18 December 2018 Hong Kong proposes to remove ring-fencing features of current exemption regime for privately-offered funds Under the current tax regime, Hong Kong's profits tax exemption1 is only offered to non-Hong Kong resident privately-offered funds. However, to fully qualify for the profits tax exemption, non-Hong Kong resident funds are prohibited from investing in private companies incorporated in Hong Kong. The exclusion of resident privately-offered funds and the prohibition on investing in local private companies were identified as a harmful tax practice by the European Union (EU) because of ring-fencing. To address the ring-fencing concerns, the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 (the Bill) was issued on 7 December 2018 to introduce a unified exemption regime for all funds. The Bill proposes that regardless of the residence, size and type, where an entity: (i) qualifies as a "fund" as defined; and (ii) has engaged a "specified person"2 to arrange or carry out its transactions or has a "qualifying fund" status,3 the entity will be exempt from Hong Kong's profits tax on certain transactions. Under the Bill, a fund or a special purpose entity (SPE) will not be taxed on its profits arising from the transaction in a private company, irrespective of the country of its incorporation, if the following tests are met:
Once the above immovable property test is satisfied, the fund or SPE must also satisfy one of the following two tests:
Under the existing exemption regime, a single non-specified transaction would cause income derived from specified transactions of a nonresident person to be taxable in Hong Kong when such income would otherwise be exempt (the "tainting" provision). The proposed unified exemption regime does not include the "tainting" provision; accordingly, the tax-exempt profits of a fund or a SPE will not be tainted by disqualifying transactions. Under the proposed exemption regime, only the entity qualifying as a "fund" could be exempt from tax whereas under the current exemption regime, nonresident persons that satisfy the exemption conditions would be eligible for tax exemption, regardless of whether they are established as "funds." To avoid impacting those non-fund entities, the Bill proposes to retain the current tax exemption regime for the non-fund entities. 1 Except those established as Hong Kong resident open-ended fund companies to which a separate profits tax exemption scheme may apply. 3 A fund would be regarded as a "qualified investment fund" if, not including the originator and its associates, it has more than four investors and these investors contribute more than 90% of the capital of the fund. Furthermore, the distribution of the net proceeds of the fund to the originator and its associates cannot exceed 30%. Document ID: 2018-2506 |
