New tax rules introduced this month by Hong Kong could boost efforts to attract more multinational companies and Chinese enterprises to set up headquarters and treasury functions in the city.
Effective from June 3, qualified companies are eligible for a 50% cut to profits tax, from 16.5% to 8.25% and see all their interest expenses items become tax deductible this financial year, if they choose to set up a corporate treasury centre in Hong Kong.
The reduction was outlined back in February 2015 as part of Hong Kong’s initiative to close the gap with Singapore, its main Asia Pacific rival as a destination for company headquarters. Between 2005 and 2015, the number of headquarters of global companies in Singapore jumped from 3,600 to 12,600, according to Monetary Authority of Singapore and industry survey figures.
A range of other measures was outlined in January this year by Hong Kong politician Leung Chun-ying .
Analysts believe that the move is a timely one in reinforcing Hong Kong’s credentials as a hub for corporate treasurer centres (CTCs), with many mainland Chinese companies expanding overseas – although bankers caution that it could be some time before the city begins to see any tangible benefits.
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. Among 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; meaning that 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%.
A commentary by Ernst & Young noted 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 utilisation of tax losses in Hong Kong is a main purpose.
The new law provides that a qualifying CTC can elect in writing to have its qualifying profits taxed at the 8.25% concessionary tax rate; half 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.
Norman Chan, chief executive officer (CEO) of the Hong Kong Monetary Authority (HKMA) who led the lobbying over a two-year period for the tax changes, said that he was optimistic the concession would spur Hong Kong’s development as a place for a “headquarters economy”, and create great businesses and demand for banking, financing, risk management, taxation and legal advisory services.
Most are ‘hugely optimistic’ that their business will succeed in the year ahead, according to Ricoh Europe.
Companies have only a limited time to complete their preparations before the UK departs the EU, warns Marsh executive Mark Weil.
The bank and the International Financial Corporation are continuing the eight years old trade finance partnership with a further investment.
Although the EU’s Markets in Financial Instruments Directive (MiFID II) is now better understood by asset management firms, too many grey areas still surround the regulation, claims Linedata.