Hong Kong Guides On Treasury Center Tax Breaks
by Mary Swire, Lowtax.net, Hong Kong
12 September, 2016
Hong Kong's Inland Revenue Department has issued Departmental Interpretation and Practice Notes No. 52, which explain the conditions for the deduction of interest payable on money borrowed within an intra-group financing business, and how a corporate treasury center (CTC) can obtain the new concessionary 8.25 percent profits tax rate.
The concessionary profits tax rate for qualifying CTCs (at 50 percent of the prevailing tax rate) applies to relevant profits accrued on or after April 1, 2016. The half-rate concession is granted to a qualifying CTC if, in a year of assessment, the central management and control of the corporation is exercised in Hong Kong and the activities that produce its qualifying profits in that year are carried out in Hong Kong.
The new interest deduction rule also applies to interest payable in relation to an intra-group financing business on or after April 1, 2016. Previously, if a corporation obtained a loan from a non-financial institution in the ordinary course of its intra-group financing business, the interest expense was only deductible if the corresponding interest income of that non-financial institution was also subject to Hong Kong profits tax. The deduction is now available even if the monies concerned are made available outside Hong Kong.
The Departmental Interpretation and Practice Notes also explain the operation of anti-avoidance provisions that have been included so as to ensure that the CTC tax incentives are consistent with international standards to combat base erosion and profit shifting.
It is required that, in respect of the interest income receivable in a territory outside Hong Kong, the CTC is subject to corporate tax at a rate not lower than Hong Kong's profits tax rate. This is intended to prevent tax avoidance opportunities "in which a corporation arranges artificial transactions generating interest expenses in Hong Kong, with lending to an associated corporation situated in a tax jurisdiction charging ultra-low or even zero rate for the profits derived from the interest income."
It is added that, in the absence of withholding tax and thin capitalization rules in Hong Kong, this requirement is necessary to ensure that the CTC tax incentives are not seen by other tax jurisdictions as eroding their tax bases, or as encouraging multinational companies to arrange transactions to achieve double non-taxation.
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