Hong Kong Faces Hedge Fund Tax Dilemma

by Carla Johnson, Investors Offshore.com

08 April 2002

Offshore hedge funds located in Hong Kong are concerned that their tax status may change after some 200 'non-resident' funds received requests from the SAR Inland Revenue Department asking them to file returns for the year 2000.

Traditionally, Hong Kong has provided specific tax breaks for the city's 2,314 authorized unit trusts and mutual funds, and hedge funds haven't fallen into the tax net at all. According to the Revenue Department, however, the issue under the microscope at the moment is not the taxation of offshore income, but the tax treatment of 'Hong Kong sourced income earned by non-qualified offshore funds managed in Hong Kong'.

Although there have been no changes made to the jurisdiction's tax regime in this area as yet, HK based hedge funds are nervous, and several have warned that if they are taxed on offshore income, they may relocate to Singapore, the United States, or the UK, where exemptions are given to offshore funds.

'It's a problem Hong Kong needs to sort out,' investment expert David Webb explained to Bloomberg last week. 'If the tax department persists in this, they'll get away with it once and then they'll drive away all the funds and there will be no more tax.'

According to estimates, there are currently around 162 hedge funds worldwide investing in Asia, of which 19% are based in Hong Kong, and 14% in Singapore.

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