TAX PLANNING &
MANAGEMENT
LECTURE OUTLINE 6
Part A: Interest Expenses
Part B: Qualifying Corporate
Treasury Centre
Materials are adapted with kind permission from
Mr Patrick Ho
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Part A: Interest Expenses
0
Deduction of Interest under Personal Assessment
•
•
•
•
Chan owns a shop, and he let the shop to Wong at a monthly rent of is
$200,000 since 1 April 2021.
Chan borrowed $30,000,000 from his father in Singapore to finance
the acquisition of the property, and is paying interest on this loan at
the rate of $100,000 per month since 1 April 2021.
Is the interest of $1,200,000 paid by Chan to his father in Singapore
deductible under personal assessment (PA) in YA 2021/22?
Interest is paid on acquisition of rental property. Under PA, the
deductible interest amount is limited to Net Assessable Value (NAV).
In this case, the NAV is $200,000 x 12 – 20% statutory deduction =
$1,920,000 which is larger than actual interest paid of $1,200,000.
Hence, full amount of $1,200,000 is deductible.
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Deductibility of Interest Expenses on Non-Money Borrowed
Interest expense
Does it satisfy the general deduction rule
under s 16(1)?
In other words:
(1) incurred [Lo & Lo case] &
(2) produce chargeable income
Yes
Not deductible
Revenue expenditure
No
(e.g. interest expense on late
payment of credit purchase)
[capital expenditure is
disallowed under s 17(1)(c)]
Yes
Deductible
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Deduction of Interest Expenses (on Money
Borrowed) under Profits Tax
Major governing sections:
•Section 16(1), section 16(1)(a)
•Section 17(1)(c)
•Section 16(2)
•Section 16(2A)
•Section 16(2B)
•Section 16(2C)
•Section 16(2CA)
•Section 16(2CC)
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•
Section 16(1)
In ascertaining the profits in respect of which a person
is chargeable to tax under this Part (i.e. Profits Tax)
for any year of assessment there shall be deducted all
outgoings and expenses to the extent to which they
are incurred during the basis period for that year of
assessment by such person in the production of profits
in respect of which he is chargeable to tax under this
Part for any period, including-
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Section 16(1)(a)
(a) where the condition for the application of this
paragraph is satisfied under subsection (2), and
subject to subsections (2A), (2B), (2C), (2CA) and
(2CC), sums payable by such person by way of
interest on any money borrowed by him for the
purpose of producing such profits, and sums
payable by such person by way of legal fees,
procuration fees, stamp duties and other
expenses in connection with such borrowing;
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Section 17(1)(c)
(1) For the purpose of ascertaining profits in
respect of which a person is chargeable to tax
under this Part no deduction shall be allowed in
respect of(c) any expenditure of a capital nature or any loss
or withdrawal of capital;
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S.16(1) and Apportionment of Interest Expense
Interest on borrowed money used in purchase of shares for
long-term purposes apportioned under IRR 2B as follows:
Cost of shares for long-term investment
Interest
= Interest x
Disallowed
Cost of the total assets of the company
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Example for Apportionment of Interest
Company X has a long-term investment portfolio at the cost of
$10,000,000, and a trading portfolio at the cost of $15,000,000.
The cost of other assets of the company at the year end is $100m
The interest expense for the year is $75,000.
10,000,000
Interest
= $75,000 x
Disallowed
10,000,000 + 15,000,000 + 100,000,000
= $6,000
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Interest Incurred for Payment of Dividend
•
Co. A made a profit of $400m, and decided to
distribute $350m as dividend to its parent company,
Co. H, a HK company.
•
However, there was no cash available for the payment
of dividend. Co. A got a loan of $350m from Co. H
for the purpose of payment of dividend.
•
Co. A made an accounting entry of debiting the
dividend payable with $350m and crediting Co. H as
loan payable with $350m.
0
•
•
•
•
Interest Incurred for Payment of Dividend
Co. H made an accounting entry of crediting the
dividend income with $350m and debiting Co. A as
loan receivable with $350m .
There was no cash movement between the two
companies for the purpose of payment and receipt of
dividend.
The interest rate was at market rate.
Question:
Whether the interest expense is deductible by Co. A
under profits tax.
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Co. H (Holding Company)
Dividend $350m
Loan $350m
Interest $20m
Co. A (Wholly Owned Subsidiary)
With a huge profit of $400m
Issue : Whether the interest of $20m is deductible
under profits tax in Co. A?
