With a reputation for being responsive to the specific needs of the different sectors of the business community, the government of the Hong Kong Special Administrative Region is committed to promoting the territory as a captive domicile. Alan Wong reports.
Recognising the importance of risk management, Asian corporations and multinational corporations have increasingly subscribed to the concept of captive formation as one of their risk management tools. There is, therefore, enormous opportunity for captive insurance in Asia.
In the 1996-1997 budget speech of the financial secretary, the government of the Hong Kong Special Administrative Region (“SAR government”) highlighted, among other things, the commitment of the SAR government to promote Hong Kong as a captive domicile in the Asian region. In addition to the attractions of Hong Kong as a business hub, the SAR government is offering considerable regulatory concessions to corporations for establishing their captives in the territory.Hong Kong is situated at the south-eastern tip of China and is ideally positioned at the centre of East Asia. The territory has an area of about 1,100 square kilometres and is made up of the Hong Kong Island, the Kowloon Peninsula and the New Territories including 235 outlying islands.
Hong Kong has an industrious population of over 6.7 million people, a substantial proportion of whom are well educated and possess an international outlook with entrepreneurial flair. Hong Kong's per capita GDP in 1998 was US$24,715, over 80% of which came from the services sector.
Heralded as the New York of Asia, Hong Kong is one of the world class financial, trading and business centres within the Asian region. It provides a sound and internationally respected legal system, a resilient, resourceful and efficient workforce, and a sophisticated and friendly business environment.
Most important of all, Hong Kong is one of the world's freest economies and the best place in Asia for overseas companies to do business. The government is a staunch advocate of the free market economy. It has a reputation for being responsive to the specific needs of the different sectors of the business community. The financial system of Hong Kong is stable and competitive. It operates effectively within a regulatory framework which is sophisticated but transparent, predictable, supportive and highly adaptable. With regard to the insurance industry, Hong Kong's regulatory philosophy can be crystallised into the following maxim: “maximum support, minimum intervention”.
After a century and a half of British administration, Hong Kong became a Special Administrative Region of China from 1 July 1997. Under the Basic Law and the Sino-British Joint Declaration, the existing economic, legal and social systems will be maintained for 50 years until the year 2047.
The Basic Law of the Hong Kong Special Administrative Region provides for the safeguard of the free enterprise system and the liberal investment regime in Hong Kong. Among other things, the Basic Law stipulates that private property, ownership of enterprises and foreign investment shall be protected by law. The Law also upholds the principles of free convertibility of the Hong Kong dollar and the free flow of capital.
The economic scoreboard of Hong Kong
• The world's freest economy.
• The world's most service-oriented economy.
• Asia's highest per capita income (in terms of domestic buying power).
• The world's 2nd highest per capita holding of foreign exchange.• Asia's 2nd least corrupted economy.
• The world's 2nd most competitive economy.
• The world's 4th largest source of foreign direct investment.
• The world's 9th largest trading economy (5th if the EU is regarded as one entity).
• The world's 10th largest exporter of services.
Selection of captive domicile
At present, there are approximately 4,000 captives worldwide. Around 200-300 new captives are formed each year. In the Asia Pacific region, Japan and Australia are the two countries which have the largest number of captive sponsors. With the relatively rapid economic development in the mainland of China and its open door policy, conglomerates with Chinese beneficial interest are increasingly interested in this alternative tool of risk financing. Singapore, another captive domicile in Asia, has registered about 50 captives in the past decade. The SAR government strongly believes that there is vast potential for development of captive insurance in this region.
As to the criteria for a multinational conglomerate in selecting an appropriate captive location, some of the common factors are:
• Adequate legal, accounting, banking and communication facilities.
• Sound insurance legislation and supervision.
• Political and social stability.
• Operating convenience in relation to the sponsoring conglomerate.
• Favourable tax treatment.
• Access to high quality professional captive management facilities.
• Freedom from exchange control restriction.
Having regard to these factors, the SAR government is convinced that Hong Kong, with its favourable attributes in the business and regulatory environment, is able to develop itself into another captive niche in the next century, on par with any well-known captive domiciles.
Reasons for setting up a captive in Hong Kong
Sound regulatory framework: Hong Kong has an excellent regulatory regime and legal structure. It also possesses an international reputation with proper concern for business probity. Regulatory legislation is kept under regular review to bring it up to international standard.
