Newsletter

In this March 2022 Issue of our Newsletter, we will discuss 2021/22 Profits Tax Return updates and the tax treatments of Keyman Insurance Policy.

4. Deductibility of Keyman Insurance Policy

Keyman insurance policy may not be a good means for the tax planning of SME businesses

It is common for a company to insure against the loss of profits arising from the death, sickness or injury of a key employee. The beneficiary of the insurance policy is usually the employer. It is known as the keyman insurance policy.

It is worth to note that the insurance premiums paid are not always deductible. The Inland Revenue Department (IRD) has listed out some conditions in its Frequently Asked Questions.

The premiums paid are only deductible if:

In the case of a life insurance policy, it is a term insurance, covering the life of the employee within the term of the policy, with no other benefits; 
The term does not extend beyond the period of the employee's usefulness to the employer; and 
The purpose of taking out the insurance is to compensate the employer for the loss of trading income that may result from the loss of the service of the key employee in case of death, sickness or injury. 
In contrast, the IRD has illustrated some scenarios that the premiums paid are NOT deductible:

CENARIO

REASON

The insured person is a sole proprietor or a partner

It is not an employer and employee relationship under a sole proprietorship or partnership

The insured person is a director of a limited company who owns not less than 20% of the company’s share

The premiums paid are of capital in nature since the purpose of the policy is to protect the value of shares

The proceeds are payable to the family member of the employee

The policy is not to compensate the employer’s loss of profits

The policy is an investment-linked policy

The premiums for the investment portion are not deductible because they are of a capital nature. Only the premiums for the risk portion are deductible. 
Apportionment of the premiums is necessary

POINTS TO NOTE 
For many family businesses in Hong Kong, the owners are both the 100% shareholders and directors of the company at the same time. They always aim to find ways to reduce the overall tax payable of the company and themselves. Based on the above analysis, keyman insurance policy obviously cannot fulfill their purposes.

Similarly, dividend and salary arrangements would not help much as well. Rental Reimbursement / Rental Value Arrangements (detailed calculation at the end) and Staff Medical Card Arrangements may help but there is a limit on the amount of benefits. 
For detailed requirements of Rental Arrangement, please refer to our November 2021 Newsletter.

A common wrongdoing committed by the taxpayer would be the settlement of directors’ personal expenses by the corporation. The corporation would claim tax deduction on these expenses while the director would not report such amount as employment income. 
They may not notice that this is an incorrect tax treatment or they may have a misconception that the worst consequence would be disallowance of expense tax deduction only. Some of them may have even made up fictitious expenses to try to reduce the profits and tax payable.

In reality, many SME taxpayers are now facing Field Audit and Investigation of the IRD these two years. Not only their private expenses would be disallowed, but also they would be subject to maximum penalty in the amount of three times of tax undercharged and imprisonment as well. They also suffer from a painful investigation process, including attending interviews with the IRD.

Rental Value Calculation:

download (1).png

For the detailed conditions and implementation of the housing benefit and other tax planning, it is always advisable for you to contact your tax consultant.

You may also be interested in
article-image
tag
HONG KONG TAX
09 August 2021
Inland Revenue Ordinance Section 15F – Double Taxation Risk on MNC with Research & Development (R&D) functions in Hong Kong
article-image
tag
HONG KONG TAX
09 August 2021
Tax Relief Measure: Conditional Surcharge Waiver (i.e., Interest-free) for tax payments by instalment
article-image
tag
HONG KONG TAX
18 August 2021
[Court Case Study] Payment for “going away quietly” NOT subject to Salaries Tax
article-image
tag
HONG KONG TAX
18 August 2021
8.25% Tax Rate available for Hong Kong Insurance Business corporations
article-image
tag
HONG KONG TAX
22 March 2022
Lenient approach by the IRD on application deadline of tax credit claim
article-image
tag
HONG KONG TAX
01 May 2022
Deductibility of Keyman Insurance Policy
article-image
tag
HONG KONG TAX
27 May 2022
PROPOSED PROFITS TAX EXEMPTION FOR FAMILY OFFICE BUSINESS
article-image
tag
CHINA TAX
31 July 2022
LIMITATION ON USE OF CAPITAL FOR WHOLLY FOREIGN OWNED ENTERPRISE (“WFOE”) IN MAINLAND CHINA
article-image
tag
CHINA TAX
31 July 2022
RECENT COURT CASES OF FOREIGN EXCHANGE VIOLATION
article-image
tag
CHINA TAX
31 July 2022
HIGHER BENEFITS BUT STRENGTHENING SUPERVISION ON HIGH AND NEW TECHNOLOGY ENTERPRISE (高新科技企業)