Hong Kong’s aim to be a corporate treasury centers (CTC) hub got a big boost recently when the Hong Kong Inland Revenue Amendment No. 4 Bill 2015 was enacted into law on June 3.
Aimed at attracting multinational and mainland China enterprises to establish CTCs in Hong Kong, the new law addresses the deduction for interest paid to overseas associated corporations and provides an 8.25% concessionary tax rate for qualifying profits of qualifying CTCs.
The new rule could help Hong Kong close the gap with Singapore whose friendly tax regime has been attracting MNCs, according to a news report that cited analysts. Howard Yang, country head of Hong Kong for Citi’s Treasury and Trade Solutions, told the South China Morning Post that it could take up to five years before Hong Kong catches up with Singapore which has the early starter advantage.
The Legislative Council passed the Inland Revenue (Amendment) (No. 4) Bill 2015 on May 26, 2016. The concessionary profits tax rate for qualifying corporate treasury centers will apply to relevant profits accrued on or after April 1, 2016, and the new interest deduction rule will apply to interest payable in relation to an intra-group financing business on or after the same day.
Revised provisions in relation to regulatory capital securities (RCSs) and related amendments to the Stamp Duty Ordinance is now into operation.
“The Amendment Ordinance provides a conducive environment for attracting multinational and Mainland corporations to centralize their treasury functions in Hong Kong, thereby enhancing the competitiveness of our financial markets and contributing to the development of a headquarters economy,” says Secretary for Financial Services and the Treasury, Professor K C Chan.
The Amendment Ordinance also facilitates banks' issuance of relevant securities in compliance with international regulatory capital requirements, promoting the stability and resilience of the banking sector.
Under the new law, interest paid by a corporation carrying on an intra-group financing business in Hong Kong, to its overseas associated corporations will be tax deductible. One of the key specified conditions is that the interest income received by an overseas associated corporation is “subject to tax” in a territory outside Hong Kong i.e., overseas tax of a nature similar to Hong Kong corporate income tax has been paid or will be paid at not less than the applicable rate of either 8.25% or 16.5%.
“Subject to tax” condition would not be regarded as satisfied if, for example, the overseas associated corporation incurred a substantial loss for a long period and it has not paid any tax.
According to Ernst & Young, two specific anti-avoidance provisions were newly added concerning: arrangements under which an overseas associated corporation passes the interest received to a related person which is not subject to tax in Hong Kong or overseas, or if subject to tax, the rate is less than the applicable rate; and arrangements where the utilization of tax losses in Hong Kong is a main purpose.
The new law provides that a qualifying CTC can make an election in writing to have its qualifying profits taxed at the 8.25% concessionary tax rate (i.e., 50% of the normal rate of 16.5%).
A CTC would be regarded as a qualifying CTC if it is a corporate entity solely dedicated to the conduct of one or more of the following corporate treasury activities: carrying on an intra-group financing business; providing corporate treasury services; or entering into corporate treasury transactions.
A corporation may also be regarded as a qualifying CTC if it satisfies the specified safe-harbor rules, or if it has obtained a determination from the Commissioner of Inland Revenue.
The new law also contains provisions deeming or clarifying that interest income on loans and related income in respect of certificates of deposit, bills of exchange and regulatory capital securities earned by a corporation carrying on an intra-group financing business in Hong Kong would be deemed to be taxable profits.
The interest deduction rules and concessionary tax rate will apply retroactively on sums paid, received or accrued on or after 1 April 2016. The deeming provisions will apply to sums received or accrued on or after 3 June 2016.