Amendments made in IRO for Profit Tax Calculation and different Alternative Bond Schemes in Tax Receipts for Taxpayer having Company Setup in Hong Kong


04 Jan

In this blog we will be discussing some points on the topic of amendment in Inland Revenue Ordinance then we will discuss the interest and profits exemption from Renminbi Sovereign Bonds. We will also explore the alternative bond schemes and that these are accorded identical profits tax treatment to a traditional bond arrangement. And as the last part of the blog we will explore in details the terms such as qualifying bond arrangements and qualifying instrument arrangement.

Amendments (No. 2) in Inland Revenue Ordinance

A private fund of equity on offshore carrying out a ‘particular transaction’ can be eligible for exemption on tax by concerning the profits by that transaction of taxpayer having company setup in Hong Kong if any of the conditions given below is satisfied:

  • The offshore private fund of equity managing the particular transaction is a ‘qualifying fund’; or
  • A particular person arranges or carries out that particular transaction;

The definition of word ‘securities’ was reformed in the year of 2015 on June 17th, for helping taxpayer having HK company registration for their better understanding of the word in such a way that:

  • A transaction in special purpose vehicle (SPV) is included in the definition of a ‘specified transaction’; and
  • A secured transaction in a qualified private company known (Expected private company, i.e., EPC) will always be included in a ‘stated transaction’.

This is because due to this reason, offshore private fund of equity will not be subjected to the tax on profits obtained from the transaction in securities in an expected and eligible private company through the securities’ distribution in a special purpose vehicle (SPV).

As from the assessment year 2015 / 16, the payment of tax on profit is not applicable on the special purpose vehicle concerning the profits obtained from a proceeding in securities of taxpayer having HK company registration in:

  • An (expected private company) eligible private; or
  • A mediated special purpose vehicle. The reference for these points is taken from the Section 20 ACA (1) of Inland Revenue Ordinance.

An ‘expected private company’ is also termed as offshore private company if for all the times within a period of 3 years before a proceeding in securities in the offshore company incorporation it:

  • Through an everlasting establishment, did not carry on any type of business from or through a permanent inception.
  • Slips within any of the descriptions that are given below:
  • It held these type of share capitals but the accumulated value of holding (either directly or indirectly) the share capitals in one or more than one private companies carrying on any business from or through a permanent establishment in Hong Kong; or
  • It held these type of share capital but the accumulated value of holding the capital is analogue to not exceeding then the 10 percent of the value of its own asset.
  • Slips within any of the descriptions given below:
  • Neither immovable property is held by it in Hong Kong (either directly or indirectly) nor the share capital (however described) in one or more than that private companies with indirect or direct holding of non-moveable property in Hong Kong; or
  • It held such share capital or immoveable property (or both of these), but the accumulated value of the capital and profit holding is analogue to not more than 10 percent of the value of its own asset. The reference for these points is taken from the Section 20 ACA (2) of Inland Revenue Ordinance.

In order to be eligible for exemption of tax on profits and be a ‘qualifying fund’, the conditions given below required to be fulfill:

  • All the time after final termination of sale of interests:
  • The number of individuals who invested exceeds four; and
  • The capital dedication made by the individuals who invested exceed more than 90 percent of the aggregate capital dedications.
  • The portion of the net transactions being raised out of the transactions of the fund to be received by the affiliates of originator and originator himself, after withdrawing the portion chargeable to their capital support (that is proportionate to the accountable capital contributions of investor), is assented under an accord managing the fund’s operation to be an amount not being more than 30 percent of the net proceeds. The reference for this statement is taken from the Section 20 AC (6) of Inland Revenue Ordinance.

Considering the Allowances to prohibit the abuse via special purpose Vehicles

The already present considering allowances will be applicable equally to the offshore company incorporation private fund of equity. A person that is resident of Hong Kong (alone or jointly with his affiliates) holding an interest of beneficiary of greater than and equal to 30 percent in a private fund of equity for tax-exempt will be considered to have obtained attributable profits concerning the profits grossed by the fund from particular proceedings and same proceeding in Hong Kong. The reference for this statement is taken from the Section 20 AE of Inland Revenue Ordinance.


Other Funds Exemption

Enterprises owned by state of Hong Kong, funds of sovereign and funds of pension may keep on enjoying the exemptions from tax:

  • Under the Section 26A (1A) of Inland Revenue Ordinance if they got selected as an authentic broadly held investment schemes which observed with demands of a supervisory authority within a regulator arrangement that is acceptable.
  • Under Section 20AC (1) of Inland Revenue Ordinance concerning the profits obtained from the particular transactions arranged by or carried out through a particular person.

