Hong Kong Tax — efficient funding

One of the key issues facing a business operating in Hong Kong is the deductibility of funding costs. Deductions for interest and borrowing costs are subject to many practical constraints in Hong Kong. Interest deductibility problems are likely to arise where: 

• Funding has been raised for share acquisitions
• Business operations/investments have been made outside Hong Kong
• Operations are funded through a mix of retained earnings and debt

We have developed a process designed to manage the tax risk of interest disallowance and provide constructive solutions to ensure deductions for borrowing costs are secured. We have developed solutions which include commercial debt push down strategies, commonly used to locate the debt funds in the entity deriving taxable profits. In addition, we have structures for allocating interest bearing and non-interest bearing funds and the use of preference shares.

Debt funding can also be a useful repatriation technique in a global tax environment. Hong Kong does not tax interest derived from offshore deposits (except for financial institutions and money lenders). In addition, there is no withholding tax for interest in Hong Kong or thin capitalisation constraints.

A well planned funding structure can secure interest deductions in Hong Kong but can also minimise regional tax rates and allow for tax effective repatriation of cash in and out of Hong Kong.