At least three mainland Chinese companies have expressed their intent to set up corporate treasury centers (CTC) in Hong Kong after the city introduced changes to its tax rule last year. The amendments reduce the profits tax rate on specified activities of qualifying CTCs by 50%.
“At least three central state-owned enterprises, including China Huaneng Group, State Power Investment Corporation and China Three Gorges Corporation, have expressed their intention to establish or expand their CTCs in Hong Kong in the near future,” according to Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, in an article he wrote.
“Such positive responses are undoubtedly a strong stimulus to our efforts in expanding the scope for further development of Hong Kong’s financial industry.”
Chan noted that many large multinational corporations usually have in-house CTCs, which act like “in-house banks” to effectively manage and deploy funds, such as managing liquidity, financing, foreign exchange, investment and hedging activities of their branch offices and subsidiaries.
In-house CTCs not only allow these multinationals to manage their funds in a more flexible manner, but also help reduce their overall financing and operational costs, according to Chan.
“Very often the operation of CTCs requires the support of liquidity management, financing, risk management, taxation and legal advisory services. As Mainland enterprises are actively expanding in the international market under the “Go Global” initiative, the transfer and allocation of funds overseas has become even more important,” adds Chan.
“They require the support of an efficient CTC to centralize the management of their treasury and risk-management activities. With its wide-ranging strengths, including a premier financial market, the largest offshore renminbi market in the world, as well as world-class talent in the financial and related fields, Hong Kong is the ideal location for Mainland enterprises to set up their CTCs to support overseas business expansion.”
Chan notes that the growing popularity of Hong Kong as a hub for CTCs will also be conducive to the development of headquarters economy in Hong Kong, because many multinational companies tend to set up their CTCs and regional headquarters in the same location. This will provide a greater impetus for Hong Kong’s economic activities and long-term development.
The former tax system stifled the development of Hong Kong as a CTC hub, according to Chan. Only few mainland firms set up operations in the city because companies had to pay tax on interest income generated by the intra-group financing activities of the corporate treasury centers.