In order to grow its market in PRC, KK(HK)Ltd is likely to set up an auxilliary brand in PRC. Other than the injection of initial capital, KK(HK)Ltd is going to finance the funding from the subsidiary via interest bearing loan. Roughly the money required coming from Hong Kong by PRC part is as follows:
| |2009 (3 months) |2010 (12 months) |2011 (12 months) | |Funding required |$1, 500, 000 |$5, 500, 000 |$2, 000, 1000 | |Estimated Interest rate |5% |5% |5%
KK(HK)Ltd will receive the funding through bank borrowings.
The movie director of KK(HK)Ltd approaches you for guidance.
Comment on the Hong Kong tax position of KK(HK)Ltd in respect of the account cost in respect of the dotacion of money to the PRC subsidiary by means of an interest bearing loan. (Note to college students: consider situations governing the deduction interesting expense, the treating interest received and how the origin of interest is usually ascertained and the withholding taxes under PRC under CDTA)
It is the objective of KK (HK) Ltd. to obtain financial institution borrowings to finance the operation in the PRC. Interest can be incurred on the bank loan. From the HK tax perspective, KK (HK) Limited would be able to have a tax deductions for the interest expense if it is incurred within the manufacturing of assessable revenue (i. e. the bank financial loan money will be used to develop HK taxable profit) so that it should be examined by Earnings tax.
If funding is inserted in the form of a bearing bank loan, interest profits would be received from the PRC subsidiary. Any kind of interest paid by the PRC subsidiary to KK (HK) Ltd will be subject to a PRC withholding tax.
From the perspective of KK (HK) Ltd, the taxability from the interest profits in HK would depend for the...