what is reasonable can be obtained by looking at the Control of

3 Exemption Clauses Ordinance. This ordinance is also of interest to leasing companies because it prohibits exclusions and restrictions from liability for death or personal injury caused to any person by reason of a leasing company's negligence. The Supply of Services (Implied Terms) Ordinance will also be of interest to leasing companies because it will be an implied term in a Hong Kong lease that the lessor will carry out its services under the lease (for example, delivery, installation and/or maintenance of the equipment) with reasonable care and skill. Like the Sale of Goods Ordinance, the exclusion of implied terms in a contract for the supply of services is subject to the Control of Exemption Clauses Ordinance. The Unconscionable Contracts Ordinance allows a court to refuse to enforce an unconscionable contract, or any part, in which one of the parties is dealing as a consumer. As the name suggests, this Ordinance is designed to protect innocent consumers from excessive terms or unscrupulous conduct of suppliers. With the increasing influence of the United Nations Security Council, leasing companies are becoming aware of the sanctions which are extended to Hong Kong. At the current time, trading by a Hong Kong company with Iraq, Libya, Afghanistan, Sudan, Liberia, the Democratic Republic of the Congo, Somalia, the Democratic People's Republic of Korea, Lebanon, Iran, Eritrea, Yemen, Central African Republic and Guinea-Bissau is partially banned depending upon the goods carried or the services rendered. Hong Kong continues to be a relatively simple jurisdiction to set up in business. In keeping with Hong Kong's laissez-faire tradition, there are no special regulations for leasing companies, although to counter loan-sharking Hong Kong has some fairly strict regulations when it comes to money lending. A Hong Kong leasing company wishing to include into its leasing activities the advance of loans or the provision of credit, into which bracket finance leases arguably fall, will have to apply for a money lenders licence pursuant to the Money Lenders Ordinance. In early 2014, the major and comprehensive exercise to rewrite the Companies Ordinance which was launched in mid-2006 was completed. The new Companies Ordinance (Cap. 622) commenced operation on 3 March 2014, while the previous ordinance is renamed as the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). The two ordinances currently in force provide the legal framework which enables the business community to form and operate companies. They also set out the parameters within which companies must operate, so as to safeguard the interests of those parties who have dealings with them, such as shareholders and creditors. The new Companies Ordinance aims to modernise the company law, to facilitate a more business-friendly environment and to bring the law more in line with the major United Kingdom company law reforms of recent years. It is one of the longest and most complex pieces of legislation in Hong Kong, with 21 Parts, 921 Sections, 11 Schedules and 12 subsidiary instruments. On 3 March 2014, the core provisions governing the operation of companies under the previous Companies Ordinance were repealed except for provisions relating to the winding up and insolvency of companies which remain in the Companies (Winding Up and Miscellaneous Provisions) Ordinance. The new Companies Ordinance is of importance to lessors and lessees in Hong Kong as the changes will impact their business operation and corporate governance. To name a few examples, the new Companies Ordinance has (i) clarified the standard of directors' duty of care, skill and diligence; (ii) updated the list of registrable charges (e.g. by expressly providing that, in addition to a charge on a ship or any share in a ship, a charge on an aircraft or any share in an aircraft is also registrable), and (iii) allowed more private companies and small guarantee companies to take advantage of

4 simplified accounting and reporting requirements. Readers should also be aware that Hong Kong's first comprehensive cross-sector Competition Ordinance was enacted in June 2012, and its substantive provisions are expected to come into force later this year on a date to be set by the government. The new Competition Ordinance aims to prohibit conduct that prevents, restricts or distorts competition in Hong Kong. In addition to prohibiting certain merger and acquisition transactions that restrict competition in Hong Kong, the Competition Ordinance contains a generally worded prohibition of anti-competitive agreements and a prohibition against unilateral conduct that constitutes abuse of substantial market power. It will be prudent for a Hong Kong leasing company to familiarise itself with the key prohibitions in the Ordinance and identify any potential areas of risk in respect of its business activities. Company directors and senior executives may also face significant financial and other risks as individuals if they are involved in the operation or management of a company that contravenes the Ordinance. A leasing company wishing to do business in Hong Kong can register itself as a "registered non-hong Kong" company in Hong Kong or set up afresh in accordance with the filing regulations laid down in the new Companies Ordinance. There are no restrictions as to Hong Kong nationality or residency of directors or shareholders. No Hong Kong consents are required. Hong Kong has no exchange control restrictions or foreign investment regulations. There is no requirement that board meetings be held in Hong Kong. Readers might like to know however that consents of other countries may still be required and fiscal considerations of other countries may point to a particular type of constitution. For example, a subsidiary of a U.K. or U.S. company setting up in Hong Kong may wish to protect its parent's tax position by introducing a provision to ensure that "central management and control" remains at all times in Hong Kong. Some good news, so as to encourage investors to set up companies in Hong Kong, is that capital duty levied on Hong Kong companies on the increase of their share capital was abolished from 1 June Its abolition allows Hong Kong companies to raise their capital without any government fee or tax. Leasing companies may be private or public, or limited by guarantee or shares. Shelf companies may be purchased if speed is preferred and the name is not of importance initially. The name (which must be in English) can always be changed subsequently. There is no system for name approval. Instead, the Registrar of Companies has a right to request that the chosen name be changed, usually due to it being too similar to an existing name on the Register. Every Hong Kong private company must have a minimum of 1 director who is a natural person (note that public companies and companies limited by guarantee still require at least 2), 1 shareholder, a company secretary (who must be a Hong Kong resident or Hong Kong company with its place of business in Hong Kong), an auditor (who must be a Hong Kong registered auditor) and a registered office address in Hong Kong. Anyone commencing a leasing business in Hong Kong (which includes companies incorporated in Hong Kong) must register that business with the Business Registration Office. A business registration certificate is issued and this must be renewed annually at a nominal cost. A legal community of over 800 law firms provides the legal services necessary to deal with the initial setting up and annual filing requirements of Hong Kong businesses.

5 Article Endnote 1 Dean Young is a senior consultant of Mayer Brown JSM. He advises on commercial, corporate and security issues affecting shipping and airline companies, including sale and purchase, construction, leasing and registration of ships and aircraft. The author may be reached at dean.young@mayerbrownjsm.com. Mayer Brown JSM is part of Mayer Brown, a global legal services organization advising many of the world s largest companies, including a significant portion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world s largest banks. Our legal services include banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; employment and benefits; environmental; financial services regulatory & enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management. Please visit our web site for comprehensive contact information for all Mayer Brown JSM offices. Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the Mayer Brown Practices ). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC ); Mayer Brown, a SELAS established in France; Mayer Brown Mexico, S.C., a sociedad civil formed under the laws of the State of Durango, Mexico; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customs and trade advisory and consultancy services, not legal services. Mayer Brown and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or be a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein The Mayer Brown Practices. All rights reserved.