Hong Kong: Fifty per cent cut in corporate profits tax for standalone corporate treasury centres

December 2015

Draft legislation (the Inland Revenue (Amendment) (No. 4) Bill 2015) means companies operating a CTC as a standalone corporate entity will now pay a concessionary 8.25% tax on profits, provided such CTC is a standalone corporate entity with at least 75 percent of profits attributable to qualifying activities. Companies will also benefit from improved interest deduction rules on intra-group financing.

The proposed legislation also offers some clarification on deemed interest income and on certain profits derived from lending and borrowing activities by a CTC, now deemed as taxable trading receipts.

The corporate treasury function is essential to all multinational companies (MNCs), intended to optimise procurement and the use of capital across the entire group. Increasing numbers of MNCs are seeking to manage their treasury operations through regional CTCs, with a number doing so to facilitate their expansion in Asia. At the same time, many Asian companies – particularly Chinese state-owned enterprises (SOEs) and privately-owned enterprises (POEs) – are looking to establish a CTC as part of their international expansion.

Currently, where a company obtains a loan from a non-financial institution to facilitate lending or borrowing to subsidiaries or intra-group companies, any interest expenses are tax deductible only if these are incurred in generating chargeable profits, and if such interest, where received by a non-financial institution, is subject to Hong Kong profits tax. In other words, where a CTC is performing group treasury activities in Hong Kong, any interest payments to associated corporations outside Hong Kong are not tax deductible, whereas any interest income arising from standard corporate treasury management and money lending activities within Hong Kong is liable for profits tax at 16.5 percent.

To qualify as a CTC, a corporation must be involved in one or more corporate treasury functions in Hong Kong (while not engaging in any other business activities). It must satisfy “safe harbour rules” as a multifunctional corporation (or have previously been awarded CTC status by the Commissioner). NB: not all corporate treasury activities performed by a CTC in Hong Kong qualify for the 8.25% concessionary tax rate, however. Such non-eligible activities might include any intragroup financing of a Hong Kong associated company, or the provision of corporate treasury activities to a Hong Kong associated company.

Under the new legislation, the deduction of interest expenses incurred by a corporation in the ordinary course of managing intragroup financing operations within Hong Kong will be allowed if: 

• The lender is subject to tax at a rate not lower than the current Hong Kong profits tax rate (i.e., either 16.5 percent or – where the lender is itself a qualifying CTC – 8.25 percent); and
  
  
• The lender’s right to use and enjoy such interest is not constrained by any contractual or legal obligation, unless such obligation arises as a result of a transaction between the lender and an entity other than the borrower.

 The tax bill is intended to amend Section 15 of the IRO to provide that the interest income and specified disposal profits earned by a corporation in respect of any intragroup financing are deemed trading receipts and subject to profits tax, even where such funds are made available, or the transaction is effected, outside Hong Kong.

Currently under review by the Legislative Council, the bill is not expected to come into effect before 1 April 2016.

Jimmy Chung, tax partner, Russell Bedford Hong Kong, commented: "Hong Kong’s reputation as an international financial centre means it is perceived as a premier location for business and treasury management throughout Asia. These tax concessions on CTC activities are clearly directed at enhancing Hong Kong’s competitiveness to incentivise more MNCs to manage their treasury operations via CTCs in Hong Kong."