Government support: The SAR government advocates and practises a regulatory policy characterised by the maxim “maximum support, minimum intervention”. The Insurance Authority (regulator of the insurance industry) assumes a dual role both as the regulator and the facilitator of the industry. The SAR government allows free play of market forces and intervention is kept to the minimum. It will not interfere with the market unless the interests of policyholders are in jeopardy.Simple and low taxation: Hong Kong has a simple tax regime with a corporate profit tax rate as low as 16%, while the maximum rate of personal income tax is only 15%. These tax rates are among the lowest in the world.
Tax in Hong Kong is levied on a territorial source concept in that only profits arising in Hong Kong from a trade, profession or business carried on in the territory are taxable. Offshore income or income derived from investments outside Hong Kong are therefore not taxable in Hong Kong.
In addition, unlike many other jurisdictions, Hong Kong has neither value added tax nor capital gains tax. Dividend and interest income from deposits with financial institutions are not subject to tax and there is generous capital allowance.
A concessionary tax rate equivalent to 50% of the normal profits tax rate applies to interest income and trading profits derived from certain qualified debt instruments issued in Hong Kong.
In respect of the insurance sector, a concessionary tax rate at 50% of the normal profits tax rate is also provided for the offshore business of professional reinsurers (including captive reinsurers) in Hong Kong.
Excellent banking services provided by banks of international status: In terms of external transactions, Hong Kong has become the 6th largest international banking centre. We have attracted 79 out of the top 100 banks in the world to set up branches here. Banks in Hong Kong provide a wide range of retail and wholesale banking services, including deposit-taking, trade financing, corporate finance, treasury activities, securities trading, etc.
Free flow of funds: Hong Kong has no control on foreign exchange or transfer of funds. Its currency is freely convertible in international markets.
Investment services: Hong Kong is rated as one of the most open and transparent financial markets. Taking advantage of the favourable time zone location, the market of Hong Kong is able to have foreign exchange dealings 24 hours a day by linking to the New York and London markets. Hong Kong has the second largest stock market in Asia in terms of market capitalisation. Coupled with the rapidly growing debt market, Hong Kong has become the regional centre for investment portfolio management activities.
High quality accounting and legal services: Almost all internationally renowned accountancy firms and legal firms with a wide range of commercial experience have established their offices in Hong Kong.
Convenient access to high quality captive management services: There is sufficient and first class captive management expertise available in Hong Kong. Depending on the demand of the market, such expertise could be enhanced readily.
Advanced telecommunication facilities: Telecommunications and postal facilities are available using the latest technology.
Social and political stability: A stable and responsible government is conducive to Hong Kong's social and political stability. This favourable attribute is enshrined in the Basic Law which provides the following:
• Hong Kong's capitalist system and lifestyle to remain unchanged for 50 years to the year 2047;
• Commitment to Hong Kong's role as an international business and financial centre;
• Guarantee of financial prudence;
• Promise of economic autonomy;
• Respect for the Rule of Law and independent judicial powers including the right to final adjudication of disputes.
Close proximity to the huge market of China: With its open-door policy and gradual deregulation of its insurance industry, China is expected to grow very fast economically over the next few decades. Hong Kong is strategically positioned to serve the insurance needs of foreign undertakings in this fast developing economy.
Highlights of the regulatory concessions for captives
The Insurance legislation was amended in May 1997 to offer regulatory concessions to captive insurers to encourage their establishment in Hong Kong.
The salient concessions are highlighted as follows:
In addition, a captive insurer is also exempted from the requirements to demonstrate to the Commissioner of Insurance before authorisation that:
(1) it has undertaken a feasibility study in respect of its proposed operation in or from Hong Kong;
(2) it will not engage in a “fronting” operation;
(3) it will be managed and operated independently of its group.
Annual and authorisation fee
The annual and authorisation fee for a captive insurer is HK$22,600 (US$2,900), only one-tenth of the fee chargeable to other authorised insurers in Hong Kong.
Application forms and authorisation guidelines are available from the Office of the Commissioner of Insurance upon request. They are also available from the website of the Office. It would be useful for prospective applicants to meet with our officers at the earliest opportunity to acquaint themselves with the regulatory framework and the financial reporting requirements in Hong Kong. The principal considerations which the Commissioner of Insurance will take into account in assessing an application are the fitness and propriety of the captive sponsor, the financial resources of the captive insurer and its reinsurance arrangements. The Office of the Commissioner of Insurance is committed to deal with an application within 2 months, subject to the sufficiency of the information submitted.
Alan Wong, Commissioner of Insurance. Tel: 852 2867 2550; fax: 852 2869 0252; e-mail: email@example.com; internet homepage: http://www.oci.gov.hk