The Hong Kong SAR government has released a stream of tax incentives to bolster the financial services industry. It therefore came as no surprise that the government introduced a concessionary tax regime to further develop the insurance sector and bolster Hong Kong SAR’s competitiveness as an international insurance hub and risk management centre.
Previously, Hong Kong SAR had a concessionary tax regime whereby a profits tax rate of 8.25% (half of the current profits tax rate of 16.5%) was available to authorised captive insurance business and reinsurance business of professional reinsurers in Hong Kong SAR.
Effective from March 19 2021, the new rules extend the concessionary tax regime to certain qualifying insurance-related businesses as follows:
- All general reinsurance business of a direct insurer (‘specified insurer’);
- Certain types of general insurance business of a specified insurer (‘specified general insurance business’); and
- Certain types of insurance brokerage business of licensed insurance broker companies.
However, there is a specific carve-out for specified general insurance business covering the following five types of risk and liabilities, namely:
- Health risk;
- Mortgage guarantee risk;
- Motor vehicle damage risk;
- Employees’ compensation liability; and
- Owners’ corporation third-party liability.
The new rules contain an anti-avoidance provision (i.e. a main purpose test) to deny the concessions if a direct insurer enters into a transaction or a series of transactions with a person for the sale or purchase of insurance or reinsurance and the main purpose, or one of the main purposes, in entering into the transactions is to avoid or postpone the liability to pay tax or reduce the amount of tax liability (e.g. where direct insurers buy reinsurance among themselves to cede part of their respective risks primarily for a tax benefit).
The new rules also include provisions on:
- Ascertaining the assessable profits of the qualifying insurance business that are chargeable to profits tax at 8.25% as opposed to other businesses that are subject to the current profits tax rate of 16.5%; and
- The treatment of losses where a person derives concessionary trading receipts and normal trading receipts from carrying on qualifying insurance business and other business.
To meet the international standards on BEPS, the Ordinance has included substantial activity requirements that must be met in order to qualify for the concessionary regime.
Specifically, the tax concession applies to qualifying taxpayers operating in Hong Kong SAR and require that the core income generating activities are undertaken in Hong Kong SAR provided threshold requirements are met.
The new tax concession for insurance-related businesses could potentially attract more insurers and insurance brokers to set up or relocate their regional hubs to Hong Kong SAR. This also places Hong Kong SAR insurance businesses with a competitive advantage to position itself to capture opportunities for businesses looking to invest in the Belt and Road, and Greater Bay Area initiatives.
Taxpayers should review their current operations and activities, and consider the commercial and tax implications of any potential restructuring to meet the qualification requirements.
Taxpayers should also review their operating protocols and Hong Kong SAR presence to ensure that they meet the threshold requirements to enjoy the profits tax concession. It is expected that the Inland Revenue Department to issue guidance on the application of the concession in due course, ideally including comments on transition to the new rules.
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