As Asia continues to be of increasing significance in the international market, more multinational corporations (MNCs) are looking to establish global and regional corporate treasury centers (CTCs) in the region.
Under China’s ‘Belt and Road’ initiative, Hong Kong is expected to serve as a ‘superconnector’ linking mainland businesses with the world. Financial Secretary John Tsang announced in his 2015 Budget speech that the government would further promote group treasury activities in Hong Kong.
A qualifying CTC only carries out corporate treasury activities in Hong Kong, or satisfies the defined safe harbor rules, or has obtained the Commissioner of Inland Revenue’s discretionary consent to be considered a qualified CTC
The Hong Kong Government recently gazetted the Inland Revenue (Amendment) (No. 4) Bill 2015, which introduces:
- a concessionary profits tax rate for qualifying CTCs
- new rules to deem certain interest income and other gains as being Hong Kong sourced
- amendments to the existing interest deduction provisions to allow a deduction for interest on certain intra-group lending transactions
Three broad definitions
The Bill introduces a concessionary tax rate (i.e. at 50 percent of Hong Kong’s prevailing profits tax rate of 16.5 percent) for qualifying CTCs. The new concessionary tax rate will only apply to qualifying CTCs in respect of qualifying profits from corporate treasury activities performed for overseas group entities.
A qualifying CTC is a corporation that:
- only carries out corporate treasury activities in Hong Kong during the relevant year of assessment, or
- satisfies the defined safe harbor rules, or
- has obtained the Commissioner of Inland Revenue’s discretionary consent that it is a qualifying CTC
The corporation must, in the relevant year of assessment, be centrally managed and controlled in Hong Kong, and the activities giving rise to the profits must either be carried out or arranged by the corporation in Hong Kong.
The safe harbor rules introduced in the Bill enable the corporation to be considered a qualifying CTC when the corporate treasury profits and corporate treasury assets amount to a minimum of 75 percent of the total profits and assets of the corporation in the relevant year of assessment.
Alternatively, the 75 percent threshold must be satisfied by an average percentage over the current year and the preceding one or two years of assessment, depending on how long the corporation has carried out its trade or business.
Finally, even where a corporation is unable to meet either of the above conditions, the Commissioner may, on application, use his discretion and deem the corporation to be a qualifying CTC if he is satisfied that the corporation would have met either the treasury or safe harbor CTC requirements, except for some extreme or unforeseen circumstances.
An election must be made to take advantage of the concessionary tax rate for Qualifying CTCs, and the election, once made, is irrevocable.
Updating tax deductibility rules
A key component of the government’s proposal is to update the tax deductibility rules to allow a tax deduction for qualifying interest expenditure on intra-group borrowings.
Currently, corporations using a Hong Kong entity as a group treasury center may be denied a deduction for interest paid to offshore associates, as such expenditure would not satisfy Hong Kong’s strict deduction rules. This restriction was perceived as a significant limitation for Hong Kong when multinationals consider a treasury center location.
The Bill proposes certain changes to the interest deductibility rules so that a corporation involved in the intra-group financing business in Hong Kong can deduct interest payable on loans from non-Hong Kong associated corporations in certain circumstances.
This amendment addresses corporations’ current potential mismatch on cross-border borrowing and lending transactions, whereby interest income could be subject to tax while a deduction may not be allowed for the corresponding interest expense.
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