Exemption of the Profits and Interest being raised from the Renminbi Sovereign Bonds   

According to order of profits tax on 2009 also known as Renminbi Sovereign Bonds, the payment of tax on profits after establishing a business in Hong Kong is not allowed on a person concerning the sums accumulated to or received by him as:

  • Interest payable or paid on the Renminbi sovereign bonds; or
  • Profits on the retrieval on maturity, on other disposal or show of Renminbi sovereign bonds or on the sale

For the assessment year beginning on the 1 April 2009 and all following assessment years.

The meanings of the ‘Renminbi sovereign bonds’ is any kind of bonds:

  • Issued by the Government of Central People in Hong Kong; and
  • Designated in the Renminbi.

Schemes of Alternative Bond

In order to ensure that alternative bond schemes are recorded to identical treatment of profits tax for traditional arrangement of bond, Sections 21 and 22 of Schedule 17A alter some of the allowances of the Inland Revenue Ordinance. The alterations are briefed in the table given below:


Allowances of the Inland Revenue Ordinance

Particulars

Sections 14A and 26A

The tax exemption and concession for the qualifying debt instruments is applicable to the alternative bonds consignable by their delivery that are issued under the qualifying bond arrangements.

Section 15 (1) (j), (k) and (l)

These considering allowances are expanded to the alternative bond schemes under a qualifying bond arrangement that is consignable by their delivery.

Section 16 (2) (f)

The interest deduction on instruments and legal documents is expanded to the extra payments that are payable to the bond holders by the bond issuer on alternative bonds issued under a qualifying bond arrangements.

Section 16 (2) (f) (iii)

The return on the investment that is payable to the issuer of bond by the originator under an arrangement of qualified investment is deductible concerning to the conditions being met.

Section 20 (AC) (7) – dis-inclusion of certain profits from the tax

The disallowance for certain profits of non-resident that are applicable to the transactions in traditional bond transactions incurs alternative bonds issued under a qualifying bond arrangement.

Section 26A (4)

A qualifying bond arrangement is not considered as the unit trust, mutual fund or same investment schemes.

  

The meaning of Qualifying Bond Arrangement

 

The arrangement of bond in a particular alternative bond scheme is considered as the qualified bond arrangement or QBA at any time (material time) subject to certain events of disqualifications if at the that material time the scheme follows from, and with the beginning of the particular term of the scheme up to material time has always followed by the following conditions given in Section 13 (1), 13 (3), 13 (5) and 28 of Schedule 17 A:


The condition of reasonable commercial return

Both:

  • The accumulated amount paid to BHs in actual; and
  • The maximum accumulated amount of the bond return that under the terms or condition of the scheme, may be payable to the BHs.

Must not overreach an amount that would be a logical return on the money debited of the amount of the bond transacts. The reference for this statement is taken from the Section 14.

The arrangement of bond as condition of financial liability

The arrangement of bond in a specified alternative bond scheme must be served as a financial liability of the bond issuer in accordance with either the

  • Standard of international financial reporting; or
  • Standards of Hong Kong Financial Reporting. The reference for this statement is taken from the Section 15.

The condition of hong kong connection

The alternative bond issuer must be:

  • Registered on a stock exchange in Hong Kong; or
  • Issued in concerning of carrying on the business in Hong Kong and in good faith; or
  • Retailed in Hong Kong; or
  • Cleared by and Wedged with the unit of central Moneymarkets operated by the Monetary Authority. The reference for these statements is taken from the Section 16.

The condition of maximum term length

The period of the particular alternative bond scheme must not be more than 15 years. The secretary of Finance may alter the period, by notice published in Gazette. The reference for these statements is taken from the Section 17.

The arrangements performed in accordance with the terms condition

The particular alternative bond scheme must be executed according to the characteristics and features as advised in the Schedule 17 A of the Inland Revenue Ordinance. The reference for these statements is taken from the Section 18.


The meaning of Qualified Instrument Arrangements 

 

The particular arrangement of investment in a specified alternative bond scheme is an arrangement of qualified investment subject to certain events of disqualification at any time (material time), if Sections (13 (2), 13 (4), 13 (5) of Schedule 17A:


  • At the material time, the arrangement of bond in the scheme is, and from the beginning of the particular period of the scheme has always been a qualifying bond arrangement up to the material time; and
  • At the material time the scheme observes with and from the beginning of the particular term up to the material time has always assembled with the two conditions given below:

    • The bond issuer as channel condition
    • Under the terms and condition of particular alternative bond scheme, the total accumulated amount of the investment return that may be obtainable by the bond issuer must not surpass the maximum total amount of the bond return payable to the bond holders. Other than that, the investment return’s total amount received by the Bond issuer in actual must not surpass the total amount of the bond return paid to bondholders in actual. As discussed in the Section 19.
    • The investment arrangement as condition of financial liability
    • The arrangement of investment in the particular alternative bond scheme must be served as a financial accountability of the originator on accordance with wither the:
    • Standards of Hong Kong Financial Reporting; or
    • Standards of international Financial Reporting. As discussed in the Section 20.
    •       

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