In December 2015, a new draft tax law has been released for attracting overseas and China companies to set up their corporate treasury centres (CTCs) in Hong Kong.

Among other things, the following key provisions are proposed:
•    Introducing a reduced profits tax rate of 8.25% (which  is half of the standard profits tax rate of 16.5%) for profits derived by a qualifying CTC in Hong Kong; and
•    Enhancing the interest expense deduction rules for intra-group interest paid on loans from foreign associated corporations.

It is advisable for multinational enterprises to review their current corporate operation to tap into the potential benefits of the draft tax law while taking note of the potential issues in interpreting and applying the proposed provisions.

Reduced profits tax rate for qualifying CTCs

To enjoy the tax concession, the CTC would have to be a corporation that is centrally managed and controlled in Hong Kong and its qualifying corporate treasury activities would have to be carried out in Hong Kong.

There are three categories of qualifying CTCs:

Category 1 - Standalone CTC:

CTC should conduct one of the following three specific treasury activities and it should not conduct any other activities:
(i)    carrying on an intragroup financing business (i.e. the business  of borrowing money from and lending money to an associated corporation);
(ii)    providing any of the designated corporate treasury services (as listed in the draft tax law) to an associated corporation; or
(iii)    entering into any of the designated corporate treasury transactions (as listed in the draft tax law) that is associated with the operation of an associated corporation.

“Qualifying profits” that would be subject to the 8.25% reduced tax rate are profits derived from activities with non-Hong Kong associated corporations. A non-Hong Kong associated corporation is defined as an associated corporation that does not carry on any trade, profession or business in Hong Kong.

Category 2 - CTC by safe-harbour rule:
CTC should satisfy either one of the following safe- harbour rules:

•    The 1-year safe harbour rule:
(a)    The corporate treasury profits (CTP) percentage is not less than  75% for a 1-year period, where the CTP percentage is the ratio of the total CTP to the total profits accruing to the CTC; and
(b)    The corporate treasury assets (CTA) percentage is not less than 75% for a 1-year period, where the CTA percentage is the ratio of the total CTA to the total value of all assets of CTC.

•    The multiple-year safe harbour rule:
Similar to the 1-year safe harbour rule except that the average  CTP and  CTA percentages over a period of two or three years will be used.

Category 3 - CTC by the Commissioner’s determination:
CTC can obtain a determination from the Commissioner of Inland Revenue that it is a qualifying CTC.

Deductibility of intra-group interest paid on loans from foreign associated corporations
Subject to certain conditions, the draft tax law would allow deduction for interest payable to a foreign associated corporation (i.e. the lender), incurred by a company (i.e. the borrower)  carrying on an intra-group financing business in Hong Kong.