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Frequently Asked Questions & Answers on Completion of Supplementary Form S7 – Authorized captive insurer (applicable for year of assessment 2018/19 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
Section 1 – Basis Period
1.
Q:
Can I report different basis periods for the return and the form?
A:
No. The basis period of both of the return and the form should be the same.
Section 2 – Insured
2.
Q:
For the purpose of section 2.1, do I need to state the exact amount of premiums derived from each of the intra-group insured which are not Hong Kong tax residents?
A:
No. You only need to state the name of the three main jurisdictions of tax residence of the intra-group insured which are not Hong Kong residents. If there are less than three jurisdictions, just state the name of the relevant jurisdiction(s).
3.
Q:
How should I determine whether a jurisdiction is a "main" one?
A:
You are required to provide the name of three jurisdictions of the intra-group insured from where you have received the greatest amount of the premium in aggregate during the basis period.
Section 3 – Assessable Profits or Adjusted Loss
4.
Q:
Should I report the items under section 3 of the form on the group consolidated basis?
A:
No. You should report the data of your own business.
5.
Q:
If I have prepared financial statements for a period of more than 12 months (or less than 12 months), how should section 3 be completed? Should the amounts be apportioned or grossed up to show figures for a 12-month period?
A:
It is not necessary to apportion (or gross up) the figures if the financial statements for a period of more (or less) than 12 months have been prepared. Amounts extracted from the Statement of Comprehensive Income/Profit and Loss Account should be used in completing section 3.
6.
Q:
What is the relationship among the various terms to report under sections 3.1 to 3.4?
A:
For "Gross premiums" under section 3.1, you should report your total premiums from all sources, whether or not derived from the captive insurance business. Out of the amount reported under section 3.1, you should report the amount attributable from connected persons carrying on business in Hong Kong for section 3.2. For sections 3.3 and 3.4, you should report the relevant amount of premiums by taking the related gross premiums less any such premiums returned to the insured and any premiums paid on corresponding reinsurance.
7.
Q:
What is meant by "connected persons"?
A:
| Under section 16(1C) of the Inland Revenue Ordinance ("IRO"), a person is a connected person of a corporation if the person is – | ||
| (a) | an associated corporation of the corporation; or | |
| (b) | a person (other than a corporation) – | |
| (i) | over whom the corporation has control; | |
| (ii) | who has control over the corporation; or | |
| (iii) | who is under the control of the same person as is the corporation. | |
8.
Q:
What is the relationship among the assessable profits/(adjusted loss) to report under sections 3.6 to 3.8?
A:
For section 3.6, you should report your total assessable profits/(adjusted loss) from all sources as ascertained under section 23A of the IRO, and the amount should match with that reported on the return and your tax computation. For section 3.7, you should report the assessable profits/(adjusted loss) only in relation to the concessionary trading receipts from the business of insurance as an authorized captive insurer under section 14B(1)(b) of the IRO. For section 3.8, you should report the assessable profits/(adjusted loss) which do not fall into the scope of the concessionary trading receipts reported for section 3.7. The amount reported under section 3.6 should be the sum of each amount reported under sections 3.7 and 3.8.
Section 4 – Activities Producing Qualifying Profits Chargeable At Concessionary Tax Rate
9.
Q:
What is meant by "Qualifying Profits"?
A:
It refers to the profits from the business of insurance as an authorized captive insurer, which are qualified for concessionary tax rate under section 14B(1)(b) of the IRO.
10.
Q:
I carried on more than one Relevant Activities during the year, but some of them have ceased now. What should I tick for section 4.1?
A:
You should tick the boxes for all the Relevant Activities that you carried on during the basis period even though some of them have ceased after the basis period.
11.
Q:
What is the difference between the Relevant Activities carried out by the employees of associated person(s) in box 1 and the Relevant Activities carried out by the Taxpayer's associated person(s) in box 2 for section 4.2?
A:
For the scenario in box 1, it generally refers to the situation that the employees of the associated person(s) are assigned / seconded to work for the Taxpayer. For the scenario in box 2, it involves the engagement of the service of the associated person(s) at a fee charged to the Taxpayer on an arm's length basis. Please refer to the examples in Note 8 and Note 9 of the form for details.
12.
Q:
If the associated person does not have Business Registration Number, what should I fill in for section 4.3?
A:
Please provide the name of the associated person and state "NA" for the Business Registration Number.
13.
Q:
What is the basis of counting the number of employees? Is the number of employees as at the end of the basis period an acceptable basis for this purpose?
A:
All these are related to the threshold requirements on the indicator of the level of activity under section 26AB(4) of the IRO. After the relevant bureaux have consulted their stakeholders on the detailed arrangement, the Commissioner will specify the detailed thresholds, which are applicable to all taxpayers who enjoy the tax concessions, in a notice to be published in the Gazette. The Department will announce the details after consultation with the stakeholders and seeking of the legal advice.
14.
Q:
How should a taxpayer report if the full-time employee who carried out the Relevant Activities has dual / multiple roles or capacities in the corporation?
A:
As long as the employee was a full-time staff, then no matter the number of roles or capacities he/she had in the corporation, he/she should still be counted as a full-time staff. Regarding how the employee should be counted, this is related to the threshold requirements on the indicator of the level of activity under section 26AB(4) of the IRO. After the relevant bureaux have consulted their stakeholders on the detailed arrangement, the Commissioner will specify the detailed thresholds, which are applicable to all taxpayers who enjoy the tax concessions, in a notice to be published in the Gazette.
15.
Q:
What do employees with the "necessary qualifications" refer to?
A:
The taxpayer should include the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications / with relevant working experiences in relation to the Relevant Activities.
16.
Q:
All of my employees or the employees of the associated person in Hong Kong who carried out the Relevant Activities were employed on a part-time basis, what should I fill in for section 4.4?
A:
If all of the employees are under part-time employment, they should not be counted for the purpose of section 4.4. However, please note that an employee who worked partly for the company and partly for other companies in the same group in Hong Kong should be treated as a full-time employee.
17.
Q:
What type of employee should I report as "Others" in section 4.4?
A:
You should include the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications in relation to the Relevant Activities.
18.
Q:
What is meant by "Operating expenditure incurred in Hong Kong for the Relevant Activities" in section 4.5? Do I need to provide a breakdown of the expenditure?
A:
It refers to the operating expenses that were incurred in Hong Kong for the production of the qualifying profits from the qualifying professional reinsurance business. Please refer to Note 11 of the form. There is no need to provide a breakdown of the expenditure.
19.
Q:
Regarding Operating expenditure incurred in Hong Kong for the Relevant Activities, the note stated that "the amount of operating expenditure reported should include the remunerations borne by the Taxpayer in respect of the employees of the associated person(s) who carried out the Relevant Activities, and/ or the service fee incurred by Taxpayer for the Relevant Activities carried out by the associated person(s)".
Suppose a taxpayer is recharged by an associated person in one lump sum which includes cost of management support, office and administrative charges, and staff remuneration etc. for both relevant and non-relevant activities. But the taxpayer has difficulty to allocate the expenditure incurred in Hong Kong for the relevant activities specifically. What cost allocation method would be accepted by the IRD for the purpose of reporting this section?
A:
The taxpayer may consider to allocate the cost attributable to the Relevant Activities and other activities respectively by reference to a basis as to reasonably reflect the contributions by the employees to the carrying out of the Relevant Activities, e.g. by income or working time. Please note that for any activity which does not generate income to the taxpayer, it should not be allocated with any of the operating expenditure.