Question Marks Continue To Hang Over Hong Kong Fund Taxation

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

25 January 2005

In December 2004, the Hong Kong government issued its second consultation on the vexed issue of taxation on the jurisdiction’s fund industry in an attempt to improve proposals laid out in the first consultation paper.

However, it seems that the new proposals have not impressed tax experts or industry participants.

Currently, only funds that are authorized by the Securities and Futures Commission or those that are widely held and regulated overseas are exempt from tax in Hong Kong, a situation the industry complains is too ambiguous and a source of uncertainty for the fund sector in Hong Kong.

In response to these concerns, the SAR government issued the first consultation paper on exemption of offshore funds in January 2004. This paper proposed to exempt those offshore funds that are managed by offshore based fund managers through a residency test that stipulated funds would have to be 80% beneficially owned by non-resident investors.

In the second consultation paper published in December 2004, the residency test has been removed, but the scope of the exemption remains unchanged. Furthermore, a deeming provision has been introduced under which Hong Kong residents with a 30% or more interest in an exempted fund will be brought into the local tax net.

Experts are sceptical that these changes, while an improvement, will be an attractive proposition for investment funds, including hedge funds. For example, Florence Chan of Ernst & Young argued that the deeming provision in its present form will be cumbersome and difficult to implement. She also believes the scope of the deeming provision is too wide.

Chan suggests that the government should consider extending the scope of the proposed exemption to those funds that employ the services of Hong Kong based fund managers or advisors. The scope of the exemption should also be extended to cover relevant incidental income from the securities trading activities.

“The government has not listened to the industry," observed Chan.

"In its current form, the revised approach will not work to reinforce Hong Kong's status as an international fund management centre, and may in fact discourage fund managers from locating in Hong Kong at all," she warned.

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