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Ayesha Lau |
Darren Bowdern |
A corporate treasury company often borrows from group companies with surplus cash and on-lends to other group companies. Hong Kong's tax laws provide that interest paid by a treasury is generally not tax deductible when borrowed from an offshore group company notwithstanding that interest income from these activities is subject to tax in Hong Kong. Consequently, and directly due to the asymmetry of tax treatment, Hong Kong is seldom a preferred location for multinationals establishing regional corporate treasury companies. Hong Kong's financial secretary announced in his Budget speech in February 2015 that the government intends amending the taxation laws to allow for interest deductions for Corporate Treasury Centres (CTCs) as well as a tax rate cut of up to 50% for firms setting up CTCs in the territory.
The government is confident that these proposed incentives will enable Hong Kong to actively compete for firms looking to establish CTCs in the Asia Pacific region and will help Hong Kong cement its position as a prime financial hub.
The development of Hong Kong as a regional CTC hub would benefit Hong Kong's financial and business sectors, and help increase Hong Kong's capital markets, including the offshore RMB market. It is likely that the focus of the government's recent announcement is emerging Chinese and Asian multinationals.
Many multinational companies regard Singapore as having an advantage over Hong Kong as a regional treasury centre, mainly due to its favourable tax treatment of CTCs. Hong Kong can, however, claim many of the same advantages. In particular its network of double taxation treaties is generally considered to be modern, of good quality and is still expanding. Under the current proposal, the Hong Kong tax rate for qualifying treasury centre income (8.25%) will actually be lower than Singapore (10%) and with the intention of amending the interest deduction rules, a Hong Kong CTC would no longer be economically disadvantaged if it is funded by offshore entities within the same group.
The proposed legislation is not expected until the latter part of 2015, and a consultation period is likely to take place beforehand. Once the consultation period is announced, further details of what activities would constitute a CTC are likely to be published.
The relaxation of the interest deduction rules for qualifying CTC activities and a concessionary half-rate regime for qualifying CTCs will definitely enhance Hong Kong's future attractiveness.
Ayesha Lau (ayesha.lau@kpmg.com) and Darren Bowdern (darren.bowdern@kpmg.com)
KPMG
Tel: +852 2826 8028 and +852 2826 7166
Website: www.kpmg.com/sg