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Co. A’s Perspective
•
Dr. Retained Earnings
Cr. Dividend payable
$350m
$350m
•
Dr. Dividend payable
Cr. Loan payable to Co. H
$350m
$350m
•
Dr. Interest expense
$20m
Cr. Interest payable to Co. H $20m
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Interest Incurred for Payment of Dividend
•
Deduction of interest is governed by section
16(1) (and other relevant sections) of the Inland
Revenue Ordinance (IRO). The expense must
be, to the extent, incurred in the production of
assessable profits.
•
The issue here is whether the interest expense
was incurred in the production of assessable
profits under section 16(1) of the IRO.
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Interest Incurred for Payment of Dividend
•
The facts in this question are similar to those of
Zeta Estates Ltd v CIR (2007).
•
There are two alternatives open to the taxpayer
for the raising funds for the payment of
dividend:
(a) to sell sufficient assets for the payment of
the dividend, or
(b) to borrow a loan for the payment of the
dividend.
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Interest Incurred for Payment of Dividend
•
•
•
In Zeta case, the taxpayer preferred to borrow a
loan to pay for the dividend, and maintain
sufficient assets to earn future profits.
In Zeta case, the judges accepted the taxpayer’s
argument and treated the interest was incurred in
the production of assessable profits.
Similarly, applying the decision of the case to the
facts of this question, the interest is deductible
under section 16(1) (and other relevant sections)
of the IRO.
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Capital Expense Not Allowed – s.17(1)(c)
•
Interest incurred on capital expenditure –
NOT deductible
•
Property under development may be capital or
revenue expenditure depending on whether the
property under development is a capital asset or a
trading stock for sale.
0
Interest Incurred on Construction Work
Trading Stock
Capital
Asset
Before
Completion
After
Completion
Interest
Interest
NOT
deductible
Deductible, but subject to
but part of s.16(2), (2A),
cost of
(2B), (2C),
construction.
(2CA),
IBA / CBA
(2CC)
Before
Completion
Interest
charged
to P/L
Interest
charged
to WIP
Interest
deductible etc
NOT
deductible
After
Completion
Interest
deductible
but subject
to s.16(2),
(2A), (2B),
(2C), (2CA),
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(2CC)
Deduction of Interest Expenses (on Money Borrowed)
under Profits Tax
S.16(2)(a)
S.16(2)(ab)
S.16(2)(b)
S.16(1),
S.16(1)(a)
S.17(1)(c)
S.16(2)(c)
S.16(2)(d)
S.16(2A)
S.16(2B)
S.16(2)(e)
S.16(2)(f)
S.16(2C)
S.16(2)(g)
S.16(2CA)
S.16(2CC)
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8 Conditions of Section 16(2)
s. 16(2)(a) – interest paid by a financial institution
s. 16(2)(ab) – interest paid by a Loss Absorbing Capacity
(LAC) banking entity
s. 16(2)(b) – interest paid by a public utility company
s. 16(2)(c) – interest paid to an entity not financial
institution
s. 16(2)(d) – interest paid to a financial institution
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1.
2.
3.
8 Conditions of Section 16(2)
s. 16(2)(e) – interest paid for purchase of machinery or
trading stock and not borrowed from associated parties
(defined in s. 16(3))
s. 16(2)(f) – interest paid on listed debentures or marketable
instruments
s. 16(2)(g) – interest paid by a corporation carrying on in
Hong Kong an intra-group financing business (defined in s.
16(3)) (e.g. a corporate treasury centre CTC) to non-HK
associated companies (defined in s. 16(3))
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Section 16(2A), (2B), (2C), (2CA) and (2CC)
After having satisfied one of the 8 conditions of section
16(2), the interest expense is also required to satisfy:
– s.16(2A) – secured loan test for s.16(2)(c), (d) & (e)
– s.16(2B) – interest flow back test for s.16(2)(c), (d) & (e)
– s.16(2C) – interest flow back test for s.16(2)(f)
– s.16(2CA) – interest diversion test for s.16(2)(g)
– s.16(2CC) – loss shifting test for s.16(2)(g)
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Deduction of Interest s.16(2)(a), (ab) and (b)
s.16(2)(a) – interest paid by a financial
institution (FI)
s. 16(2)(ab) – interest paid by a LAC banking
entity by the way of issuing a regulatory
capital security for the purposes of meeting the
stipulated LAC requirements
s.16(2)(b) – interest paid by a public utility
company
0
Characteristics of s.16(2)(a), (ab) and (b)
No additional requirement, except s.16(1) and
s.17(1)(c), for deduction of interest paid by a
FI, LAC banking entity, or a public utility
company
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Deduction of Interest s.16(2)(b)
List of public utility companies in Schedule 3 of IRO
•The Hong Kong Electric Co. Ltd.
•China Light and Power Co. Ltd.
•The Hong Kong and China Gas Co. Ltd.
