In December 2017, the Hong Kong government published the Inland Revenue (Amendment) (No. 6) Bill 2017 in its official gazette altering the country’s tax concessions for a variety of businesses, including captive insurers.
In December 2017, the Hong Kong government published the Inland Revenue (Amendment) (No. 6) Bill 2017 in its official gazette altering the country’s tax concessions for a variety of businesses, including captive insurers.
The bill, which was introduced into the Legislative Council on 10 January 2018, is part of amendments being made by the Hong Kong government to address findings of the Organisation for Economic Co-operation and Development’s (OECD) Forum on Harmful Tax Practices’ (FHTP) findings of their preferential tax regime. An October 2017 review found that the tax concessions for multiple industries in Hong Kong, including captive insurance, were deemed harmful preferential tax regimes that did not comply with the OECD’s base erosion and profit shifting (BEPS) minimum requirements.
In joining BEPS, Hong Kong committed to the implementation of its four minimum standards in the areas of harmful tax practices, tax treaty abuse, country-by-country reporting requirements and improvements in cross-border tax dispute resolution.
The Hong Kong Financial Services Development Council (FSDC) explains how the new bill will impact captives in Hong Kong and the rest of Asia.
How will the Inland Revenue (Amendment) (No. 6) Bill 2017 impact captives in Hong Kong and Asia?
Currently, the ‘offshore’ captive insurance companies in Hong Kong enjoy tax concessions and are taxed at half of the normal tax rate. The Inland Revenue (Amendment) (No.6) Bill 2017 proposes, amongst others things, to extend this concessionary tax treatment to cover ‘onshore’ businesses as well.
This is to ensure the concessionary tax regime for captive insurance companies in Hong Kong is compliant with the
OECD’s BEPS.
The proposed change is important as it ensures that the country’s concessionary tax regime is sustainable in the international tax environment. In addition, it can provide certainty to existing captive insurers operating in Hong Kong and encourage multinational corporations and mainland Chinese groups to set up their captive insurance operations in the domicile.
Where does the domicile currently sit in the captive market?
As of 14 February 2018, there are three captive insurance companies licensed in the domicile. This is a small number compared with the worldwide captive insurance market, but Hong Kong is still in a start-up phase in terms of its captive market development.
How realistic is the FSDC’s target of 50 captives by 2025?
This is believed to be a realistic goal given the number of organisations in mainland China, and the surrounding region that have the size, scale, risk profile and the relevant growth plans to utilise captives.
Hong Kong has a number of strengths that give it the potential to attract mainland and multinational corporations to set up captives in the domicile.
Firstly, it is a global offshore centre for the Chinese currency, RMB. Mainland China’s initiative to internationalise RMB and an increasing amount of international exposure in mainland China means there is a need for corporations to manage and maintain a captive’s risk exposure in RMB to eliminate the exchange rate risk. Hong Kong is a natural choice in this aspect given the wide range of RMB based banking and investment products available.
Hong Kong is a well-established gateway for mainland companies to invest abroad. With the increasing amount of overseas investments made by mainland companies, Hong Kong has well established itself as the international investment and holding platform of the mainland companies. This encourages the setting up of captives in the domicile to manage the international risk exposure associated with overseas businesses.
Under the Belt and Road initiative, major mainland Chinese organisations are expanding their footprint in developing countries along the Belt and Road. Having a compliant and fit-for-purpose global insurance programme is a key economic enabler of growth, as it increases the business resiliency against natural and other perils and protects the corporate balance sheet.
Given the support of the Belt and Road initiatives in the country’s financial services industry, setting up a captive in Hong Kong can serve as a point of consolidation in terms of data collection, programme management and risk management.
Another strength is the country’s mature and sizable insurance industry with a good talent pool in risk management, underwriting and claims management. The capability to provide sufficient and qualified human capital and professionals to manage captives is an important strength.
The various tax incentive and exemption regimes offered by the government in recent years for corporate treasury, asset management and reinsurance also complement the development and the operation of captives.
What does Hong Kong need to do to become an established player in the captive market?
More education for CEO’s, C-suite and risk managers of mainland Chinese corporations on the benefits and uses of captives can help to promote the captive industry in the domicile. There is still a general lack of knowledge and experience on the use of captives in this part of the world. Hong Kong can take a more proactive role in filling the information and education gap mainland Chinese and Hong Kong corporations face when it comes to knowledge about captives.
Also, the domicile has a very short history in terms of promoting itself as a captive centre and more promotion in China and worldwide can be done to help establish the domicile in the captive market.
How close are Hong Kong to becoming completely OECD BEPS compliant?
The bill was introduced to ensure that the tax regime will be OECD BEPS compliant. This bill has now been submitted to the Legislative Council for reading and is expected to be enacted into law in mid-2018. By then the tax regime should meet the minimum OECD BEPS compliant standard.
