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Hong Kong takes the lead of corporate treasury centre hub with attractive tax incentives

Written by: Catherine Le Bourgeois and Wilson Yeung

Foreword

Nowadays, owing to the growing importance of the Asian market, multinational corporations are encouraged to set up their corporate treasury centres (“CTC”) in the region. Hong Kong has been one of the ideal locations of choice for forming up regional CTCs. Hong Kong’s attractiveness in recent years, however, has been dampened by certain inadvertent taxation consequences, as well as the competition from Singapore, but since the announcement of proposed changes of tax legislation in the 2015/16 budget, as well as the CTC bill recently came into force in early June 2016, there were promising development in this respect in Hong Kong.  

What is a CTC and what are the benefits to a group?

Essentially CTC is an in-house bank within a multinational corporation. It mainly focuses on the optimal procurement and capital usage for the group operation. CTC carries out a couple of functions including intragroup loan, cash management, payments processing to vendors, capital raising support and risk management. CTC brings several benefits to a group mainly by lowering cost and improving operational efficiency. More specifically, CTC reduces the cost of capital by optimising both internal and external fund raising; lowers transactional costs and banking charges by standardising payment systems and multi-currency transactions; decreases foreign exchange risk by centralising foreign exchange management; and strengthen the efficiency of working capital by centralising the management of accounts receivables and payables.

What are the existing tax legislations and why changes are necessary?

By virtue of the prevailing Hong Kong tax legislations, interest expenses paid by a Hong Kong CTC on borrowing from associates outside the territory of Hong Kong may not be tax deductible under certain circumstances. On the other hand, interest income received by a Hong Kong CTC is generally liable for profits tax, resulting in a relatively less appealing taxation environment to carry out corporate treasury activities in here.  Meanwhile, Singapore has all long been offering tax incentives to attract multinational corporations to centralize and manage their regional treasury activities in Singapore.  The Economic Development Board of Singapore administers a scheme called Finance and Treasury Centre, in which approved CTC can be able to enjoy a concessionary corporate tax rate of 10% as opposed to the standard rate of 17%, as well as withholding tax exemption. In view of the above, and since multinational corporations would only select to locate their CTC in a tax efficient jurisdiction, it is believed that certain relaxation of the interest deduction rules for those qualifying CTC activities and a concessionary 50% discounted profits tax rate regime (i.e. 16.5% x 50% = 8.25%) for qualifying CTCs would help enhance the competitiveness of Hong Kong and show the determination of Hong Kong Government in providing a market-friendly taxation framework for CTC operations in Hong Kong.  

How is the latest development of CTC activities in Hong Kong?

In August 2015, Hong Kong Government said that Hong Kong shall amend its Inland Revenue Ordinance for those provisions relevant to One Belt One Road (“OBOR”) in 2016, in order to attract more China and overseas enterprises to set up their CTC and captive insurance company in Hong Kong. Hong Kong Government thinks that the local insurance cost is relatively low, which can diversify the enterprises’ risk during their development phase, so it is believed that a lot of enterprises around the world shall be attracted to Hong Kong for such purpose. Recently, Chinese enterprises like CNOOC, CGN and CNPC have already incorporated their captive insurance company in Hong Kong, so as to manage their overseas operation. Such trend shall be continued.

To attract China and overseas enterprises to set up their CTC in Hong Kong, coupled with the fierce competition between jurisdictions facing such golden opportunities given by OBOR, Hong Kong Government insisted to change its tax law to cater for this need as abovementioned.

In addition, Hong Kong, with 32 comprehensive double tax agreements (CDTA) signed and effective with its trading partners, is eager to extend its CDTA network with those countries along the OBOR, including India, Russia, Romania and Germany, etc. 

Why Hong Kong is an ideal place for CTC location?

Despite the recent announcement made by Singapore Government to have their corporate income tax rate decreased to 8% for CTC qualifying companies and transactions, it is believed that Hong Kong still takes the lead of CTC hub in the region.  Hong Kong has a very simple and competitive tax system. Hong Kong does not levy tax on dividends, capital gains and estates. She also does not impose withholding tax on dividend or interest payments. Furthermore, there are no indirect tax such as business tax, value-added tax (“VAT”) or sales tax in Hong Kong. Below is a diagram showing the tax advantageous of Hong Kong when compared to Mainland China and Singapore.   

Type of tax

Hong Kong

Mainland China

Singapore

 

Profits tax rate for CTCs (Concessionary)

8.25%

25%

8%

       

VAT / Sales Tax

0%

17%

7%

       

Individual tax rate

15%

45%

20%

       

Social security (Employer)

5%*

35%**

17%*

       

Social security

(Employee)

5%*

10.5%**

20%*

   

 

 

Note:

 

* subject to cap 

** varies between cities and subject to cap  

 

 

 

 

In addition to attractive tax system, Hong Kong also possesses some other excellent factors for multinational corporations to consider opening up their CTC in here, which include well-established common law regulatory system, international financial market, banking network, as well as talent pool, etc.

Conclusion

The development of Hong Kong as an Asian regional CTC hub would benefit both the financial and business sectors, and help strengthen the capital market which include the offshore RMB market. A lot of multinational corporations would co-locate their CTCs with their regional headquarters, and thus the change of Hong Kong tax legislations in providing a more tax efficient and market friendly environment, particularly for those China groups wanting to go aboard, is a positive move to induce more real inflow of funds into Hong Kong and provide catalyst for developing Hong Kong’s headquarters economy.  

CONTACT US

Masson de Morfontaine is an international tax and business advisory services firm having offices in Hong Kong and Shanghai specializes in providing comprehensive professional services for worldwide clients. As an AOA Regional Chair Firm of Hong Kong (2015-2016), we are experts helping our clients with practical tax and business advices and keen on advising as well as implementing corporate treasury centre operations. We are more than welcome to discuss with you about our services. Please call or email us should you require more information. 

Catherine LE BOURGEOIS                           Wilson YEUNG

Main Partner                                              International Tax Director

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