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Hong Kong Issues Practice Notes on Interest Deduction Rules for Intra-Group Financing and Concessionary Profits Tax Rate for Corporate Treasury Centers

On 9 September 2016, Hong Kong Inland Revenue issued Departmental Interpretation and Practice Notes No. 52 - Taxation of Corporate Treasury Activity, which covers the new interest deduction rules for intra-group financing and concessionary profits tax rate for corporate treasury centers as approved in Inland Revenue (Amendment) (No. 2) Ordinance 2016. The Ordinance enables, under specified conditions, the deduction of interest payable on money borrowed by a corporation carrying on an intra-group financing business in Hong Kong. It also provides for a concessionary profits tax rate of 8.25% (half the standard rate - 16.5%) for qualifying corporate treasury centers in Hong Kong. The main conditions are summarized as follows.

Interest Deduction Rule

The interest deduction rule allows a corporate borrower carrying on an intra-group financing business in Hong Kong to deduct interest payable on money borrowed from a non-Hong Kong associated corporation, provided that:

  • The deduction claimed is in respect of interest payable by a corporation (the borrower) on money borrowed from a non-Hong Kong associated corporation (the lender) in the ordinary course of an intra-group financing business;
  • The lender is, in respect of the interest, subject to a similar tax in a territory outside Hong Kong at a rate that is not lower than the reference rate (standard 16.5% or 8.25% if concession below applies); and
  • The lender’s right to use and enjoy that interest is not constrained by a contractual or legal obligation to pass that interest to any other person, unless the obligation arises as a result of a transaction between the lender and a person other than the borrower dealing with each other at arm’s length.

For the purpose of the deduction, "intra-group financing business" in relation to a corporation means the business of the borrowing of money from and lending of money to its associated corporations.

The interest deduction rule applies to sums payable on or after 1 April 2016.

Concessionary Rate for Corporate Treasury Centers

The concessionary tax rate (half rate) applies for corporate treasury centers (CTC) that are considered qualifying corporate treasury centers (QCTC). A corporation is considered a QCTC if:

  • It is a dedicated CTC that has carried out one or more corporate treasury activities in Hong Kong, and has not carried out any other activities in Hong Kong;
  • It is a CTC which has satisfied either a 1-year or multiple-year safe harbor rule (percentage of corporate treasury profits/assets is at least 75% of total profits/assets for year(s) of assessment); or
  • The Commissioner has exercised his discretion to determine that it is a QCTC.

Financial institutions are specified as ineligible to be a QCTC.

The concessionary tax rate for QCTCs applies from 1 April 2016. Any sums received or accrued before that date are not eligible.

Click the following link for Departmental Interpretation and Practice Notes No. 52 - Taxation of Corporate Treasury Activity for additional information and examples.

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