One condition for the deductibility of interest relates to corporate borrowings through debentures or other marketable debt instruments. In those cases, interest deduction is allowed for the issuer only where the debentures are listed on a recognized stock exchange, or the debt instruments are issued either:
• Bona fide and in the course of carrying on business and is marketed in Hong Kong or another major financial Centre.
• Under any arrangements, where the issue of an advertisement, invitation or document in relation to the agreement or arrangements to the public has been authorized by the Securities and Futures Commission.
Interest on debentures issued under the Loans Ordinance or the Loans (Government Bonds) Ordinance and any profit arising in relation to bonds are exempt from profit tax. Both ordinances effectively deal with loans made to the government.
It is more common for debentures to be in registered form. However, if the register is not required to be kept in Hong Kong, stamp duty does not apply as it can fall outside the definition of Hong Kong stock. Convertible debentures give rise to additional stamp duty issues, as their conversion into Hong Kong stock may trigger further stamp duty liability as a transfer of Hong Kong shares from the issuer to the bondholder.
There are several exemptions potentially applicable to taking a debentures outside of the stamp duty net. However, planning with product features is required. For example, if the debentures is not denominated in Hong Kong dollars, it is not subject to stamp duty.An exemption from stamp duty in relation to transfer within a corporate group is available for transferors and transferees that are associated by not less than 90% of the issued share capital of each other.
Profits Tax of Interest Received
Only interest arising in or derived from Hong Kong is liable to profits tax. For many years, the Department has taken the view that for the purpose of determining the place where interest arises or is derived from, it is the location of the originating cause that almost invariably determines the source. In essence, the place of derivation of interest is the place where the credit was provided to the borrower, i.e. the place where the funds from which the interest is derived were provided to the borrower, commonly known as the "provision of credit" test.
Double Taxation Relief
When taxes of substantially the same nature as tax imposed under the IRO are charged elsewhere on such interest or gains then, provided the Commissioner is satisfied that the overseas taxes have been paid, a deduction is granted for those taxes in ascertaining the profits chargeable to profits tax.
Where the overseas tax is charged on the gross amount of earnings and is payable regardless of whether or not a profit is derived such that it falls outside the ambit of this relief, then a deduction will be considered under the principal provision of section 16(1).
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