The taxation of insurers in Hong Kong has historically been subject to comparatively antiquated rules and it has been a recurring complaint of both practitioners and their clients that the applicable regime for the computation of the profits and losses of insurers was difficult to apply. In response to those concerns, the Inland Revenue (Amendment) (Profits Tax Concessions for Insurance-related Businesses) Bill 2019 (Amendment Bill) proposes to introduce two important developments to the taxation of insurers and licensed insurance brokers in Hong Kong: first it would expand the scope of the tax concession applicable to insurance businesses and, second, it would substantially redraft and update the statutory drafting governing the methodology by which an insurance business should compute its taxable profits. The concessionary tax regime means that the profits arising from an insurance business, as defined in the Inland Revenue Ordinance as amended by the Amendment Bill, would be taxed at half the normal rate (that is, 8.25 per cent for bodies corporate). The Amendment Bill is consistent with the strategic objective of the Hong Kong Government of attracting insurance business to Hong Kong.
By way of summary, the existing concessionary tax regime for qualifying reinsurance and captive insurance businesses would be extended to cover certain types of general insurance business of direct insurers and certain types of insurance brokerage business of licensed insurance broker companies. In other words, instead of being limited to certain captive insurers and professional reinsurers, the Government proposes to apply the concessionary tax regime to general insurance business (as defined in Part 3 of Schedule 1 of the Insurance Ordinance); general reinsurance business; and licensed insurance broker companies (as defined in section 2(1) of the Insurance Ordinance). That means a much broader range of insurance businesses should be able to enjoy the reduced concessionary tax rate. Furthermore, Lloyd’s and an association of underwriters approved by the Insurance Authority as mentioned in section 6(1)(c) of the Insurance Ordinance would also fall within the scope of the concessionary regime. That said, a critical limitation to the expansion of the concessionary regime is that certain contracts of insurance would be expressly excluded from the concession. Such excluded contracts would include contracts for the management of health, mortgage guarantee, motor vehicle damage, employee’s compensation liability, and owners’ corporation third-party liability risk.
Separately, the Amendment Bill proposes to clarify the methodology for insurance businesses to compute their taxable profits. Although the rules would remain materially identical on a conceptual level, the Amendment Bill proposes to amend these to provide greater clarity and ease of use. This simplification process would extend to the computation of assessable profits of: life insurance, mutual insurance, and non-life insurance businesses.
The contents of the Amendment Bill are politically uncontroversial, and we would expect it to be enacted relatively swiftly.
How we can help
The taxation of insurers in Hong Kong can be complex. We are highly experienced in advising on the regulation and taxation of insurers, and should be pleased to assist in explaining how the Amendment Ordinance may provide fresh opportunities for commercial growth and tax efficient planning in Hong Kong. We intend to circulate an update when the Amendment Bill is, as expected, enacted by the Hong Kong Legislative Council.