Tax Hong Kong Client Alert New Report Recommends Tax and Regulatory Changes to Make Hong Kong More Attractive to Chinese Companies that Invest and Expand Overseas The Financial Services Development Council (“FSDC”) recently released a report titled “Chinese Enterprises ‘Going Global’: Opportunities and Hong Kong’s Policy Responses” (available here), setting out recommendations on how Hong Kong can become more attractive to Chinese enterprises investing and expanding overseas. The FSDC is a high-level advisory body, established in 2013 by the HKSAR Government to formulate proposals to promote the development of Hong Kong’s financial services industry. The report pointed out that Hong Kong has been a popular platform for Chinese enterprises expanding overseas, taking up over half of the Mainland’s outbound foreign direct investments. However, in light of the Mainland’s newly established Free Trade Zones that aim to attract financial institutions and offer choices for Chinese enterprises to go global, the report opined that Hong Kong should maintain its position as the business hub of choice for enterprises with overseas aspirations by strengthening its core advantages as an IPO and financing platform, and enhancing offshore RMB business and professional services. After a short overview of the report, this client alert focuses on the report’s tax policy recommendations. According to the report, the HKSAR Government should sign more double taxation agreements, and speed up the plans to adopt tax measures to attract offshore private equity fund and multinational corporates’ treasury activities. These policies, if adopted, will increase the attractiveness of Hong Kong globally. I. Overview of the recommendations The report sets out 16 recommendations regarding tax policy, regulation and other governmental policies. Some of the recommendation concern policies set by HKSAR Government. Others concern potential changes in the Mainland that the HKSAR Government should promote by communicating and cooperating with China’s Central Government. The report recommends the HKSAR Government to consider providing a more conducive tax environment by expanding the double taxation agreement network as well as offering accommodative tax treatment for offshore private equity funds and corporate treasury activities; facilitating Chinese enterprises’ use of assets in the Mainland for offshore financing; June 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 | June 2015 simplifying regulatory requirements for Mainland operations of Hong Kong’s commercial banks; attracting large-scale state-owned enterprises listing and operating in Hong Kong; stepping up the promotion of Hong Kong’s high-quality professional services in the Mainland and encouraging Chinese enterprises to set up captive insurance business in Hong Kong; and strengthening the talent pool by attracting professionals from outside Hong Kong as well as enhancing local talents’ competitiveness. For regulatory issues in the Mainland as identified by Hong Kong’s financial service practitioners, the report suggests the Central Government to consider streamlining the relevant approval process for Chinese enterprises to go overseas; amending the relevant legislations and regulations such as “Document 10” to facilitate Chinese enterprises to carry out overseas listing as red chip companies; reviewing the practice of reducing/transferring state-owned shares; relaxing regulations on issuance of H-shares, preference shares, and convertible bonds; reducing the capital gains tax arising from transfer of assets; simplifying the foreign exchange acquisition process; implementing pilot projects of professional manager system; and relaxing, in a targeted manner, regulatory controls over private enterprises. II. Tax recommendations for Hong Kong 1) Double Taxation Agreements (“DTAs”) “Going Global” involves cross-border economic activities, which often lead to double taxation. DTAs would mitigate this issue. While Singapore has already signed DTAs with around 76 countries and regions, Hong Kong has only signed 32 DTAs, with 13 more under negotiation. The report recommends that the HKSAR Government should sign more new DTAs, especially with those jurisdictions which Chinese enterprises have close trade relationships, like Russia and India, to enhance the attractiveness of Hong Kong for Chinese enterprises to conduct crossborder business. 2) Taxation of offshore Private Equity (“PE”) funds The lack of understanding in managing cross-border M&A transactions and the lack of knowledge in the law and culture in host countries often hampered the success of Chinese enterprises’ overseas M&As. To improve the rate of success, PE funds with extensive knowledge and experience in cross-border transactions are often invited to participate as investors in these M&A transactions. To attract more offshore PE funds to establish local presence, Singapore has implemented the “Offshore Fund Tax Exemption Scheme”, which exempts offshore PE funds from tax. In Hong Kong, it was proposed in the 2013-14 Budget (the “Budget”) to extend the profits tax exemption for offshore funds to include transactions in private companies which are incorporated or registered outside Hong Kong but do not hold any Hong Kong properties nor carry out any business in Hong Kong. This will allow PE funds to enjoy the same tax exemption arrangement as offshore funds. The Budget also proposed that the June 2015 | Baker & McKenzie 3 Government would conduct studies to make legislative amendments to introduce the open-end investment company structure to attract more traditional funds as well as hedge funds to be based in Hong Kong. The recommendations were reiterated in the 2015-16 Budget and the Government has gazetted a bill on 20 March 2015. The report recommends that relevant SAR Government departments should speed up the implementation of the plan. 3) Taxations on multinational corporates’ treasury activities As an international financial centre, Hong Kong is an ideal location for the management of global or regional treasury activities of enterprises “Going Global”. In order to make Hong Kong more attractive to such activities, it was proposed in the 2014-15 Budget that the Government will review and clarify the profits tax deduction requirements on interest expense for corporate treasury activities. The recommendation was reiterated in the 2015-16 Budget and the Government has planned to table a bill in the Legislative Council during the 2015-16 legislative year. The report recommends that relevant SAR Government departments should speed up the implementation of the plan. III. Tax recommendations for Mainland China In “Going Global”, domestic or cross-border mergers and restructuring are necessary steps. Based on current Chinese corporate income tax laws, unless special tax deferral arrangements are invoked during the restructuring, the capital gains from transfer of assets must be assessed based on the fair value of the transferred assets to evaluate the relevant tax obligations. Conditions for invoking special tax deferral arrangements are very stringent, and are only applicable to very few cases of crossborder restructuring. This potential tax cost constitutes an obstacle for enterprises venturing out. Since the revised Enterprise Income Tax Law came into effect in 2008, the Ministry of Finance of the People’s Republic of China (“MOF”) and State Administration of Taxation have issued a number of notices including  No.59 and  No.4, which required government authorities to improve their policies to promote corporate restructuring. On 7 March 2014, the State Council issued the  No. 14 (“Document 14”), requiring various government departments to make policy improvements to encourage corporate mergers and restructurings. In terms of tax policies, Document 14 requires a relaxation of corporate income tax laws on special tax arrangements for corporate restructuring. In view of this, the State Administration of Taxation has been studying new policies. The report supports the the new policies  No.109 (“Document 109”) and  No.116 (“Document 116”) jointly announced by the MOF and State Administration of Taxation which greatly improve the tax arrangement for domestic corporate restructuring. However, the coverage of Document 109 and Document 116 over cross-border restructuring is still limited. 4 Baker & McKenzie | June 2015 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 Richard Weisman +852 2846 1969 email@example.com Pierre Chan +852 2846 1560 firstname.lastname@example.org Noam Noked +852 2846 2116 email@example.com 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 firstname.lastname@example.org. © 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. The report therefore recommends that consideration should be given to the following three aspects with a view to exploring more possibilities for enterprises to make better use of the special tax arrangements for their cross-border restructuring activities: 1) Clarifying the conditions for invoking special tax arrangements in cross-border restructuring. For example, the general conditions for common restructuring under the special tax arrangement should be applicable to the common restructuring exercises which involve a merger between two Chinese companies belonging to the same overseas parent company. 2) The requirements for cross-border equity share transfers should be relaxed to the extent that the special tax arrangements would be applicable to indirect shareholdings. 3) Consideration should be given to how the special tax arrangements could be allowed for the common cross-border restructuring models other than the three prescribed cross-border restructuring models.