The Legislative Council passed the Inland Revenue (Amendment) (No. 4) Bill 2015 (the Bill) on 26 May 2016. Amendments are made to the Inland Revenue Ordinance in the following three areas: (1) a concessionary profits tax rate for corporate treasury centres (CTCs), (2) new deduction rules for interest expenses incurred by an intra-group financing business and new deeming provisions on interest income and certain profits arising from such business, and (3) profits tax and stamp duty treatments in respect of regulatory capital securities (RCSs) issued by financial institutions.
The amendments related to (1) and (2) are basically the same as those proposed by the Bill. As for the proposed amendments related to RCSs, the proposed section 17H regarding the application of the arm’s length and separate enterprise principles in circumstances other than those in connection with a RCS is now removed. Upon gazette of the Ordinance, the 8.25% tax rate applicable to CTCs and the new interest expense deduction rules for intra-group financing business will apply retrospectively from 1 April 2016 whereas the other provisions will apply from the commencement date of the Ordinance or the transitional year of assessment. Two Departmental Interpretation and Practice Notes will be issued to provide practical guidance on the new provisions on CTCs and RCSs respectively.
The new CTC tax regime puts Hong Kong in a competitive position when multinational corporations (MNCs) consider where in Asia to set up or relocate their regional CTCs. In considering where the best location is, MNCs should take into account both tax considerations and non-tax factors such as their own business needs and mode of operation as well as the regulatory environment, the financial and capital markets and the availability of finance talents in different locations