AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Offshore funds exempted from Hong Kong profits tax

Florence Yip

PricewaterhouseCoopers

Q3 2006

 

March 1 2006 was a big day for the fund industry, fund managers and investors. This was the day that the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 (the ‘New Law’) was enacted into law.

The New Law has been long awaited. The then Financial Secretary, Antony Leung, in giving his 2003/04 Budget Speech openly said that the Government intended to amend the tax legislation to exempt offshore funds from Hong Kong profits tax in early 2003. After three years of waiting, the tax legislation has eventually been amended to grant Hong Kong profits tax exemption to offshore funds provided that they meet the specific conditions set down in the New Law.

Provided certain conditions are met, offshore funds with Hong Kong fund managers and investment advisors may now confidently state that they are not subject to tax in Hong Kong on profits derived in Hong Kong.

The Hong Kong Government believes that the New Law will provide a fresh stimulus for growth for the investment management industry in Hong Kong by removing the uncertainty concerning the Hong Kong profits tax position of offshore funds that has existed up to now, and further underpin Hong Kong’s position as an eminent asset management centre in the Asia Pacific Region.

Key Provisions

The New Law impacts not only on funds but also on investors. The key provisions introduced into the Inland Revenue Ordinance (‘IRO’) are outlined below:

Exemption Provisions

Exemption from Hong Kong profits tax will be granted to non-resident persons (including natural persons, corporations, trustees and partnerships) in respect of profits from certain types of transaction (“specified transactions”) in any year of assessment commencing on or after 1 April 1996. There are six types of “specified transaction”; namely transactions in securities, transactions in futures contracts, transactions in foreign exchange contracts, transactions involving the making of deposits other than by way of a money lending business, transactions in foreign currencies and transactions in exchange traded commodities.
The definition of securities is widely drafted and includes most, if not all, listed and unlisted equity and debt instruments, warrants, options and derivatives commonly invested by funds. The Hong Kong Government, however, for policy reasons has specifically excluded securities issued by private companies incorporated under section 29 of the Hong Kong Companies Ordinance and insurance contracts and products from the definition of "securities". The “specified transactions” must be carried out through or arranged by “specified persons” i.e. registered authorised financial institutions or persons holding any of the types 1 to 9 licenses under the Securities and Futures Ordinance (“SFO”). Furthermore, the non-resident must not carry on any other business in Hong Kong. Other income from transactions carried out in Hong Kong which are "incidental" to the carrying out of the specified transactions will also be exempt from tax provided such income does not exceed 5% of the trading receipts of the non-resident from the exempt and incidental transactions in Hong Kong.

The residency of a corporation / trust / partnership will be the location where the entity’s “central management and control” rests. The residency of a natural person is also defined in the New Law.

Losses from Exempt Transactions

Losses sustained by a non-resident person from “specified transactions” in a year of assessment will not be available for set off against assessable profits for Hong Kong profits tax purposes.

Deeming Provisions

The Deeming Provisions are anti-avoidance provisions which provide that (i) a resident person who, together with his associates, holds a direct or indirect beneficial interest of 30% or more in a tax exempt non-resident person or (ii) a resident person who holds any interest, direct or indirect, in an associated tax exempt non-resident person will be subject to Hong Kong profits tax on its share of the non-resident's tax exempt profits, regardless of whether an actual distribution has been made or not. The purpose of the Deeming Provisions is to avoid abuse of the Exemption Provisions by Hong Kong residents, and they will apply from the year of assessment 2006/07 and onwards.The Deeming Provisions will not apply, however, in the case where the beneficial interest in the non-resident fund is regarded by the Commissioner of Inland Revenue as "bona fide widely held".

The New Law provides that non-participating “management shares” without economic participation rights held by fund managers in offshore funds are outside the definition of “beneficial interest” for the purposes of applying the Deeming Provisions.

Note:
Please note the information contained in this article is for general guidance on matters of interest only and does not constitute tax advice. It should not and cannot be relied upon as tax advice from PricewaterhouseCoopers. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure you contact your regular PwC professional services team to obtain advice specific to your circumstances.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Systemically Important Financial Institutions ('SIFIs')
      6. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      7. Shadow Banking
      8. Volcker Rule
      9. Other
      10. Systemic Risk Reporting
      11. Dealing Commission
      12. Corporate Governance
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. ESMA Guidelines
        2. MiFID II / MiFIR - HFT
        3. MAD / MAR
        4. Flash Crash
        5. IOSCO
        6. Germany
        7. CFTC Automated Trading
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      7. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      8. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
      9. Securities Settlement
      10. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. BEPS
        4. CFTC Registration and Exemptions
        5. Corporate Governance
        6. Dealing Commission
        7. Derivatives
        8. FTT
        9. High Frequency Trading
        10. MiFID / MiFIR
        11. Other Hot Asset Management Topics
        12. Other Hot Markets Topics
        13. Other Hot Tax Topics
        14. Position Limits
        15. UK Partnership Tax Review
        16. Trading
        17. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Useful Websites
    11. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites