Under Hong Kong’s territorial tax system, only interest income that is derived from Hong Kong (or deemed as such) can generally be within the scope of Hong Kong Profits Tax. Hong Kong companies that lend overseas are in some cases not subject to Hong Kong Profits Tax on interest receipts.
Under new proposals made by the Organisation for Economic Co-operation and Development (“OECD”), Hong Kong’s approach to taxing interest could come under increasing pressure. The denial of foreign interest deduction or the blocking of treaty access for interest withholding tax relief are among the potential implications of these new proposals.
Multinational groups should be considering now what to do if such rules were to be enacted, including contingency plans looking at bringing such payments within the Hong Kong tax net and a consideration of the Hong Kong Corporate Treasury Centre (“CTC”) regime for qualifying entities. With indications that the Hong Kong Government is planning to enhance the CTC regime, if this is effectively handled, it could in fact create new opportunities to attract global investment through Hong Kong as a financing and treasury hub.