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SCMP Reporter

Many Hong Kong companies lending funds to overseas entities could be subject to tax for the first time, following a decision in the Privy Council dealing with the source of company profits.

 The case concerned the profits of Cayman-registered Orion Caribbean, and whether they arose from business transacted by its parent, Orion Royal Bank, in Hong Kong.

 Orion Royal Bank is in turn wholly-owned by the Royal Bank of Canada.

 Orion Caribbean was established within the Royal Bank of Canada group as a vehicle for ensuring tax on transactions was minimised.

 According to the Privy Council ruling, money was borrowed from Royal Bank of Canada subsidiaries in currencies other than Hong Kong dollars, and on-lent to borrowers in a way that allowed a profit to be made out of the interest differential between the borrowings and the lendings.

 The money was also on-lent in currencies other than Hong Kong dollars. The company believed the profit accrued was tax-free under Hong Kong tax law, because it did not arise locally.

 The Privy Council ruled that much of the borrowing and lending activity did in fact arise in Hong Kong - and was therefore taxable.

 Michael Olesnicky, partner-in-charge of tax at law firm Baker & McKenzie, said the decision had 'significant ramifications for some group treasury companies set up within large companies set up for the purpose of borrowing funds'.

 Arthur Andersen tax partner Marcellus Wong said the Inland Revenue Department was in future likely to view entities which had similar types of structures in place with 'suspicion'.

 'Hong Kong companies now need to more carefully plan the relationship between themselves and overseas associated companies,' he said.

 There was a need to ensure that operations performed in Hong Kong were not overly substantial, he said.



Tax ruling deals blow to Canadian bank offshoot