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Deduction of Interest – Payable by a Company
(Not F.I., LAC banking entity, public utility
company, debenture)
s.16(2)(c) – interest paid to a non-financial institution
s.16(2)(d) – interest paid to a financial institution
s.16(2)(e) – interest paid for the purchase of machinery
or trading stock and loan not borrowed from an
associate (defined in s. 16(3))
0
Deduction of Interests s.16(2)(c)
Lender
(Not a FI)
Loan
Borrower
(taxpayer)
Interest
Interest income taxable
Interest income not taxable
Interest deductible subject
to ss.16(2A) and (2B)
Interest not
deductible
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Deduction of Interest s.16(2)(c)
– Loan NOT Borrowed From a Financial Institution
Interest income NOT taxable if the recipient is:
•an individual, or
•an overseas company not carrying on a business in Hong Kong
Therefore, interest expense :
– paid to an individual – not deductible
– paid to an overseas company not carrying on a business in
Hong Kong – not deductible
Nevertheless, interest expense paid to a Hong Kong company –
deductible (assuming interest income is chargeable to tax in
Hong Kong) (but still subject to ss.16(2A) & (2B) requirement)
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Example on Section 16(2)(c)
•
Flora operates a Beauty Shop in Hong Kong. She borrows money to
purchase equipment.
•
–
Determine if the following interest expenses on the loan are deductible:
Loan A from her father in Canada who has no business in HK. The
money is given to her in Canada.
Not deductible. S.16(2)(c) condition is not met. The provision of
credit is outside HK. Also, it is assumed that her father is not
carrying on a business in HK. Hence, interest income received by
her father is not chargeable to tax.
What if her father is in Hong Kong?
Not deductible. S.16(2)(c) condition is not met. Although the
provision of credit is in HK, interest income received by her
father is not chargeable to tax because it is assumed that her
father is not carrying on a business in HK.
•
–
•
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Deduction of Interest s.16(2)(d)
– Loan Borrowed a from Financial Institution
•There is no requirement that the interest received by
the FI must be taxable in Hong Kong.
•Interest borrowed from:
– a bank in Hong Kong – deductible
– an overseas bank – deductible
(but still subject to section 16(2A) & (2B) requirement)
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Deduction of Interests s.16(2)(d)
Loan
HKFI or
overseas FI
Interest
Borrower
(Taxpayer)
Interest income taxable
Interest deductible subject
to ss.16(2A) and (2B)
Interest income not taxable
Interest deductible subject
to ss.16(2A) and (2B)
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Deduction of Interest s.16(2)(e)
– Loan Borrowed For Machinery & Stock
•Applicable when s.16(2)(c) is not satisfied.
•s.16(2)(e) – The loan is used exclusively and wholly
for the purchase of machinery or trading stock, and the
loan is not borrowed from an associate
Therefore, 2 conditions are required:
•Borrowed for purchase of machinery and trading stock
producing chargeable profit, and
•Not borrowed from an associate
(but still subject to sections 16(2A) & (2B) requirement)
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Deduction of Interests s.16(2)(f)
– Listed Debentures or Marketable Instruments
•s.16(2)(f) – The money is raised by a corporation
through issue of listed debentures or marketable
instruments
•The stock exchange may be in Hong Kong or overseas
(as long as approved by CIR)
•Then the interest is deductible.
(but still subject to section 16(2C) requirement)
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Deduction of Interests s.16(2)(f)(i) and (ii)
Issuers of listed debentures
or marketable instruments
Issue of
debentures /
marketable
instruments
Cash for
subscription
Interest deductible subject
to s.16(2C)
Hong Kong or Overseas Holders
of listed debentures
or marketable instruments
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Deduction of Interests s.16(2)(f)(iii)
Loan
Taxpayer
Loan interest
The excess of
loan interest over
debenture interest
is not deductible
[the amount of
interest deductible
subject to s.16(2C)]
Issuers of listed debentures
or marketable instruments
Debenture
interest
Cash for
subscription
Issue of
debentures /
marketable
instruments
Hong Kong or Overseas Holders
of listed debentures
or marketable instruments
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The Inland Revenue
(Amendment) (No.2) Ordinance 2016
New interest deduction rule for corporation
carrying on an intra-group financing business
in Hong Kong: s 16(2)(g), s 16(2CA),
s16(2CC)
➢ New interest taxability rule for corporation
carrying on an intra-group financing business
in Hong Kong: s 15(1)(ia), s 15(l)(la)
➢ Profits tax concession of Qualifying
Corporate Treasury Centre (QCTC)
➢
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Deduction of Interest Expense For
Corporate Treasury Centre (CTC)
– Position Before 2016 Amendment
•
Although a Corporate Treasury Centre
(CTC) is an in-house lending institution,
CTC is not a financial institution, and it is
no difference from an ordinary company.
