EY Hong Kong Tax Alert

Hong Kong Tax Alert: 9 January 2014

Proposed incentive for taxing captive insurers at half the normal rate

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Background

Captive insurance is a form of self-insurance by companies.  A captive insurer normally only underwrites insurance and reinsurance of risks relating to its fellow group companies.  One main reason for a group to establish a captive insurer is generally that some companies within the group may find it difficult or cost-inefficient to approach the market for insurance coverage of their specific risks. 

As one of the measures to foster co-operation between the Mainland and Hong Kong, the Central People’s Government announced in June 2012 a policy of encouraging Mainland enterprises to form captive insurers in Hong Kong to enhance their risk management.   

Against this backdrop, the Financial Secretary indicated in his 2013/14 Budget delivered in February last year that he would propose to reduce by half the normal tax rate applicable to the profits of the business of insurance of offshore risks of captive insurers. This proposal would accord captive insurers the same tax concession currently available to companies deriving profits from the business of reinsurance of offshore risks as a professional reinsurer. 

The legislative bill implementing the above proposal, the Inland Revenue (No. 3) (Amendment) Bill 20131 (the Bill), was gazetted on 27 December 2013.  The Bill was presented to the Legislative Council for first reading on 8 January 2014.

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1 The Bill can be retrieved from here. Aside from the proposal to tax profits of the business of insurance of offshore risks of captive insurers at half the normal rate, the Bill also contains a proposal to raise the tax deduction ceiling for contributions made by employees or self-employed persons to recognized retirement schemes, subsequent to the increase of the maximum relevant income level for contributions under the Mandatory Provident Fund Schemes Ordinance, from HK$25,000 to HK$30,000 per month with effect from 1 June 2014. The latter proposal is not discussed in this alert.