Hong Kong: Tax changes in draft legislation implementing risk-based capital regime for insurers

Draft legislation implementing the risk-based capital (RBC) regime for Hong Kong insurers was introduced to the Legislative Council and had its first reading on 19 April 2023. The RBC regime would introduce various changes to the taxation of Hong Kong insurers.

Currently a rule-based capital adequacy regime applies to Hong Kong insurers, under which an insurer’s capital adequacy for long-term business and general business is assessed on the basis of its solvency margin, which is linked to the amount of premium income and level of insurance liabilities. This regime does not take into account pertinent factors related to the business and risk management practices of each individual insurer, such as potential risks associated with the nature of products offered and with investments made.

The proposed RBC regime takes a modular assessment approach that is more sensitive to each insurer’s risk profile—consisting of market risk, life and general insurance risks, and operational risk. Under this approach, insurers with solid risk management measures and better asset and liability management would face lower capital requirements. 

The valuation method for determining an insurer’s liabilities would change under the RBC regime, resulting in profits tax implications for those insurers that calculate assessable profits with reference to those liabilities. The draft legislation contains various proposed amendments to the Inland Revenue Ordinance (Cap 112) to address the corresponding tax issues, including:

• Section 23 would be amended to refine the ascertainment of the adjusted surplus for those taxpayers who have elected that basis for computing the assessable profits from life insurance business.
• Section 23AAA would be added to provide for the ascertainment of assessable profits from non-life long-term insurance business.
• Sections 23AAAB to 23AAAE would be added to provide for the spreading of any one-off increase in assessable profits due to the adoption of the RBC regime over a period of five years for life insurance business and non-life long-term insurance business.
• Sections 23A and 23AB would be amended to adjust the ascertainment of assessable profits from general insurance business and general reinsurance business, respectively, due to implementation of the RBC regime. 
• Section 23AD would be added to provide for the spreading of any one-off increase in assessable profits due to the implementation of the RBC regime over a period of five years for general insurance business.

There are still matters that either have not been addressed or require more certainty as the draft legislation progresses to the bills committee, including:

• The specific mechanism(s) to “de-consolidate” the financial results of an insurance group in the RBC reports to facilitate the profits tax filing
• The effect of the proposed rules on long-standing tax treatments adopted by insurers for certain parts of the business and / or certain types of income
• Application of the arrangement for early adopters, specifically for insurers of transitioning to the RBC regime part way through a basis period

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com