Hong Kong's Offshore Fund Tax Proposals Come Under Fire

by Mary Swire, Tax-News.com, Hong Kong

02 March 2004

There is growing concern within the business and fund management community in Hong Kong that new proposals to exempt offshore funds from tax will come at the price of a high compliance and administrative burden.

Whilst the government’s decision to propose new legislation has been long awaited by the fund management industry, organizations such as the Association of Chartered Certified Accountants Hong Kong (ACCA HK) consider that the proposed anti-avoidance provisions are too complicated to follow and have voiced concerns that this will deter offshore fund managers and choke off the inflow of investment from abroad.

One of ACCA’s strongest objections pertains to a proposal in the government’s Consultation Paper that the interest of non-resident persons in the relevant entity should not be below 80%. ACCA considers that this proposal contravenes the underlying principle of Hong Kong tax law. “We do not consider it as appropriate to include such stringent and unreasonable provision,” commented Leo Lee, President of ACCA HK.

He adds: “Any change of the ultimate ownership of one of the investors of the fund during a particular time of a year of assessment could affect the tax position of the offshore fund and give rise to unnecessary tax exposure of genuine non-resident investors.”

In addition, ACCA recommends that it is equally important to provide tax incentives such as reduced tax rates to those offshore fund managers in order to encourage them to set up fund management operations in Hong Kong.

Accounting firm PricewaterhouseCoopers has expressed similar sentiments, advocating a simpler alternative to the legislative proposals.

“We have suggested that consideration should be given to granting a blanket exemption from Hong Kong profits tax to genuine and bona-fide offshore funds that are managed in Hong Kong or are advised by an Securities and Futures Commission approved investment adviser,” said the firm.

"It is good to see that the Hong Kong Government has a policy initiative to help the fund management industry grow here”, added Robert Grome, Partner, Asia-Pacific Leader of Investment Management Industry Group at PwC.

"However, some other Governments in the region also recognise this great potential and therefore there are no guarantees that fund managers will choose to set up operations in Hong Kong,” he observed.

“This consultation paper is only a start and needs further detailed consideration of its likely impact. We believe that, if the government fully embraces this opportunity, Hong Kong would establish itself as the dominant regional hub for the fund management industry", Mr Grome concluded.

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