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18 July 2023

Hong Kong introduces new tax treatments for insurers upon adoption of a risk-based capital regime

  • A new law requires Hong Kong-authorized insurers to adopt a risk-based capital (RBC) regime in relation to the capital adequacy requirement.
  • New tax treatments are introduced in relation to the adoption of RBC regime
  • Hong Kong insurers may want to assess the implications on their tax positions, particularly the early RBC regime adopters for their 2022-23 profits tax returns

Executive summary

The Hong Kong "Insurance (Amendment) Ordinance 2023" (the New Law) was gazetted on 14 July 2023. The New Law introduces the RBC regime for Hong Kong insurers under the Insurance Ordinance and makes corresponding tax legislative changes. The new tax treatments will be applicable to an insurer in the year of assessment in which it adopts the RBC regime.

Detailed discussion

Currently, insurers of Hong Kong are subject to a rule-based capital adequacy regime that does not consider risk profiles of individual insurers. The RBC regime introduced by the New Law will align Hong Kong with international regulatory requirements to fully reflect the risk profiles of individual insurers.

The New Law also provides new tax treatments to address consequential tax changes:

  • Taxpayers may elect to spread tax liabilities over five years from a one-off transitional adjustment post-adoption of the RBC regime. However, this election is not available to businesses in Classes G (retirement scheme management category I) and H (retirement scheme management category II).
  • The method for calculating tax basis for non-life long-term insurance business is changed from the "formulaic method" to the "adjusted surplus method."
  • When applying the "adjusted surplus method" to ascertain assessable profits for an insurance fund that covers both a life insurance business and non-life long-term insurance business, the net asset value of the fund is apportioned based on respective premiums.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2023-1260

 
 

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