Though it has only two captives at present, with total premiums of HKD$704.8 million (USD$90.9 million), the Hong Kong government is seeking to ramp up its captive offering with the recent announcement of a 50 percent profit tax reduction for captive insurance companies.
Though it has only two captives at present, with total premiums of HKD$704.8 million (USD$90.9 million), the Hong Kong government is seeking to ramp up its captive offering with the recent announcement of a 50 percent profit tax reduction for captive insurance companies.
To further butter up prospective businesses, the financial secretary also proposed to waive business registration fees for 2013 to 2014.
“On profits tax, the financial secretary proposed to extend the profits tax exemption for offshore funds to allow private equity funds to enjoy the same tax exemption and to reduce the profits tax on the offshore insurance business of captive insurance companies, such that they will enjoy the same tax concessions as those currently applicable to reinsurance companies,” said a statement from the Hong Kong government.
As to whether it will work—the jury is out. “If you go back prior to the handover, prior to 1997, the general policy of the Hong Kong government was not to be a captive domicile because this was seen to be advertising a ‘tax haven status’ which we did not wish to have,” comments Michael Somerville, chairman of the captive insurance committee of the Business and Professionals Federation of Hong Kong.
“So there was no appetite then to become a captive centre. There were also the political implications—people were dubious about what the future held and that Hong Kong was not seen as a stable enough place politically to consider it.”
But, he adds, Hong Kong is in the process of becoming an active captive domicile, due to a dramatically changed landscape, and its pertinent role as the gateway to China.
“There is a very clear role that Hong Kong can play for China in the general expansion of its insurance business including captive insurance. Up until now it has been a purely domestic market; the Hong Kong market has been very small, particularly with the move of manufacturing away from Hong Kong that also had an impact. Now we have China as a very major market, which initially was a very closed domestic market but now is becoming more open and international.”
“Since the late 1990s, the Insurance Authority of Hong Kong has been actively promoting captive insurance,” adds Tony Chan, acting assistant to the Commissioner of Insurance in Hong Kong.
“In 1997, legislation was enacted to provide regulatory concessions for captive insurance companies, and the first captive insurance company was authorised in Hong Kong in 1999. You’ll notice from section 2(7) of the Insurance Companies Ordinance that the captive insurance companies permitted in our regime is the traditional type of captives (ie, not more sophisticated types such as rent-a-captives, protected cell captives, etc) that carry on general insurance business. We welcome any enterprises from different regions to establish captive insurance companies in Hong Kong.”
One of the two captives that are domiciled in the country belongs to the Mainland China Group, and Somerville asserts that it is the big mainland conglomerates that are the primary focus.
“The fundamental primary focus at this stage is those big mainland conglomerates that are going global. Inevitably one of the first things to happen is that they will almost certainly end up acquiring a captive one way or another.”
“If you take a company like Geely Motors, they will almost certainly have a captive somewhere in their camp. So that raises the question of what is the attitude of the mainland regulators, both the fiscal and the insurance regulators to this? And in the early stages, it was one of them really not wanting to know.”
The realisation that captives are a major part of risk management controls of a multi-disciplinary, multi-territorial organisation is a relatively new concept, says Somerville. “On the other hand, most of the senior management now in these big major corporations are trained overseas or running their businesses on international business practices, so it’s a whole new board game on the mainland. We have for the last two or three years been discussing both with mainland conglomerates and with the regulators what their position on this is and there has been something of a breakthrough in recent times in that the insurance regulators have acknowledged that captive insurance is an important risk management factor for major corporations and are now pro captives.”
And it is certain that Hong Kong’s status as a powerful player in the financial global markets will hold it in good standing when it comes to captives. A free flow of funds and information, coupled with good infrastructure, a sound regulatory system, superb banking services and the rich pool of talent are all big pluses for the captive market.
There are also regulatory concessions to captive insurance companies, including lower capital and solvency margin requirements, exemption from certain statutory requirements and minimal annual fees, at just $22,600.
These are all positives, but it still remains that a low captive count is a major downside to attracting more companies. “I think as in all of these things you just have to start the ball rolling,” concludes Somerville. “As it stands, one of the largest multinational corporates in China is very interested in seeing this going ahead. So I think we’ve always seen that as being the starting point, once that is bedded down then we can actually go to the regulatory authorities and say we want you to not stand on the sidelines [but] be supportive.”
“Hong Kong is not going to try and be ‘all things to all men’. We will focus on the niche, and work from there.”
