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Treasury & Capital Markets
New Group Tax Loss Relief proposal to boost innovation and investment in Hong Kong
The new Group Tax Loss Relief proposal, which allows intra-group loss transfer for tax saving purposes, is a positive for innovation and investment in Hong Kong, in particular for the technology sector and for startups which are part of, or looking to join, larger corporate structures.
Derrick Hong 15 Sep 2017

The new Group Tax Loss Relief proposal, which allows intra-group loss transfer for tax saving purposes, is a positive for innovation and investment in Hong Kong, in particular for the technology sector and for startups which are part of, or looking to join, larger corporate structures. 

The Hong Kong Financial Service Development Council’s proposal, which currently has no implementation timeframe, outlines a framework for allowing corporate groups to offset tax losses among wholly-owned companies operating in Hong Kong. Tax losses from one business can be offset against the profits of another business if they are conducted within the same legal group.

Unlike nearly all other developed economies around the world, Hong Kong currently has no group tax loss relief mechanism. The current rules only allow a company to carry forward tax losses to offset against its own future profits.

Start-ups and the high-technology sector are expected to benefit from the new tax proposal as their losses, resulting from their large initial investments, can be absorbed by their sister companies, promoting innovative ventures. Group tax loss relief will also incentivize investment by allowing high technology businesses to manage risk via a corporate group structure and receive a tax shelter if an investment doesn’t go well.

“New business ventures undertaken in separate corporate entities would be able to offset their tax losses against the profits of group companies and alleviate the financial burden of any start-up costs or commercial failures,” says Darren Bowdern, partner and head of financial services, tax at KPMG Hong Kong. “This would be a great initiative to encourage Hong Kong businesses to invest and innovate.”

Moreover, the Hong Kong government recognises the importance of investment in the high technology sector and has earmarked HK$10 billion for the technology sector. The group tax loss relief will complement this funding initiative.

Currently Hong Kong’s corporate tax rate is 16.5%, slightly lower than Singapore and Taiwan, both at 17%, while the UK has a rate of 19%. The global average stands at 24.3%, according to data compiled by KPMG.

According to KPMG, OECD member countries are looking to reduce corporate tax rates and to modernize their tax systems as a means of supporting local businesses and attracting foreign capital and investment. Aligning and simplifying tax rules also remains high on the agenda for OECD member countries.

“With this changing landscape, Hong Kong cannot simply rely on its low tax system to stay globally competitive, particularly when Hong Kong’s 16.5% corporate tax rate may not be ‘low’ based on international developments,” says Ayesha Lau, managing partner of KPMG Hong Kong. “Hong Kong needs to continue to evolve and innovate in order to maintain its competitiveness as an international hub and financial centre.”

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