The Hong Kong Special Administrative Region (HKSAR) Government wants more multinational enterprises (MNEs) to call Hong Kong home. Recent financial budgets have contained important tax initiatives to encourage MNEs (including Chinese enterprises) to establish their asset management businesses, corporate treasury centers and intellectual property holding hubs in Hong Kong.
Under existing Hong Kong tax law, income earned by a group treasury company from its ordinary course of corporate treasury management and money lending activities carried out in Hong Kong is subject to profits tax at the rate of 16.5%. However, any interest payment made by such a group treasury company to its overseas group companies is not tax deductible because such interest is not chargeable to Hong Kong profits tax in the hands of the overseas recipients. This asymmetrical tax treatment has resulted in Hong Kong being a less attractive location for corporate treasury operations.
In the 2016 Budget, the Financial Secretary also sought to provide a more commercially friendly environment for operating an intellectual property (IP) hub in Hong Kong, with a view to attracting MNEs to hold their IP in Hong Kong. In particular, the scope of the tax deduction for capital expenditure incurred on the purchase of IP rights would be extended to cover more types of IP rights as appropriate.
Among other measures, the bill introduces the following amendments to the Inland Revenue Ordinance (IRO):
- An 8.25% (i.e. current profits tax rate of 16.5% × 50%) concessionary tax rate will apply to qualifying profits of a qualifying CTC in relation to its qualifying corporate treasury activities, including:
- Borrowing of money from and lending of money to non-HK associated corporations;
- Qualifying corporate treasury services provided to non-HK associated corporations.
- Adding new deeming provisions, to make it clear that the interest income and specified disposal profits – earned by a CTC in respect of the business of the borrowing from and lending of money to associated corporations in or outside Hong Kong – are deemed trading receipts chargeable to profits tax.