Establishing CTCs in a changing Hong Kong environment

By Wang Jihong and Xu Yibai, Zhonglun Law Firm
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With proximity to mainland China, Hong Kong is an important international financial, shipping and trade centre, and a globally recognized free and open economy, with extensive international economic and trade links and a well-developed service industry. The service industry of Hong Kong is equipped with many talents, a high degree of professionalism and globalization, a complete protection mechanism of intellectual property rights, a market and legal system in line with international standards, and a strong international competitiveness.

Hong Kong
Wang Jihong
Partner
Zhong Lun Law Firm

Many mainland Chinese enterprises have taken a fancy to Hong Kong’s many advantages and choose to set up international corporate treasury centres (CTCs) in Hong Kong, even if they already have general CTCs on the mainland. Many multinational enterprises also choose to set up their Asian or Greater China CTCs in Hong Kong.

Successful cases demonstrated by the Hong Kong Monetary Authority include: Avnet, CGNPC Huasheng Investment, COSCO Shipping, Hitachi Capital, IKEA, and Kerry Logistics. This article outlines policy and environmental advantages, new challenges faced recently, and some that may be faced in the near future, possible Hong Kong licences involved, and possible preferential policies when it comes to setting up a CTC in Hong Kong.

The advantages

First of all, Hong Kong is one of the global leading financial centres, with excellent performance in banking, stock markets, bond markets and asset management.

Hong Kong
Xu Yibai
Associate
Zhong Lun Law Firm

Second, Hong Kong enjoys free flow of capital, free exchange of foreign currencies, and free flow in and out of the territory.

Third, Hong Kong’s service industry is well developed, especially in finance, accounting, law, design, consulting and other professional services. It has competitive international talent, especially financial talent. Fourth, Hong Kong has a simple and transparent taxation system with relatively light tax burden.

There are only three types of direct taxes: profits tax, salaries tax and property tax. Taxes commonly seen in other jurisdictions, such as sales tax/consumption tax/VAT, withholding tax, capital VAT, dividend tax and inheritance tax are not imposed in Hong Kong.

In addition, Hong Kong has many other advantages such as a predominant business environment, a comprehensive renminbi business, multiple capital flow channels with the mainland, and being an important city in the Greater Bay Area (Guangdong-Hong Kong-Macau) plan.

Recent challenges

However, since 2019, a series of events around Hong Kong have raised concerns including: (1) the unrest caused by the Anti-Extradition Law Amendment Bill (anti-ELAB) movement has damaged Hong Kong’s international reputation; (2) covid-19 has imposed a great impact on Hong Kong because of its special economic structure; (3) Beijing’s decision to enact the National Security Law has triggered the US threat to strip Hong Kong of its special status; and (4) even China’s policy of transforming Hainan to a free-trade port has raised speculation about whether the move will challenge Hong Kong’s position as a trade centre.

In terms of international ratings, Moody’s downgraded Hong Kong’s long-term credit rating from “Aa2” to “Aa3” on 20 January 2020. Fitch lowered Hong Kong’s credit rating in September 2019 to “AA”, and downgraded it further to “AA-” in April 2020, all proof that Hong Kong is facing many new situations and challenges.

Licensed activities

A CTC may engage in the 12 types of regulated activities prescribed in schedule 5 of Hong Kong’s Securities and Futures Ordinance, Type 4 (advising on securities), Type 6 (advising on corporate treasury), and Type 9 (asset management) in particular. In addition, the operation of the CTC may also involve the money lender licence stipulated by Hong Kong’s Money Lenders Ordinance, and the money service operator licence stipulated by the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

Therefore, if enterprises were to set up a CTC in Hong Kong, they should pay close attention to whether their gradually unfolding business falls into special regulated areas, and analyze in advance whether they need to obtain relevant licences, with their specific requirements and potential applicability of statutory exemptions from applying for licences, so as to avoid compliance risks caused by unlicensed or non-compliant operations.

Preferential policies

Under the Hong Kong Inland Revenue (Amendment) (No.2) Ordinance 2016, there are two main tax benefits available for qualifying CTCs: (1) a qualifying CTC will receive a 50% profits tax deduction for “qualifying profits”, reducing the tax rate from 17.5% to 8.25%; and (2) borrowers’ interest expenses from intra-group financing business are deductible when it comes to profits tax calculation. Enterprises only need to choose the half-amount tax rate in writing at the time of tax declaration, and there is no need to apply in advance for setting up the qualifying CTC.

Generally speaking, enterprises planning to set up a CTC should conduct a comprehensive investigation and horizontal comparison of the environment, policies, laws and regulations of the candidate sites beforehand, and choose the most suitable ones according to the latest international situation.

However, with everything considered, the authors believe that Hong Kong is still among the top choices for mainland enterprises to set up international CTCs, with its advantages from superior international status, close ties with the mainland, and competitive talent pool and systems, regardless of the many recent challenges.

Wang Jihong is a partner and Xu Yibai is an associate at Zhonglun Law Firm

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