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13.2. Thin-capitalization and other Restrictions to Interest Deduction

Hong Kong does not have any specific provisions in regard to thin-capitalization. However, there are provisions in place that are anti-avoidance in nature on the deductibility of interest. These provisions are in place to ensure that deductions can only be taken when the funds, on which the interest arises, are used for the production of taxable profits in Hong Kong.

In respect of sums payable on or after 1 April 2016, new rules for interest deduction on intra-group financing were introduced. Under these rules, a corporate borrower carrying on an intra-group financing business in Hong Kong is allowed to deduct interest payable on money borrowed from a non-Hong Kong associated corporation, provided that:

  • The deduction claimed is in respect of interest payable by a corporation (the borrower) on money borrowed from a non-Hong Kong associated corporation (the lender) in the ordinary course of an intra-group financing business;
  • The lender is, in respect of the interest, subject to a similar tax in a territory outside Hong Kong at a rate not lower than the reference rate (standard 16.5% or 8.25% if concession specified in Section 6.7 to qualifying corporate treasury centers applies); and
  • The lender’s right to use and enjoy that interest is not constrained by a contractual or legal obligation to pass that interest to any other person, unless the obligation arises as a result of a transaction between the lender and a person other than the borrower dealing with each other at arm’s length.

For the purpose of the deduction, intra-group financing business in relation to a corporation means the business of the borrowing of money from and lending of money to its associated corporations.