| Q1 |
Under Hong Kong Accounting Standard 39 ["HKAS
39"], the amortised cost of a financial asset or financial
liability should be measured using the "effective interest
method". Imputed interest will then be measured in respect
of the interest-free loans or loans bearing above or below
market interest rate and recognized accordingly. As such,
should the interest income and expenses calculated under the
"effective interest method" or the actual interest
income and expenses be taxable and deductible for tax purpose?
|
| A1 |
As stated in Departmental
Interpretation and Practice Notes No. 42, the Department
takes the view that in analysing a financial instrument, the
starting point is to decide its nature according to its legal
form rather than the accounting treatment or the underlying
economic characteristics. For interest-free loan, the lender
does not have any right (legal or contractual) to receive
interest while the borrower has no legal obligation or accrued
liability to pay the interest. The interest income and expenses
so recorded in the profit and loss account are merely book
entries for which there is no actual receipt or payment. Notwithstanding
the accounting treatment, only the actual interest income/expenses
based on the contractual rate (zero rate for interest-free
loans) will be assessed/allowed for tax purpose. Similar taxation
treatment will also be applied to the imputed interest involved
in those loans bearing off-market interest rate. |
| Q2 |
Assuming that a Hong Kong company advances
an interest-free loan to a third party (a natural person)
for 3 years in Hong Kong. There will be an imputed interest
expense in year 0 and imputed interest income in subsequent
years using the "effective interest method". Will
the imputed interest expense in year 0 be deductible under
section 16 of the Inland Revenue Ordinance ("IRO")?
Will the imputed interest income in subsequent years be taxable
as the "provision of credit" is made in Hong Kong? |
| Q3 |
Rental deposit is a kind of financial instruments.
If a company calculates the imputed interest on the rental
deposit paid or received on its Hong Kong properties using
the "effective interest method" under HKAS 39, will
the interest be deductible or taxable? |
| A3 |
A rental deposit paid by the tenant to the
landlord is usually non-interest bearing and repayable upon
termination of lease. When the rental deposit is recognized
at amortised cost using the "effective interest method",
the accounting treatment is similar to that for interest-free
loan. As stated in A1 above, the
imputed interest expense or discount so recognized under HKAS
39 is not deductible while the interest income or reversal
of discount is not taxable. |
| Q4 |
The adoption of HKAS 39 on interest-free loans will result
in imputed interest recognized in the accounts. Will the interest
income and expenses so calculated under "effective interest
method" fall within the scope of sections 61 or 61A of
the IRO? |
| A4 |
HKAS 39 establishes the principles and sets
out the basis for the measurement and recognition of financial
instruments including loans and receivables. When considering
if a transaction is "artificial or fictitious" or
is designed to avoid liability for tax under sections 61 or
61A, the primary concern is the loan transaction itself together
with its underlying motive/purpose, rather than its basis
of recognition under HKAS 39. |
| Q5 |
If a company is not allowed to deduct the imputed interest
expenses in year 0 by reason of sections 61 or 61A of the
IRO, will the imputed interest income in subsequent years
be charged under section 14 of the IRO? |
| A5 |
If a loan transaction falls within the ambit
of sections 61 or 61A, the transaction may be disregarded
as if it has not been carried out. Where a loan transaction
has been so disregarded, the interest expenses in year 0 will
be denied for tax deduction whereas the interest income arising
from the same transaction recognized in subsequent years will
not be taxed. |
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