Hong Kong promises better tax deals, fund structures for PE

Making his annual budget speech, Financial Secretary Paul Chan (pictured) acknowledged the role that PE plays in economic development. He observed that the asset class not only attracts the “capital, talent and expertise” required for investment activity but also drives demand for management, accounting and legal services and creates business opportunities for the conference, hotel and tourism industries.

Chan went on to say that the government will “study the case of introducing a more competitive tax arrangement to attract private equity funds to set up and operate in Hong Kong.” He did not go into more detail as to what these arrangements might be.

Steps have already been taken to make it easier for private equity firms to carry out meaningful activities in Hong Kong without triggering permanent establishment from a taxation perspective. Amendments will come into effect on April 1 that should make the profits tax exemption more usable. Notably, the government has removed a tainting provision that threatened to make an entire fund liable for local tax if a single investment had exposure to Hong Kong real estate.

However, uncertainty continues to overshadow other aspects of taxation. For example, industry participants are frustrated about the difficulties around proving local substance so special purpose vehicles can access tax treaty benefits. Treatment of carried interest is another sensitive topic. Should Hong Kong follow through on plans to treat it as income rather than capital gain – potentially increasing the tax exposure from zero to 16.5% – PE firms might be incentivized to locate people elsewhere.

The reference to a limited partnership regime echoes comments made by Carrie Lam, Hong Kong’s chief executive, in her 2018 policy address. Following the introduction of an open-ended fund structure last year, the government is looking at ways to encourage private equity firms to domicile their funds in Hong Kong and bring every part of the fund management and investment process onshore.

There is already a limited partnership ordinance, but it was introduced in 1912 and does not cover issues such as capital distributions, investor protection and confidentiality. The Financial Services Development Council (FSDC) issued a paper in 2015 outlining what a revised structure might look like.

Hong Kong is the world’s third-largest financial center, benefiting from ample liquidity, the free flow of capital, commodities and information, a strong talent base, and a reliable and independent legal system. But Chan said the territory must do more to address increasing international competition.

Efforts in this area include encouraging more companies to establish their regional headquarters in Hong Kong. The territory is currently the primary Asia base for more than 1,500 enterprises and it hopes to become the platform of choice for more mainland companies looking to go global.

Other areas covered in the budget statement included the asset allocation of Hong Kong’s Future Fund, which was established in 2016 to cover future liabilities arising from an ageing population and slower economic growth. Chan said he would seek input from the financial services community as to how to diversify the fund’s investments.

The Future Fund, which is the responsibility of the Hong Kong Monetary Authority (HKMA), currently has HK$224.5 billion ($28.6 billion) in assets. The initial plan was to deploy more than half of these assets in alternatives over a three-year period.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Regulation
• Advisory
• GPs
• Hong Kong (China)
• tax