Global Tax Alert | 10 January 2014

Hong Kong proposes 8.25% tax rate for captive insurers

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To attract more enterprises to form captive insurance companies in Hong Kong, the Hong Kong Financial Secretary indicated that he would propose a reduction of the rate applicable to the profits of the business of insurance of offshore risks of captive insurers to 50% of the normal corporate tax rate. 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 (Bill) implementing the above proposal was published in the Official Gazette on 27 December 2013 and presented to the Legislative Council for first reading on 8 January 2014. Subject to the passing of the Bill by the Legislative Council, the tax concession measure will take effect from the year of assessment commencing on 1 April 2013.

The amendments to the Inland Revenue Ordinance (IRO) proposed by the Bill include the 8.25% applicable profits tax rate, and formula for ascertaining the assessable profits derived from the business of insurance of offshore risks of an authorized captive insurer, and loss treatment, among others.

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 cooperation between the Mainland and Hong Kong, the Central People’s Government1 announced in June 2012 a policy of encouraging Mainland enterprises to form captive insurers in Hong Kong to enhance their risk management.

Since utilization of captive insurance in Asia and the Mainland has been relatively low, this proposed concessionary tax rate is intended to attract more enterprises to set up captive insurers in Hong Kong as well as to foster cooperation between the Mainland and Hong Kong.

From a tax perspective, the fact that the concessionary tax rate will only apply to the assessable profits derived from the business of insurance of offshore risks would make the proposal less susceptible to being exploited by Hong Kong taxpayers.

It is also worth noting that, since captive insurance is a form of self-insurance within a group, the dealings between the captive insurer and its fellow group companies will be related party transactions. Accordingly, the insurance premiums charged would potentially be subject to examination by the relevant tax authorities under arm’s-length principles. Further, it will be examined as part of the base erosion and profit shifting (BEPS) project, initiated by the Organization for Economic Co-operation and Development, since one of the aims of the BEPS project is to identify and address the issue of profits being unduly shifted to locations with favorable tax treatment by eroding the taxable base of a jurisdiction.

Endnote

1. The Central People’s Government of People’s Republic of China.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong
  • Tracy Ho
    +852 2846 9065
    tracy.ho@hk.ey.com
  • Florence Chan
    +852 2849 9228
    florence.chan@hk.ey.com
Ernst & Young LLP, Hong Kong Desk, New York
  • Connie Chan
    +1 212 773 2661
    conniehf.chan@ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM4094