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Hong Kong Urged To Improve PE Fund Tax Exemption

by Mary Swire,, Hong Kong

27 July 2017

Hong Kong's Financial Services Development Council (FSDC) has proposed that the Offshore Private Equity Fund Tax Exemption should be extended to certain Hong Kong portfolio companies to boost the development of the industry.

The FSDC's report follows up on the extension of the offshore tax funds exemption to cover private equity (PE) funds. It said that restrictions on eligibility to the exemption has meant that the number of offshore PE funds managed in Hong Kong has not gone up noticeably.

In July 2015, the offshore funds tax exemption was extended to PE funds. Specifically, its scope was extended to investments by offshore funds into offshore private companies as well as certain Hong Kong and non-Hong Kong incorporated special purpose vehicles used by PE funds to hold offshore private companies. The conditions for the offshore funds tax exemption were also amended so that PE funds managed by fund managers that are not required to obtain a licence from the Securities and Futures Commission in Hong Kong could also qualify.

In particular, the FSDC has recommended that Hong Kong:

  • Extend the Offshore PE Fund Tax Exemption to cover investment in Hong Kong private companies and non-Hong Kong private companies with substantial operations in Hong Kong, with the exception of those holding substantial Hong Kong residential properties;
  • Remove the provision relating to tainting such that an offshore PE fund investing in a non-qualifying investment would only be subject to tax in respect of the investment income derived from such non-qualifying investment, to the extent such investment income are Hong Kong-sourced revenue gains;
  • Introduce a provision to treat any gains derived from the disposal of a non-qualifying investment mentioned in paragraph 5(b) above as capital in nature if such an investment has been held for more than two years; and
  • Expand the scope of allowable activities of a special purpose vehicle.

The FSDC said that this would make the regime "more attractive and in line with the Government's policy to promote new business start-ups in Hong Kong."

The Chairman of the FSDC Laura M Cha said: "In the face of the keen competition among jurisdictions to be the leading international asset management center in the region, Hong Kong should strive to uphold its prevailing competitive edge in the industry. There is room for further enhancement of the tax exemption regime. Private equity and venture capital funds' investments in Hong Kong and non-Hong Kong portfolio companies should be placed on a level playing field."

TAGS: Offshore | tax | investment | business | private equity | offshore | Hong Kong | Tax

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