Hong Kong introduces legislative bill for corporate treasury center incentives

Transcription

1 11 December 2015 Global Tax Alert Hong Kong introduces legislative bill for corporate treasury center incentives EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary In order to attract multinational corporations to establish corporate treasury centers (CTCs) in Hong Kong, including facilitating the drive of mainland China enterprises to go global under the One Belt One Road initiative, the Financial Secretary of Hong Kong announced in his Budget that the Hong Kong Government would amend the Inland Revenue Ordinance (IRO) to allow a deduction for interest paid to overseas associated corporations and provide an 8.25% concessionary tax rate for qualifying profits of qualifying CTCs. 1 The legislative bill 2 (Bill) implementing the above proposal was published in the Official Gazette on 4 December 2015 and will be presented to the Legislative Council for first reading on 16 December Subject to the passage of the Bill by the Legislative Council, the proposed interest deduction rules and concessionary tax rate for qualifying profits of a qualifying CTC will apply to sums payable, received or accrued on or after 1 April This Alert summarizes the key provisions of the Bill.

2 2 Global Tax Alert Detailed discussion Interest deduction for CTCs Under a new section 3 to be introduced into the IRO, any corporation which carries on, in Hong Kong, a business of borrowing money from and lending money to its associated corporations, can claim a tax deduction for interest paid to a non-hong Kong associated corporation provided that all of the following conditions are satisfied: (i) The money is borrowed in the ordinary course of the intra-group financing business of the corporation. (ii) The lender is, in respect of the interest, subject to tax overseas which is similar to the corporate tax of Hong Kong, at a rate not lower than the reference rate (i.e., 16.5% or 8.25% as applicable). For this purpose, the lender would be considered as being subject to tax overseas where the Commissioner of Inland Revenue (CIR) is satisfied that the relevant overseas tax has been or will be paid. (iii) The lender s right to use and enjoy that interest is not constrained by a contractual or legal obligation to pass that interest to any other person (unless the obligation arises as a result of a transaction between the lender and a person other than the borrower dealing with each other at arm s length). Concessionary 8.25% tax rate for qualifying profits of a qualifying CTC A qualifying CTC can elect to have its qualifying profits taxed at the 8.25% concessionary tax rate. Such an election, once made, is irrevocable for so long as the corporation remains as a qualifying CTC. When a CTC has made an election but fails to qualify as a qualifying CTC for a particular year, the CTC will be denied the concessionary tax rate for the subsequent year of assessment. 4 Qualifying transactions generating qualifying profits Money lent in the ordinary course of the CTC s intragroup financing business to a non-hong Kong associated corporation A corporate treasury service (as defined under the Bill) provided by the CTC to a non-hong Kong associated corporation A corporate treasury transaction (as defined under the Bill) entered into by the CTC on its own account that is related to the business of a non-hong Kong associated corporation Further, to qualify for the concessionary tax rate, any sum paid to the CTC for the above three types of qualifying transactions cannot be tax deductible to the payer in Hong Kong. Qualifying CTC To qualify as a qualifying CTC for a year of assessment, (i) the central management and control of the CTC concerned for that year has to be exercised in Hong Kong; and (ii) the activities that produce the qualifying profits in that year have to be either (a) carried out in Hong Kong by the CTC itself; or (b) arranged by the CTC to be carried out in Hong Kong. The above business substance in Hong Kong requirements are to ensure that the proposed tax incentive in the form of the concessionary tax rate would not be regarded as a harmful tax practice by the international community, in the context of the initiative spearheaded by the Organisation for Economic Co-operation and Development and the G20 countries in addressing base erosion and profit shifting. The business substance in Hong Kong requirements would also be compatible with the desire of many CTCs to claim tax benefits under the expanding tax treaty network of Hong Kong. The Bill also stipulates that, subject to certain safe harbor rules, a CTC would be a qualifying CTC only if, for the year of assessment in question, it is a standalone corporate entity dedicated to conduct one or more of the following corporate treasury activities and no others (an entity-based approach): Carrying on an intra-group financing business of borrowing money from and lending of money to its associated corporations Providing a corporate treasury service Entering into a corporate treasury transaction A CTC not dedicated solely to one or more of the specified corporate treasury activities would nevertheless be regarded as a qualifying CTC under the following two safe harbor rules: (1) Both the aggregate amount of the corporate treasury profits (CTP) and the aggregate value of the corporate treasury assets (CTA) for the year of assessment in question are not less than 75% of the total amount of the profits and value of the assets of the CTC concerned. 5 (2) Where a CTC fails to qualify as a qualifying CTC on the above, the CTC may make an application to the CIR requesting the CIR s determination.

3 Global Tax Alert 3 New deeming sections The Bill proposes two new deeming sections that the interest income and relevant profits in respect of certificates of deposit, bills of exchange and regulatory capital securities derived by a CTC from its business of intra-group financing business in Hong Kong would be deemed as taxable profits. Endnotes 1. For more details, see EY Global Tax Alert, Hong Kong Budget proposes investment incentives and reduced tax rate for certain treasury activities, dated 4 March The bill referred to is Inland Revenue (Amendment) (No. 4) Bill 2015 and is downloadable from egazette/pdf/ /es pdf. 3. Section refers to sections of the Inland Revenue Ordinance. 4. A year of assessment commences on 1 April and ends on 31 March of the following year. 5. The average CTP and CTA percentage over the subject year of assessment and the two preceding years would be taken into account, or the average CTP and CTA percentage over the subject year and the preceding year of assessment where the CTC concerned carries on business in Hong Kong for less than two consecutive years immediately before the subject year of assessment.

4 4 Global Tax Alert For additional information with respect to this alert, please contact the following: Ernst & Young Tax Services Limited, Hong Kong Tracy Ho Florence Chan, Financial Services Ernst & Young LLP, Hong Kong Desk, New York Connie HF Chan Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty Kaz Parsch Bee-Khun Yap Ernst & Young LLP, Asia Pacific Business Group, Houston Trang Martin

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG no. CM NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com