•
Deduction of interest was governed by
sections 16(2)(c) and (e).
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Deduction of Interest Expenses under Profits Tax (Old Law)
S.16(2)(a)
S.16(2)(b)
S.16(1),
S.16(1)(a)
S.17(1)(c)
S.16(2)(c)
S.16(2)(d)
S.16(2A)
S.16(2B)
S.16(2)(e)
S.16(2)(f)
S.16(2C)
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Deduction of Interest Expense For CTC
– Position After 2016 Amendment
Now it is governed by :
•section 16(2)(c) and (e) [subject to section
16(2A), and section 16(2B) requirements]
•section 16(2)(g) [subject to section 16(2CA),
and section 16(2CC) requirements]
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Interest Paid by
an Intra-group Financing Business – s.16(2)(g)
•
•
the borrower is a corporation carrying on in
Hong Kong an intra-group financing
business and (i) the deduction claimed is in respect of
interest payable by it on money borrowed
from a non-Hong Kong associated
corporation (lender) in the ordinary course
of that business;
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Interest Paid by
an Intra-group Financing Business – s.16(2)(g)
• (ii) 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; and
• (iii) 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
0
each other at arm’s length.
“Subject to tax” condition under s. 16(2(g)
NO
Interest
accrued has
been reduced
to NIL or a
loss by direct
expenses?
NO
NIL tax payable
on the net
interest income
after offsetting
tax losses?
Effective tax
rate on net
interest
income is
lower than the
reference rate
(16.5/8.25%?)
YES
YES
YES
NO
“Subject to
tax” condition
is satisfied
“Subject to
tax” condition
is NOT
satisfied
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Deduction of Interest - s.16(2)(g)
Non-Hong Kong
associated company
Loan
Interest
Borrower
(CTC)
If interest income is taxable outside Hong Kong (at a
rate not lower than 16.5% (or 8.25% if s.14D(1) is
applicable. Note that profits of QCTC is charged at
8.25%),
interest expense paid is deductible – s.16(2)(g),
but still subject to s.16(2CA) and (2CC).
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Deduction of Interest Expense under Profits Tax (New Law)
S.16(2)(a)
S.16(2)(ab)
S.16(2)(b)
S.16(1),
S.16(1)(a)
S.17(1)(c)
S.16(2)(c)
S.16(2)(d)
S.16(2A)
S.16(2B)
S.16(2)(e)
S.16(2)(f)
S.16(2C)
S.16(2)(g)
S.16(2CA)
S.16(2CC)
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Secured Loan Test – s.16(2A)
•
If interests are deductible under s.16 (2) (c), (d) & (e), and
•
During the period a deposit or a loan is made to the lender or a
financial institution (including overseas financial institution)
for the security of the loan, and
•
Interest derived from the deposit or the loan used for security is
not assessable to profits tax and the deposit or the loan is
provided by borrower or its associates (相聯者) (defined in
s.16(3)), then
•
Deductible interest expense will be reduced as appropriate
under the circumstances (i.e. s.16(2A) applies)
0
Secured Loan Test – s.16(2A)
Loan
S 162 ld ]
Bank
Borrower
Loan interest
lender ask for
security
(
deposit /
1 oan ]
Issue: whether there is a security for the loan;
if yes, whether the security is a deposit or loan?
0
•
•
Secured Loan Test – s.16(2A)
Loan not secured by any asset
– loan interest deductible
Loan secured by asset but not secured by deposit
– loan interest deductible
(
personalgnarateel
non
-
cashsecurity 1
Propertie ⾏
0
•
Secured Loan Test – s.16(2A)
√
Loan secured by deposit:
(a) deposit interest taxable in Hong Kong (e.g. deposit with
deposit
bank in HK) interest
interestexpenseED
– loan interest deductible
(b) deposit interest not taxable in Hong Kong (e.g. deposit
with bank outside HK) and deposit not provided by borrower
or its associates
– loan interest deductible
(c) deposit interest not taxable in Hong Kong (e.g. deposit
with bank outside HK) and deposit provided by borrower or
its associates
– loan interest not deductible wholly or partly
income im
( T)
→
了
(but still subject to section 16(2B) requirement)
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Secured Loan Test
No
security
for loan
Security
Not
deposit
Security is deposit
Deposit
interest
taxable
in HK
(e.g. from
bank
deposit in
HK)
Interest deductible:
S.16(2A) does not apply
Deposit interest NOT
taxable in HK (e.g. from
bank deposit outside HK)
Deposit NOT
provided by
borrower or
associate
Deposit provided
by borrower or
associate
Interest wholly or partly not
0
deductible: s.16(2A) applies
Deductibility of Interest Expenses Payable on Money Borrowed: Secured Loan Test under s 16(2A)
Is the payment of principal or interest
secured or guaranteed by deposit or loan?
