The Inland Revenue Department issued the Departmental Interpretation and Practice Notes No. 52 (“Taxation of Corporate Treasury Activity”) which sets out the Department’s interpretation and practice in relation to the relevant provisions in the Inland Revenue (Amendment) (No. 2) Ordinance 2016. The DIPN set out the IRD’s views on the interpretation and application of the tax regime for qualifying corporate treasury centres (QCTCs), the new deeming provisions on interest income arising through or from an intra-group financing business and the new deduction rules for interest expenses incurred in the course of an intra-group financing business.
Important features of the DIPN 52 are set out below:
Definition of intra-group financing business
A corporation carrying on an intra-group financing business borrows money from, and lends money to, associated corporations in the ordinary course of its business. To constitute an intra-group financing business, a sufficient number of intra-group borrowing and lending transactions with a number of associated corporations is required, involving a significant amount of funds, taking into account the nature and scale of the business operations of the multinational corporation. In general, in the opinion of the Commissioner, a corporation carries on an intra-group financing business if:
– the corporation conducts at least four borrowing or lending transactions per month;
– each borrowing or lending transaction exceeds HKD 250,000; and
– borrowing or lending transactions involve at least four associated corporations in the relevant basis period.
Interest on money borrowed from/lent to associated corporations
A corporate borrower carrying on an intra-group financing business in Hong Kong is allowed to deduct the interest payable on money borrowed from a non-Hong Kong associated corporation subject to specific conditions:
– the deduction claimed is in respect of interest payable by a corporation (i.e. the borrower) on money borrowed from a non-Hong Kong associated corporation (i.e. the lender) in the ordinary course of an intra-group financing business;
– in respect of the interest, the lender is subject to a similar tax in a territory outside Hong Kong at a rate that is not lower than the reference rate; and
– the lender’s right to use and enjoy the interest is not restricted by a contractual or legal obligation to transfer such interest to another 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.
However, interest paid to non-corporate associates outside Hong Kong (e.g. partnerships, trusts) is not eligible for deduction.
If a corporation (other than a financial institution) lends money to a non-Hong Kong associated corporation in the course of its intra-group financing business carried on in Hong Kong, the interest income and relevant gains or profits derived therefrom will be subject to profits tax.
Concessionary tax rate for qualifying profits of a qualifying CTC Qualifying profits (for incentive)
The new law stipulates that an 8.25% tax rate will only apply to qualifying profits derived from the following qualifying transactions but excludes amounts that can be claimed as a Hong Kong tax deduction by any person:
- Money lent to a non-Hong Kong associated corporation in the ordinary course of an intra-group financing business
- A corporate treasury service provided to a non-Hong Kong associated corporation
- A corporate treasury transaction related to the business of a non-Hong Kong associated corporation
