Hong Kong promises to push forward with PE tax exemption

Delivering his budget statement, Tsang added that regulatory frameworks for a proposal to introduce open-ended investment company (OEIC) structures through which fund managers could raise Hong Kong-domiciled funds have been drawn up. Consultation will begin next month.

The tax exemption and OEIC proposals were announced in last year's budget statement. Since then the Financial Services Development Council (FSDC) has released more detailed proposals as to how these broad goals can become concrete policies. However, it remains to be seen how any regulatory amendments will be enacted.

"What is not clear is whether or not they will go for a formal public consultation and a proposed legislative amendment," says Darren Bowdern, a tax partner at KPMG China.

Should the government decide to proceed with a legislative amendment, the process could last for a number of months. Introducing the measures through regulatory guidance, though not as robust, would take less time.

"It has been suggested the new rules could be largely introduced by way of practice notes, which are essentially guidelines that would be issued by the Inland Revenue Department," Bowdern adds. "However, practice notes are not legally binding and potentially could be subject to different interpretations by different departments."

By extending the tax exemption, PE firms with funds domiciled offshore would no longer have to set up structures designed to avoid triggering permanent establishment in Hong Kong and becoming liable for local tax.

It should also make it easier to access the tax treaty network - funds must meet local substance requirements to qualify for treaty benefits and this could be done without risking local tax liability.

The FSDC recommends that offshore funds operated by licensed managers should qualify for the exemption, although the local PE community hopes that unlicensed managers can ultimately be included as well. It also proposes the exemption apply not only to offshore funds but also the special purpose vehicles set up beneath these funds in Hong Kong for the purpose of making investments in the region.

While OEICs could feasibly be used by private equity funds, they are unlikely to supplant limited partnerships. Rather, industry participants see OEICs as a stalking horse for adjustments to the limited partnership legislation.

It is hoped that these measures will go some way to addressing concerns that Hong Kong is losing ground to Singapore, which offers greater certainty on tax treatment and clearer regulation of private equity.

Fund administrators told AVCJ this month that Singapore has become one of the fastest-growing markets in Asia for their services, citing investor comfort with the regulatory structure and tax incentives.

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