No
Yes
(
XEcmmon case
thirdparty
了
Is the security made by the borrower or an
associate of the borrower?
No
S16(2A) does not apply.
Yes
xComzncn
Is the security made to a specified person
(i.e. lender, FI, overseas FI, or their
associates)?
No
Interest deductible BUT
subject to interest flow back test
under s 16(2B)
Yes
Is the interest on the deposit or
loan taxable in HK?
Yes
No
S 16(2A) applies.
Interest wholly/partly not deductible (no specific formula for
determining the non-deductible interest amount; use a
reasonable and appropriate basis)
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Example on Section 16(2A)
•
•
–
•
–
•
Mary operates a Beauty Shop in Hong Kong. She borrows money to
purchase equipment.
Determine if the following interest expenses on the loan are deductible:
Loan from a local bank which is not guaranteed.
Deductible. The conditions under s.16(1), s.16(1)(a) and s.16(2)
(d) conditions are met. Also, s.16(2A) and s.16(2B) do not apply.
What if loan is guaranteed by HK dollars deposits of Mary’s boy
friend with the same bank?
Deductible. The conditions under s.16(1), s.16(1)(a) and s.16(2)
(d) conditions are met. Also, s.16(2A) and s.16(2B) do not apply.
Mary’s boy friend is not associate of Mary. Associate includes
spouse, child, parent, and brother/sister.
0
Consider the following situations whether
interest expense is deductible (I)
•
–
•
–
Company A paid interest of $100,000 to Company B which is BVI
company carrying on business in Hong Kong.
Deductible. Interest income of $100,000 received by BVI company
is chargeable to tax. The conditions under s.16(1), s.16(1)(a) and
s.16(2)(c) are met. Also, s.16(2A) and s.16(2B) do not apply.
Company C paid interest of $150,000 to its shareholder, Mr. D who
pays salaries tax for his employment income in Hong Kong.
Not deductible. Interest income of $150,000 received by Mr. D is
not chargeable to profits tax since Mr. D is assumed not carrying on
a business in HK. Hence, none of s.16(2) conditions (in particular,
s. 16(2)(c) condition) is met.
0
Consider the following situations whether
interest expense is deductible (II)
•
–
•
–
Company E paid interest of $50,000 to a bank in Hong Kong with
the company’s deposit placed in another bank in Hong Kong as
security for the bank loan.
Deductible. The conditions under s.16(1), s.16(1)(a), s.16(2)(d)
are met. Also, s.16(2A) and s.16(2B) do not apply.
Company F paid interest of $80,000 to a bank in Macao with a
shareholder’s property located in Macao as security for the bank
loan.
Deductible. The conditions under s.16(1), s.16(1)(a), s.16(2)(d)
are met. Also, s.16(2A) and s.16(2B) do not apply.
0
Bank Loan Secured with Bank Deposit (I)
(Deposit Amount = Loan Amount)
•
Company G borrowed $1,000,000 from Bank H
at 9% interest rate p.a. The loan was secured by
a fixed deposit of $1,000,000 placed outside
Hong Kong. The interest rate of that deposit is
9%. During that year, Company paid loan
interest of $90,000, and received tax free
(offshore) deposit interest of $90,000.
•
Compute the amount of interest disallowed.
0
Bank Loan Secured with Bank Deposit (I)
(Deposit Amount = Loan Amount)
•
As the amount of loan and deposit are of the same
amount and of the same period, the interest
disallowed equals to the amount of tax free
(offshore) deposit interest income.
•
Interest disallowed = Not Taxable Interest Income
= $90,000
•
Interest deductible = $90,000 –$90,000
= $0
0
Bank Loan Secured with Bank Deposit (II)
(Deposit Amount < Loan Amount)
•
Company K borrowed $1,000,000 from Bank M
at 9% interest rate p.a. The loan was secured by
a fixed deposit of $500,000 placed outside Hong
Kong. The interest rate of that deposit is 3%.
During that year, Company paid loan interest of
$90,000, and received tax free deposit interest
of $15,000.
•
Compute the amount of interest disallowed.
0
Bank Loan Secured with Bank Deposit (II)
(Deposit Amount < Loan Amount)
•
As the amount of deposit is smaller than the loan,
the interest disallowed equals to the amount of tax
free (offshore) deposit interest income.
