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01 July 2014
Captive insurance is a form of self-insurance set up by companies to underwrite risks within the same group of companies. It has been widely adopted in the United States and Europe by multinational enterprises to manage their risks which are either unavailable in the direct insurance market or are available, but for exceptionally high premiums.
Notwithstanding the relatively slow development of captive insurance in Asia, increasingly more enterprises in the region have begun to turn to captive insurance to manage risks as their businesses become more sophisticated. Governments in the region are also keen to create a competitive domicile for captive insurance, seeing as it can boost the country's economy and help the development of other related business, such as reinsurance.
In Hong Kong, the Inland Revenue (Amendment) (No 3) Bill 2013, which gives captive insurers a profits tax concession of 50% for their offshore risk insurance business, was passed on March 19 2014. Passage of the bill means that the tax concession will take effect in the 2013/2014 year of assessment. With the encouragement of the Chinese central government (which announced in late June 2012 its support for mainland institutes to establish captive insurers in Hong Kong), the bill reflects the Hong Kong government's determination to promote Hong Kong as a captive insurance hub.
Hong Kong has been actively promoting captive insurance since the 1990s. Legislation was passed in 1997 to make several regulatory changes, including lower capital and reserve requirements, so as to attract more captive insurers to establish their businesses in Hong Kong. However, to date, there are only two captive insurers in Hong Kong. Compared with Singapore – which is Asia's largest captive insurance centre, hosting more than 60 captive insurers – this number is far too low.
The key factor which makes many captive insurers prefer other regions (eg, Bermuda, the Cayman Islands or Singapore) over Hong Kong is tax. In Bermuda and the Cayman Islands, the world's two largest and leading captive insurance domiciles, captive insurers are charged no profits tax. In Singapore, for years, approved captive insurers have been entitled to tax exemptions on selected income streams, such as income derived from insuring and reinsuring offshore risks. However, Hong Kong offered no tax concessions to captive insurers until recently.
Under the existing regime, the Hong Kong government grants certain regulatory concessions to captive insurance companies. The regulatory requirements for captive insurance companies, which appear to be more lenient than those for non-life insurance companies, are as follows:
To promote Hong Kong as a comprehensive captive insurance hub, the bill proposes (among other things) that the profits tax for captive insurers for underwriting their offshore risks be half of the normal corporate profits tax rate of 16.5%. This tax concession should put captive insurers in line with reinsurers, as they enjoy the same tax concession under the Inland Revenue Ordinance (Cap 112).
The bill provides that the profits tax concession applies to the year of assessment commencing April 1 2013 and to all subsequent years of assessment. Further, an amendment has been made to the existing Inland Revenue Ordinance to provide a formula for ascertaining a captive insurer's assessable profits deriving from the business of insurance of offshore risks.
The proposed profits tax concession for captive insurers is an encouraging policy to develop Hong Kong as one of the Asia-Pacific region's captive insurance centres. Although the proposed tax concession may not in itself be competitive enough to attract overseas captive insurers to establish their businesses in Hong Kong, given Hong Kong's strategic location in Asia and the captive insurance policy promulgated by the Chinese central government, Hong Kong should be an attractive location for mainland enterprises to establish their captive insurance businesses, which should enhance the overall competitiveness of Hong Kong as an international financial centre.
While it remains to be seen whether Hong Kong will be a substantial domicile for captive insurers, captive insurance is still a novel concept to many enterprises in Asia. The Hong Kong government and regulatory authorities should now take this opportunity to enhance the insurance industry's awareness of captive insurance in the wider market.
For further information on this topic please contact Kevin Bowers at Howse Williams Bowers by telephone (+852 2803 3648), fax (+852 2803 3608) or email (email@example.com). The Howse Williams Bowers website can be accessed at www.hwbhk.com.
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