Subscribe to our newsletter
* indicates required


Contact details
Office
Office
Office
Follow us on LinkedIn

published: August 2015 on www.hg.org  

On 17 July 2015, the Hong Kong Government gazetted the Inland Revenue (Amendment) (No.2) Ordinance 2015 (“the Ordinance”), which extended the profits tax exemption for offshore funds to private equity (“PE”) funds.  The Ordinance takes retrospective effect, applicable to tax chargeable for any year of assessment commencing on or after 1 April 2015.  By virtue of this newly enacted tax legislation, transactions conducted by offshore private equity funds in respect of securities of eligible overseas portfolio companies will be able to enjoy profits tax exemption.

The Hong Kong Government’s objectives

The Hong Kong Government aimed at providing clear tax exemption to specified transactions conducted by offshore PE funds or their special purpose vehicles (“SPV”), hoping to attract more PE fund managers to expand their business in Hong Kong and hire local asset management, investment and advisory services, which will be conducive to the further development of Hong Kong’s asset management industry.

The three key extensions to the profits tax exemption

The three key extensions to the profits tax exemption are outlined in the table below.

1

The definition of “securities” has been extended to cover transactions in shares of excepted private companies (“EPCs”).

2

The offshore funds that engage in specified transactions even though such specified transactions are not managed by specified persons such as Securities and Futures Commission (“SFC”) licensed fund managers, are exempted from Hong Kong profits tax, given that certain criteria are met (i.e. Qualifying Funds). 

3

A Hong Kong or non-Hong Kong SPV, including interposed SPVs, are exempted from Hong Kong profits tax on gains on disposal of an EPC, given that certain criteria are met.


The three criteria for qualifying the profits tax exemption

Under the Ordinance, in order to qualify for profits tax exemption, offshore PE funds must conduct specified transactions through corporations licensed by the SFC, or they must fulfill the following three criteria:-

a. They have more than four investors;
b. The capital commitment made by investors must exceed 90% of aggregate capital commitments; and 
c. The portion of net proceeds arising from the fund’s transactions to be received by the originator must not exceed 30%.

Prevention on abuse of the profits tax exemption

According to the Hong Kong Government, in order to prevent abuse by local companies by simply converting their taxable profits to non-taxable income via an offshore fund structure, an eligible portfolio company should be an overseas incorporated private company, and it must not hold any Hong Kong properties or carry out any business in Hong Kong within a stipulated time limit. Furthermore, the existing deeming provisions, which provide that a resident person holding a beneficial interest of 30% or more in a tax-exempt PE fund will be deemed to have derived assessable profits in respect of profits earned by the fund in Hong Kong, will equally applicable to offshore PE funds.

What does the profits tax exemption mean to foreign investors?

As abovementioned, the Ordinance is designed to attract more offshore PE fund managers to set up or expand their business in Hong Kong and create demand for local asset management, investment, advisory and other professional services. Offshore PE funds should examine whether the extended profits tax exemption is applicable to them, and whether they can streamline their operation in Hong Kong by virtue of this extension. The following diagram depicts the three things need to do to take tax advantage of the new exemption regime.

Conclusion

The Hong Kong Government to enhance Hong Kong’s position as an attractive and competitive international asset management centre by taking a positive step in changing the tax law, which is long awaited in PE fund industry.  It is suggested that industry players should review and assess their existing structures and seek professional advice to determine whether the extended regime is applicable to them.

CONTACT US

Masson de Morfontaine is an international legal and tax firm based in Hong Kong specializes in providing comprehensive professional services for worldwide clients.  We are experts helping our clients with practical legal and tax advices and keen on advising the setup of PE funds in Hong Kong.  We are more than welcome to discuss with you about our services.  Please call or email us should you require more information.

 

Catherine LE BOURGEOIS
Partner   
+852.3953.4880
This email address is being protected from spambots. You need JavaScript enabled to view it.
  Wilson YEUNG
International Tax Director
+852.3953.4804
This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Disclaimer: This article is issued for information purpose only and it should not be viewed as a professional advice. Accordingly, you should not act solely on the basis of the material contained in this article. We recommend that formal advice be sought before acting in any of the areas.

2015 Masson de Morfontaine Limited.  All rights reserved.

Share on WeChat
  分享到微信
Subscribe to our newsletter
* indicates required


Contact details
Office
Office
Office
Follow us on LinkedIn