Hong Kong: Reduced tax rate for insurance sector

Hong Kong: Reduced tax rate for insurance sector

An enhanced tax concession for the insurance sector provides a concessionary (reduced) tax rate of 8.25% on income for certain insurance-related businesses conducting business in Hong Kong, provided certain thresholds are met.

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Overview

In recent years, the Hong Kong government allowed tax incentives to bolster the financial services industry, culminating with the concessionary tax regime to further develop the insurance sector and bolster Hong Kong’s competitiveness as an international insurance hub and risk management centre. 

In early 2021, the government issued two notices related to Inland Revenue (Amendment) (Profits Tax Concessions for Insurance-related Businesses) Ordinance 2020, to extend profits tax relief to three additional classes of insurance businesses.  The new profits tax concession is now applicable for specified insurers and licensed insurance brokers on or after 19 March 2021.

Tax concession rules

Previously, Hong Kong had a concessionary tax regime whereby a profits tax rate of 8.25% (that is, half of the current profits tax rate of 16.5%) was available to authorized captive insurance business and reinsurance business of professional reinsurers in Hong Kong.  Effective from 19 March 2021, the new rules extend the concessionary tax regime to certain qualifying insurance-related businesses as follows:

  • All general reinsurance business of a direct insurer (“specified insurer”)
  • Certain types of general insurance business of a specified insurer (“specified general insurance business”)
  • Certain types of insurance brokerage business of licensed insurance broker companies.

However, there is a specific carve-out for specified general insurance business covering the following five types of risk and liabilities: (1) health risk; (2) mortgage guarantee risk; (3) motor vehicle damage risk; (4) employees’ compensation liability; and (5) owners’ corporation third-party liability.

The new rules contain an anti-avoidance provision (i.e., a main-purpose test) to deny the concessions if a direct insurer enters into a transaction or a series of transactions with a person for the sale or purchase of insurance or reinsurance and the main purpose, or one of the main purposes, in entering into the transactions is to avoid or postpone the liability to pay tax or reduce the amount of tax liability (e.g., when direct insurers buy reinsurance among themselves to cede part of their respective risks primarily for a tax benefit).

The new rules also include provisions on:

  • Ascertaining the assessable profits of the qualifying insurance business that are chargeable to profits tax at 8.25% as opposed to other businesses that are subject to the current profits tax rate of 16.5%
  • The treatment of losses when a person derives concessionary trading receipts and normal trading receipts from carrying on qualifying insurance business and other business

Substantial activity threshold requirements

To meet the international standards on anti-base erosion and profit shifting (BEPS), the ordinance has included substantial activity requirements that must be met in order to qualify for the concessionary regime. Specifically, the tax concession applies to qualifying taxpayers operating in Hong Kong and requires that the core income-generating activities are undertaken in Hong Kong, provided threshold requirements are met.  For general reinsurance business of direct insurers and general insurance business of direct insurers, the following minimum threshold requirements must be met during the basis period for the year of assessment concerned:

Qualifying activity of:

Number of full-time qualified employees in Hong Kong  

Operating expenditure incurred in Hong Kong 

A specified insurer which is a mutual insurance corporation 

4

HK$2 million

A specified insurer which is not a mutual insurance corporation

7

HK$4 million

A specified insurer which is not a mutual insurance corporation

3

HK$1 million


In a manner similar to other concessionary tax regimes (such as those for aircraft leasing and ship leasing), the Commissioner has the discretion to assess whether the minimum thresholds are adequate in order to qualify for the concession.   

KPMG observation

The new tax concession for insurance-related businesses could potentially attract more insurers and insurance brokers to set up or relocate their regional hubs to Hong Kong.  This also places Hong Kong insurance businesses with a competitive advantage to position themselves to capture opportunities for businesses looking to invest in regions in China (such as the Belt and Road and Greater Bay Area initiatives). 

Taxpayers need to consider reviewing their current operations and activities, and consider the commercial and tax implications of any potential restructuring to meet the qualification requirements, as well as reviewing their operating protocols and Hong Kong presence to determine that they meet the threshold requirements to enjoy the profits tax concession. 


For more information contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com

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