Hong Kong: Profits Tax Exemption for Funds to be Expanded: Consultation Paper Released

Last Updated: 2 February 2004
Most Read Contributor in Hong Kong, October 2018

Written by Phillip Smith (Partner)


The Secretary for Financial Services and the Treasury Bureau of the Hong Kong Government has issued a consultation paper outlining the amendments to expand the profits tax exemption for funds managed in Hong Kong.

Full article


The 2003-04 Budget foreshadowed an exemption for offshore funds from profits tax to enhance Hong Kong's appeal as a location for fund managers.

In order to bring this proposal into effect,  the Financial Services and the Treasury Bureau (the "FSTB") has proposed several amendments to the Inland Revenue Ordinance ("IRO") and issued a consultation paper to solicit views.

Current Legislation

The following types of funds are exempt from profits tax in respect of profits derived in the ordinary course of fund management activities in Hong Kong:

(a)  a mutual fund, unit trust or similar investment scheme authorized as a collective investment scheme under the Securities and Futures Ordinance (the "SFO"); or

(b)  a mutual fund, unit trust or similar investment scheme where the Commissioner of Inland Revenue is satisfied that it is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.

Unauthorized mutual funds, unit trusts and other similar investment schemes which are not "bona fide widely held" or do not comply with "the requirements of supervisory authorities within acceptable regulatory regimes" would not be exempt under the IRO and may be subject to profits tax in Hong Kong. 

Proposed Amendments

A non-resident person (i.e. one without a permanent business presence in Hong Kong) will be exempt from profits tax in respect of any income derived from transactions undertaken in Hong Kong through an investment manager who is a broker or an approved investment adviser (defined in the IRO as a corporation licenced to carry on business in dealing in securities/advising on securities/asset management  under the SFO or an authorised financial institution registered for carrying on such a business under the SFO).   

Various anti-avoidance provisions are included to prevent abuse.

In essence, the exemption would not apply in the following circumstances:

(a)  the non-resident person is carrying on other trade, profession or business in Hong Kong in addition to transactions through brokers or approved investment advisors; or

(b)  even though the non-resident person fulfils the requirement of not carrying on any other business in Hong Kong, the interest of non-resident person in the relevant entity is below a threshold, i.e.:

(i)  where the non-resident person is a corporation, beneficially own less than 80% of its issued share capital at any time during the year of assessment;

(ii)  where the non-resident person is the trustee of a trust estate, beneficiaries under the trust who are non-resident persons beneficially own less than 80% of the value of the estate at any time during the year of assessment; and

(iii)  where the non-resident is a partnership, non-resident persons are beneficially entitled to less than 80% of its profits at any time during the year of assessment.

The proposed amendments have two schedules for determining owners of issued share capital of corporations and ascertaining the amount of share capital owned by such owners and for determining persons entitled to profits of partnerships and ascertaining the amount of profits such persons are entitled to.

Enforcement Of The Anti-avoidance Provisions

To avoid abuse of the proposed amendments, the Government considers it essential for the brokers/investment advisers to keep sufficient records for verifying the non-resident status of the investors claiming exemption.

As such, the consultation paper proposes two possible options:

(a)  to set out clearly in the legislation the types of records that need to be kept by the brokers/investment advisers for provision to the Inland Revenue Department either regularly or as and when required; or

(b)  to provide in the legislation that the burden of proof of tax exemption eligibility rests with the brokers/investment advisers.

Comments Sought

(a)  Whether the proposed amendments are sufficient for attracting offshore funds to Hong Kong and enabling Hong Kong to compete with other countries with similar exemptions on a level playing field and what other aspects the Government should consider;

(b)  Whether the proposed anti-avoidance provisions are effective in preventing round-tripping of local funds from taking advantage of the tax exemption and what other elements should be included;

(c)  Whether the 80% threshold in the proposed amendments is reasonable or what threshold is considered appropriate; and

(d)  Whether there is any difficulty in complying with the record-keeping requirement options and the details of such difficulties (if any). Whether there are other suggestions which can achieve the same purpose.

The consultation paper invites comments by 13 February 2004.

A copy of the consultation paper and the draft provisions of the proposed amendments to the IRO can be obtained from http://www.info.gov.hk/fstb/fsb/consult/doc/eof-e.pdf.

The original email legal update is copyright Johnson Stokes & Master at the date written first above. All rights reserved. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions