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.
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.
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.
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.
(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.
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