•
Interest disallowed = Not Taxable Interest Income
= $15,000
•
Interest deductible = $90,000 –$15,000
= $75,000
0
Bank Loan Secured with Bank Deposit (III)
(Deposit Amount > Loan Amount)
•
Company N borrowed $1,000,000 from Bank P
at 9% interest rate p.a. The loan was secured by
a fixed deposit of $1,200,000 placed outside
Hong Kong. The interest rate of that deposit is
6%. During that year, Company paid loan
interest of $90,000, and received tax free
deposit interest of $72,000.
•
Compute the amount of interest disallowed.
0
Bank Loan Secured with Bank Deposit (III)
(Deposit Amount > Loan Amount)
Interest = Not Taxable
x
Disallowed Interest Income
=
$72,000
=
$60,000
x
Loan
Deposit
$1,000,000
$1,200,000
Interest deductible = $90,000 – $60,000 = $30,000 0
•
•
•
Interest Flow Back Test – s.16(2B)
Where interests are deductible under s.16 (2)
(c), (d) & (e), and
During which interests payable under the loan
are payable either directly or through other
persons to the borrower or a person connected
with the borrower (defined in s. 16(3B)), who is
not an excepted person (除外⼈⼠) (defined in
s.16(2E)(c), e.g., a person who is not chargeable
to tax on interest), then
Deductible interest expenses will be reduced.
0
Interest Flow Back Test – s.16(2B)
Loan
Bank
Taxpayer
Loan interest
(may not be deductible)
^
flowbacktoyou
Advance
Interest on Advance
cinterestincome )
lmaynotbetaxable )
Overseas Associates of
Taxpayer
0
xexam
Deductibility of Interest Expenses Payable on Money Borrowed: Interest Flow-Back Test under s 16(2B)
Excepted person: (除外⼈⼠)
1.
Those who are chargeable
to tax on the interest income
2.
In the case of a person
(other than the lender) who is
connected with the borrower:
a.
Is there any arrangement in place under which
interest payment flowed back to the borrower or
connected person of the borrower?
No
S16(2B) does not apply.
Yes
Interest deductible
A bare trustee
b.
A beneficiary of a
unit trust specified
under s 26A(1A)(a)
c.
A member of a
recognized retirement
scheme
d.
A public body
e.
A government
owned corporation
f.
A FI (local or
overseas)
Is the person receiving the interest an
excepted person?
Yes
No
S 16(2B) applies.
Interest wholly/partly not deductible (specific
formula for determining the non-deductible interest
amount; referring to the period of time the interest
flow-back arrangement exists)
0
•
•
•
Interest Flow Back Test – s.16(2C)
If interests are deductible under s.16(2)(f), and
Interest payments are payable to the borrower
or a person connected with the borrower
(defined in s. 16(3B)), who is not an excepted
person (defined in s.16(2F)(c), e.g., a person
who is not chargeable to tax on interest), then
Deductible interest expenses will be reduced.
0
Deduction of Interests s.16(2C)
Day 1
Issuer of listed debentures
or marketable instruments
(Deductible expense)
Issue of
debentures /
marketable
instruments
Cash for
subscription
Interest
Hong Kong or Overseas Holders
of listed debentures
or marketable instruments
0
Deduction of Interests s.16(2C)
Day 2
Issuer of listed debentures or
marketable instruments
Issue of
debentures /
marketable
instruments
Sale of
listed
debentures
and etc
Interest
Interest
Interest
Hong Kong or Overseas Holders
of listed debentures
or marketable instruments
Overseas Associates
of Issuer
Sale of
listed
debentures
and etc
0
Deduction of Interests s.16(2C)
Day 2
Issuer of listed debentures or
marketable instruments
Issue of
debentures /
marketable
instruments
Sale of
listed
debentures
and etc
May not be deductible
Interest
Not deductible
Interest
Deductible
Interest
Hong Kong or Overseas Holders
of listed debentures
or marketable instruments
Overseas Associates
of Issuer
Sale of
listed
debentures
and etc
0
Deductibility of Interest Expenses Payable on Money Borrowed: Interest Flow-Back Test under s 16(2C)
Excepted person: (除外⼈⼠)
1.
Those who are chargeable to
tax on the interest income
2.
In the case of a person (other
than the lender) who is
connected with the borrower:
a.
b.
c.
d.
A bare trustee
A beneficiary of a
unit trust specified under
s 26A(1A)(a)
A member of a
recognized retirement
scheme
A public body
e.
A government owned
corporation
f.
A FI (local or
overseas)
Is there any arrangement in place under which
interest payment flowed back to the borrower or
connected person of the borrower?
No
Yes
Is the person receiving the interest a
market maker (i.e. 5% holding and
3 month holding period)?
Yes
S16(2C) does not apply.
Interest deductible
No
Is the person receiving the interest an
excepted person?
Yes
No
S 16(2C) applies.
Interest wholly/partly not deductible (specific
formula for determining the non-deductible interest
amount; referring to the period of time the interest
flow-back arrangement exists)
0
•
Interest Diversion Test – s.16(2CA)
Deduction of interest under s.16(2)(g) will be restricted
if there is an arrangement between borrower and lender
under which interest will be paid, whether directly or
through any interposed person, to a related person (i.e.,
borrower or person connected with borrower/lender)
(defined in s. 16(2I)(d)) who:
a. does not need to pay profits tax in Hong Kong or any
other similar tax outside Hong Kong; or
b. is required to pay profits tax in Hong Kong or a
similar tax outside Hong Kong, but no rate at which the
related person is subject to such tax is equal to or
0
higher than the Hong Kong reference rate (i.e. 16.5%
or 8.25%)
~
P 625 1612 B)
,
fllwbackconcept
Interest Diversion Test – s.16(2CA)
Non-Hong Kong
associated company
Loan
Interest
(not deductible)
Borrower
(CTC)
Advance
Interest on Advance
Related Person of Borrower or non-HK associated company
(The related person is not chargeable to HK/overseas tax or
chargeable to HK/overseas tax at rate lower than
16.5%/8.25%)
0
•
Loss Shifting Test – s.16(2CC)
Under section 16(2CC), if the CIR is satisfied that the
main purpose of the borrowing of money by a
corporation from its non-Hong Kong associated
corporation is to utilise a loss to avoid, postpone or
reduce any liability, whether of the corporation or
another person, to profits tax under the IRO, no
deduction is to be allowed in respect of the interest
payable on that money borrowed by the corporation.
0
Deduction of Interests s.16(2)(g) and s.16(2CC)
Non-Hong Kong
associated company
(Profit case)
Loan
Borrower
(CTC)
Interest
Generally, if interest income is taxable outside Hong
Kong at a rate equal to or higher than Hong Kong
profits tax rate, and the interest income is not set off by
the loss of the non-Hong Kong associated company,
interest expense paid is deductible under s. 16(2)(g), s.
16(2CA) and s. 16(2CC).
0
Deduction of Interests s.16(2)(g) and s.16(2CC)
Non-Hong Kong
associated company
(Loss case)
Loan
Borrower
(CTC)
Interest
Although interest income is taxable outside Hong
Kong, the interest income is set off by the loss of the
non-Hong Kong associated company, interest expense
paid is not deductible under s. 16(2)(g) and s.16(2CC)
even if overseas tax rate on the interest income is equal
to or higher than Hong Kong profits tax rate.
0
Part B: Qualifying Corporate
Treasury Centre
0
Definition of
Corporate Treasury Centre (CTC)
•
•
•
•
DIPN 52
Not a financial institution
An “in-house bank” within a MNE focusing on
the optimal procurement and usage of capital for
the operation of the entire group
Performs the functions of intra-group financing
optimising multi-currency cash management and
liquidity management, cash pooling, central or
regional processing of payments to vendors or
suppliers for the corporate group, etc
0
Definition of Corporate Treasury Centre (CTC)
• A CTC is a company carrying on an intra-group
financing business (i.e. a business of the borrowing
of money from and lending of money to its associated
corporation) in Hong Kong
–
Interest and gains derived from a certificate of
deposit and a bill of exchange: s.15(1)(f), s.15(1)
(j), s.15(1)(ia) and s.15(1)(la)
–
Interest expense: s.16(2)(c) and s.16(2)(e) and
limitations under s.16(2A) and s.16(2B); section
16(2)(g) and limitations under s.16(2CA) and
s.16(2CC)
–
Profits tax rate is at 16.5% under s.14(2)
0
Definition of
Qualifying Corporate Treasury Centre (QCTC)
•
The central management and control of the
corporation is exercised in Hong Kong,
and
•
Carries out in Hong Kong corporate treasury
activities and no other activities – s.14D, or
•
Satisfies the safe harbour rule – s.14E, or
•
Has obtained the CIR’s determination – s.14F.
0
Definition of
Qualifying Corporate Treasury Centre (QCTC)
•
A financial institution is not eligible to be QCTC
– s.14D(9)
0
Profits Tax Concession of QCTC
•
˗
˗
˗
Profits tax rate at 8.25% is chargeable on the
assessable profits derived from QCTC’s
corporate treasury activities (s.14D(1)):
intra-group lending transactions,
corporate treasury services,
corporate treasury transactions.
