The case for a Hong Kong RHQ tax incentive

The case for a Hong Kong RHQ tax incentive

Report proposing the introduction of a regional headquarter tax incentive in Hong Kong

Hong Kong

KPMG’s latest report proposes the introduction of a regional headquarter (RHQ) tax incentive in Hong Kong. The report also highlights the key locations in the Asia Pacific region that have been successful in attracting multinational corporations (MNCs) to establish RHQs, and the factors that have led to their success.                

The key aspects of the Report are as follows:

  • Whilst Hong Kong is a leading international financial centre and regional business hub, Singapore has historically been the clear leader in the Asia Pacific region as an RHQ hub.
  • Having a greater number of RHQs set up in Hong Kong would contribute to the growth and development of Hong Kong’s economy due to the resulting increased demand for goods and services and employment of local personnel.
  • Unlike Singapore, Hong Kong does not have an RHQ tax incentive. Accordingly, the profits of a Hong Kong RHQ would generally be subject to profits tax at 16.5%; which is highly uncompetitive when compared to the RHQ tax incentive tax rate applicable in Singapore (typically 5% - 10%) on qualifying RHQ profits.
  • Tax has been identified as the most important consideration for MNCs in determining whether to establish an RHQ in Hong Kong. Consequently, KPMG proposes that Hong Kong should introduce an RHQ tax incentive to attract RHQ establishment by addressing a key MNC need. Additionally, an RHQ tax incentive would complement Hong Kong’s corporate treasury centre regime, given an MNC’s regional treasury and RHQ function are typically undertaken at the same location.
  • KPMG proposes that the RHQ tax incentive provide a 50% profits tax rate reduction (8.25%) for qualifying RHQ profits, in line with the corporate treasury centre regime. The key requirements for RHQs to qualify are that they must: 
    • Earn arm’s length profits from performing regional management and coordination services to related group companies; 
    • Undertake a certain level of expenditure and investment into Hong Kong with respect to the RHQ activities; and 
    • Employ suitably qualified local professionals to perform the RHQ’s core functions.  
  • The conditions required for the RHQ tax incentive to apply, along with the many commercial reasons/drivers for situating an RHQ in Hong Kong (i.e. leading international financial centre and business hub), would ensure that the RHQ tax incentive is BEPS compliant.

Tax efficiency and simplicity are key parts of the decision making process of an MNC when it is deciding on where to establish its RHQ. Introducing an RHQ tax incentive in Hong Kong is a necessary step to ensure that Hong Kong retains its position as a leading financial services hub and as an attractive RHQ location. As such, in order for Hong Kong to be competitive and a viable alternative to other locations with longstanding RHQ tax incentives, Hong Kong needs to introduce its own version of an RHQ tax incentive in order to encourage MNCs to establish RHQs in Hong Kong.

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