Hong Kong has announced tax incentives for corporates setting up their regional treasury entities in the territory, including in-house banks. If passed into law, they could attract Chinese businesses looking to fund their operations abroad.
In his budget speech delivered to the territory’s legislature on February 25, Financial Secretary John Tsang announced a 50% reduction on profits tax for income from treasury management activities (which have yet to be specified but could include interest from overseas affiliates, dividends as well as certain capital gains). The relevant bill due to be introduced in the next legislative session will also allow interest expense paid by a Hong Kong treasury entity on borrowing from associates to be deductible.
“We consider that certain relaxation of the interest deduction rules for qualifying CTC [corporate treasury centre] activities and a concessionary half-rate regime for qualifying CTCs would enhance Hong Kong’s competitiveness and demonstrate the Government’s commitment to providing a market-friendly taxation framework for CTC activities in Hong Kong,” a spokesperson of the Hong Kong Monetary Authority comments.
Industry associations including the Hong Kong Institute of Certified Public Accountants (HKICPA) had been calling for a review of the taxation framework applicable to regional corporate treasury operations.
“The existing tax law on interest expense deduction is definitely not favorable for setting up a treasury centre in Hong Kong, and as a result, Hong Kong-based businesses were looking to establish their internal treasury functions elsewhere. The industry had called for changes for some time and the proposals are very good news not only for Hong Kong companies but also multinationals, which now have another option to consider,” says Jeremy Choi, tax partner at PwC.
Given the prevailing profits tax rate of 16.5%, a 50% reduction would make treasury functions of multinationals subject to an 8.25% tax rate on income in Hong Kong. This compares to Singapore, where income from treasury management activities is granted a reduced tax rate of 10% for a period of five to ten years, depending on the level of financial and manpower resources committed to the entity. Withholding taxes do not apply on interest payments in either jurisdiction.
Hong Kong has also narrowed the gap in terms of double taxation agreements signed with other jurisdictions around the world and Choi believes Hong Kong will be fully caught up within a few years.
According to HKMA, the territory has 32 agreements concluded at the end of 2014, a big increase from what it was just five years ago. However, this represents under half of Singapore’s 76 agreements. Still, sources at HKMA say agreements have been concluded with the most important trading partners. Besides, “it is not the quantity; it is the quality,” sources say. “Except for a handful of jurisdictions, the tax rate in Hong Kong is lower than in Singapore.”
However, corporates that have already set up regional treasury centres (RTCs) in Singapore are unlikely to move to Hong Kong as a result of the announced measures, which will likely take another year or two to become law.
Says one regional treasury executive at a multinational in Hong Kong: “Some of the RTCs here will be pleased about the incentives and Hong Kong will become more attractive. But I wonder which corporate will consider it because of the measures alone.”
“When planning to set up a treasury centre, companies will not only consider the tax incentives but also look at the legal and banking system, financial stability and talent recruitment,” Choi notes.
Chinese corporates looking to fund their businesses abroad will benefit from Hong Kong’s relatively cheaper cost of funds compared to onshore rates, he adds. The new tax incentives could sway their decision to establish regional treasury centres in Hong Kong, rather than Singapore, which is already home to many Chinese treasury functions not only in the oil and gas industry.