0
Definition of
Intra-group Lending Transactions – s.14C(1)
•
˗
˗
˗
An intra-group lending transaction (集團內部貸款交
易), in relation to a corporation, means
a transaction under which the corporation lends
money,
in the ordinary course of its intra-group financing
business,
to its associated corporation
0
Definition of
A Corporate Treasury Service – s.14C(1)
•
˗
•
A corporate treasury service (企業財資服務) is
a corporate treasury service provided by a
corporation to an associated corporation
See Sch 17B for details
0
Definition of
A Corporate Treasury Transaction – s.14C(1)
•
˗
•
A corporate treasury transaction (企業財資
交易) is
a corporate treasury transaction entered
into by a corporation that is related to the
business of an associated corporation
See Sch 17B for details
0
Safe Harbour Rule – S.14E(1)
•
a corporation satisfies the safe harbour rule
for a year of assessment (subject year) if the
corporation falls within—
(a) the 1-year safe harbour, or
(b) the multiple-year safe harbour.
0
1-year Safe Harbour Rule – S.14E(2)
•
A corporation falls within the 1-year safe
harbour if, for the subject year—
a)
its CTP (i.e. corporate treasury profits)
percentage is not lower than the prescribed
profits percentage (currently 75%); and
b)
its CTA (i.e. corporate treasury asset)
percentage is not lower than the prescribed
asset percentage (currently 75%).
0
CTP Percentage
the aggregate amount of the
corporate treasury profits of the
corporation in the basis period
for the year of assessment
CTP % =
the aggregate amount of profits
accruing to the corporation from
all sources, whether in Hong
Kong or not, in the basis period
for the year of assessment
0
CTA Percentage
the aggregate value of the corporate
treasury assets of the corporation as
at the end of the basis period for
the year of assessment
CTA % =
the aggregate value of all assets,
whether in Hong Kong or not, of
the corporation as at the end of
the basis period for the year of
assessment
0
Multiple-year Safe Harbour Rule – S.14E(3)
•
A corporation falls within the multiple-year
safe harbour if, for the specified years—
a) its average CTP (i.e. corporate treasury
profits) percentage is not lower than the
prescribed profits percentage (currently 75%);
and
b)
its average CTA (i.e. corporate treasury
asset) percentage is not lower than the
prescribed asset percentage (currently 75%).
0
Meaning of “Specified Years”
for Multiple-year Safe Harbour Rule
(a)
the subject year and the preceding year of
assessment (the 2 years) —
•
if the corporation has carried on a trade,
profession or business in Hong Kong for less
than 2 consecutive years of assessment
immediately before the subject year; or
0
Meaning of “Specified Years”
for Multiple-year Safe Harbour Rule
(b) the subject year and the preceding 2 years
of assessment (the 3 years) —
•if the corporation has carried on a trade,
profession or business in Hong Kong for 2 or
more consecutive years of assessment
immediately before the subject year.
0
CTP Percentage
the average annual aggregate amount of the
corporate treasury profits of the corporation
in the respective basis periods for the relevant
2 or 3 consecutive years of assessment
CTP % =
the average annual aggregate amount of
profits accruing to the corporation from all
sources, whether in Hong Kong or not, in
the respective basis periods for the relevant
2 or 3 years of assessment
0
CTA Percentage
the average aggregate value of the corporate
treasury assets of the corporation as at the end
of the respective basis periods for the relevant
2 or 3 consecutive years of assessment
CTA % =
the average aggregate value of all assets, whether
in Hong Kong or not, of the corporation as at the
end of the respective basis periods for the
relevant 2 or 3 consecutive years of assessment
0
CIR’s Determination QCTC – s.14F
•
If a corporation is not able to satisfy the
conditions of sections 14D and 14E, it may
apply to the CIR to determine whether the
corporation is qualified for a qualifying
corporate treasury centre.
0
QCTC
Central management and control in Hong Kong
Corporate treasury activities
Qualifying Qualifying
lending
corporate
transactions
treasury
services
Safe harbour rule
Qualifying 1-year
corporate
treasury
transactions
CTP
75%
CIR’s
determination
2-year / 3-year
CTA
75%
0
Profits Tax Treatments for QCTC
•
•
Interest income received from Hong Kong or nonHong Kong associated corporation is worldwide
taxable under s.15(1)(ia)
Gains on sale or redemption or presenting of a
certificate of deposit or bill of exchange received
from Hong Kong or non-Hong Kong associated
corporation is worldwide taxable under s.15(1)(la)
0
Profits Tax Treatments for QCTC
•
•
Interest expense paid to non-Hong Kong
associated corporation may be deductible under
s.16(2)(g), but subject to s.16(2CA) and s.16(2)
(CC) limitations
Assessable profits derived by QCTC’s corporate
treasury activities (made with Hong Kong or
non-Hong Kong associated corporation) are
chargeable at one-half of the profits tax rate (i.e.,
8.25%) under s.14D(1)
0