Tax Hong Kong Client Alert Changes to the Inland Revenue Ordinance to Enhance the Attractiveness of Hong Kong as a Corporate Treasury Hub On 4 December 2015, the Hong Kong Government published in the Gazette a legislative amendment bill1 (the “Bill”) that, if enacted, will enhance the existing interest deduction rules for the intra-group financing activities of multinational corporations and introduce a concessionary profits tax rate for qualifying corporate treasury centres. In terms of timing, the Bill will be introduced into the Legislative Council for first reading on 16 December 2015. Corporate treasury centres Background Until now, Hong Kong has been viewed less favourably than other jurisdictions as a location for corporate treasury centres (“CTCs”) due to the absence of specific tax incentives and as a result of restrictions on the deductibility of offshore interest payments. Changes to the tax regime for CTCs In an attempt to make Hong Kong a more attractive location for multinational and Mainland corporations to set up CTCs, the Bill will amend the Inland Revenue Ordinance (“IRO”) to: (i) allow, under specified conditions, interest deductions for CTCs; and (ii) reduce the profits tax rate for specified treasury activities by 50% (i.e., to 8.25%) . Interest deductions Under current law, if a CTC borrows from an overseas group company which is not subject to tax in Hong Kong, the CTC will not generally be entitled to a tax deduction in respect of the interest paid to the overseas group company. Under the Bill, interest expenses arising from inter-company borrowings will become tax deductible, provided that the interest income received by the overseas group company is subject to tax of a similar nature to Hong Kong profits tax and at a rate that is no lower than Hong Kong’s profits tax rate (i.e., 16.5%). 1 See Inland Revenue (Amendment) (No. 4) Bill 2015 (gazetted on 4 December 2015) December 2015 Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC T: +86 10 6535 3800 F: +86 10 6505 2309 Hong Kong 14/F Hutchison House 10 Harcourt Road Central, Hong Kong T: +852 2846 1888 F: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC T: +86 21 6105 8558 F: +86 21 5047 0020 2 Baker & McKenzie | December 2015 In order to forestall aggressive tax avoidance schemes creating interest expenses to reduce assessable profits in Hong Kong, the Bill includes an anti-avoidance provision, pursuant to which no deduction will be allowed if the Commissioner of Inland Revenue considers that the main purpose, or one of the main purposes, of the borrowing of the money is to utilise a loss to avoid, postpone or reduce any liability to Hong Kong profits tax. This change to the availability of interest deductions will help to correct the existing tax asymmetry, under which a tax deduction is not available for interest payments to an overseas group company, even though the receipt of interest income is subject to profits tax. In addition, the Bill includes a deeming provision to tax interest that arises through or from the carrying on of an intra-group financing business by a corporation in Hong Kong in the same way a financial institution would be taxed. In other words, if a corporation (other than a financial institution) borrows money from and lends money to group companies in the course of its intra-group financing business carried on in Hong Kong, the relevant interest income will be regarded as receipts derived from Hong Kong, and therefore chargeable to profits tax, even if the loan funds are made available outside of Hong Kong. This deeming provision will affect corporations who have previously applied the “provision of credit” test. Reduction of profits tax rate Under current law, if a CTC receives interest income from an overseas group company, such income is generally chargeable to profits tax. The Bill will introduce a concessionary profits tax rate for CTCs of 8.25% in respect of profits derived from qualifying corporate treasury transactions under specified conditions, and qualifying corporate treasury services or transactions made to group companies outside Hong Kong. In order to prevent taxpayers from shifting non-CTC income into the concessionary profits tax regime, the Bill provides that the concessionary profits tax rate will only apply to a corporation has not carried out in Hong Kong any activity other than a corporate treasury activity. For this purpose, only activities that generate income to the corporation are to be taken into account. Implications for Hong Kong The proposed resolution of the existing tax asymmetry is to be welcomed as this factor is a major reason why Hong Kong is often not a preferred location for multinational corporations wishing to set up a CTC in the Asia Pacific region. The amendments should help to attract more CTCs to be established in Hong Kong. The proposed concessionary tax rate of 8.25% compares favourably with concessionary tax rates in other jurisdictions. For example, an approved corporate treasury centre in Singapore is able to enjoy a concessionary corporate tax rate of 10%, as opposed to the ordinary rate of 17%. December 2015 | Baker & McKenzie 3 www.bakermckenzie.com To find out more about how we can add value to your business, please contact: Steven Sieker +852 2846 1048 firstname.lastname@example.org Pierre Chan +852 2846 1560 email@example.com Jonathan Morris +852 2846 2433 firstname.lastname@example.org This publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this publication is not an exhaustive analysis of the area of law discussed. Baker & McKenzie cannot accept responsibility for any loss incurred by any person acting or refraining from action as a result of the material in this publication. If you require any advice concerning individual problems or other expert assistance, we recommend that you consult a competent professional adviser. Unsubscribe To unsubscribe from our mailing list or to change your communication preferences, please contact email@example.com. © 2015 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. However, there are certain uncertainties which need to be clarified before the Bill is enacted. Firstly, it is not clear whether the interest deduction will be available if the recipient company does not in fact pay tax in a year of assessment because it has available losses and deductions which exceed its income (thereby resulting in there being no net assessable profits). Secondly, it is unclear why the recipient’s income needs to be subject to tax of at least 16.5% since the proposed concessionary tax rate means that, in the reverse scenario (i.e., when a Hong Kong CTC receives interest income from an overseas group company), a Hong Kong CTC will pay tax at the reduced rate of 8.25%. This creates a new asymmetry, under which a Hong Kong CTC can receive interest income and pay tax at the rate of 8.25%, but will only be entitled to a deduction for interest paid if the recipient of that interest is subject to tax of at least 16.5% thereon. In particular, it is not clear why the interest deduction would not be available in the case of interest payments made to an overseas group company in a jurisdiction which has also put in place a concessionary tax rate regime (with a reduced rate of below 16.5%, but exceeding 8.25%).