Hong Kong plans to revolutionize the corporate treasury center tax preferential system and introduce tiered concessions to enhance competitiveness

The Zhitong Finance App learned that the Hong Kong Financial Services and Treasury Bureau (Treasury Bureau) and the Inland Revenue Department jointly issued a public consultation document on July 27 to begin a six-week consultation on reforming the tax preferential system for corporate treasury centers, which ended on September 4. This consultation is an important part of implementing the “Hong Kong Corporate Treasury Centre Development Action Plan” announced in June this year.

The plan proposes a “4T” framework, which covers the four major directions of tax reform, expansion of a comprehensive network of double taxation avoidance agreements, targeted promotion, and talent training to communicate with the industry. It aims to attract more multinational enterprises to set up treasury centers in Hong Kong, and to help existing enterprises expand their scale and make full use of Hong Kong's complete financial ecosystem.

The core proposal of this consultation paper is to introduce a hierarchical tax preferential system, which is specifically divided into two levels.

Level 1 covers the optimization of current tax relief measures applicable to eligible corporate treasury centres and corporations operating intra-group financing business in Hong Kong. The main recommendations include: allowing the corporate treasury centre to defer deduction of interest expenses to the year the corporation is taxable when the corporation is not required to pay tax on such interest income in a tax year; expand the scope of deductions for interest expenses to cover a wider range of enterprises, including corporations operating and carrying out corporate treasury activities; and clarifying the definition of relevant laws and administrative activities (such as those relating to substantive legal and administrative activities) Requirements, intra-group financing business Benchmarks, definitions of corporate treasury transactions, etc.) to improve tax clarity.

The second tier focuses on adding a pre-review mechanism. After pre-approval by the Inland Revenue Department, corporate treasury centres and their associated corporations will be able to enjoy additional tax benefits or flexibility for a period of five years, including: pre-approved eligible corporate treasury centres can be exempted from complying with the requirements of an “independent corporation” and “safe harbor rules”; pre-approved Hong Kong associated corporations can receive 50% tax exemption on pre-approved eligible corporate treasury centers; Pre-approved non-Hong Kong related corporation Interest payments are exempt from “taxable conditions”; and pre-approved Hong Kong associated corporations will not be subject to the “tax arbitrage prevention rules”. Such corporations may claim full tax deductions for expenses paid or payable to pre-approved eligible corporate treasury centers, but for interest expense deductions, the deduction must be capped at 30% of their profit before interest, tax, depreciation and amortization (i.e. EBITDA).

The Secretary for Treasury of Hong Kong, Mr Hui Ching-yu said, “This public consultation is a major step to reform the tax system and an important step in implementing the Action Plan. We have always been in close communication with the industry. The hierarchical tax system proposed in the consultation document is designed to accurately respond to the industry's pain points. It can provide eligible enterprises with more comprehensive tax benefits, higher tax certainty, and greater compliance flexibility. I believe this innovative, pragmatic and competitive measure will attract more multinational enterprises from different regions and industries, make good use of Hong Kong's 'import and go out' platform function, and concentrate capital and business focus on centralized management in Hong Kong, thus enhancing Hong Kong as the main base for corporate treasury centers.”