In 2013, the Hong Kong government announced it would extend its offshore funds tax exemption. After extensive consultation with the funds industry and its advisers, a draft bill is under review and due to become law in June 2015.
The extension includes the following proposed changes for non-resident funds:
- Qualifying investments will include private companies
- Special purpose vehicles may be exempt from Hong Kong tax
- Investment decisions and management can take place in Hong Kong
- Investment advisers do not need to be licensed by Hong Kong's Securities and Futures Commission
These changes should make the exemption more accessible to private equity (PE) and real estate funds in Hong Kong, and have been welcomed by the industry.
PE and real estate funds miss out on current offshore exemption
The offshore funds exemption, introduced in 2006, was designed to attract international investors to Hong Kong. Provided certain conditions are satisfied, profits are exempt from Hong Kong tax.
One condition is that a fund makes only 'qualifying investments'. These include shares in listed companies but not private companies or Hong Kong real estate. While this works well for hedge funds, many PE and real estate funds cannot benefit from the exemption at all. To remain outside the Hong Kong tax net, these funds need to limit activities in Hong Kong to basic administration. All investment decisions and fund management must take place offshore – not ideal for funds investing in the region.
Extension expected to stimulate Hong Kong funds industry
Once the changes come into effect, fund formation and administration in Hong Kong should be simpler, with streamlined fund structures and less regulation. Funds will be able to manage investments in Hong Kong while remaining outside the Hong Kong tax net. They will also benefit from greater access to Hong Kong's broad network of double tax treaties, in particular its treaty with China.
Meanwhile, the Hong Kong government has high hopes for the extension. If it attracts more funds to Hong Kong as expected, there should be increased demand for local asset management, investment and advisory services. Combine this with Hong Kong's existing financial and legal infrastructure, and Hong Kong is set to secure its place as a leading centre of expertise for the funds industry.
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