Reforms to UFE regime will help ensure competitiveness with others in Asia

09 November 2023, Hong Kong (SAR), China ("Hong Kong") – Hong Kong has long been seen as Asia’s leading asset management hub, but the city has to take further steps to become a more attractive location of choice for alternative assets. While the Hong Kong government has a number of policies in place to support the asset management sector, providing more clarity to some current incentives such as the Unified Fund Exemption (UFE) regime, is the most important step, according to KPMG and the Alternative Investment Management Association (AIMA).

A new report from AIMA, supported by KPMG, titled 'Action Plan for Alternatives: Strengthening Hong Kong’s status as Asia’s leading hub for alternative assets' takes a look at the current landscape for alternative assets in Hong Kong, and evaluates the government’s current policy support for the sector, and provides suggestions for ways that the city can reinforce its foundations and prepare for the future.

Asia Pacific’s alternative asset class is growing faster than the rest of the world, with Hong Kong managing most of the alternative assets in the region. Investors in the region who formerly focused on more traditional forms of asset management and savings, are developing a taste for alternatives as they seek to diversify and grow their investments. To serve this potential market, Hong Kong needs to look at further reforming its fund rules in order to promote Hong Kong as a fund management hub, and also to ensure that Hong Kong remains a competitive jurisdiction for funds to hold and manage their investments in the region.

Darren Bowdern, Head of Alternative Investments, Hong Kong, KPMG China, says: “With more than HK$35 trillion in assets under management, and home to the biggest concentration of investment professionals in the region, Hong Kong is well positioned as Asia’s leading asset management hub and we believe that Hong Kong’s alternatives sector has a bright future ahead. However, if it is to continue to grow and thrive, it cannot be complacent. We believe that these issues can be remedied by some important reforms to the tax regimes and a more accommodating licensing regime, that will attract alternative asset managers to manage more funds and use more structures in Hong Kong.”

Michael Bugel, Managing Director, Co-Head of APAC, AIMA says: “Hong Kong has an important opportunity to implement essential reforms and re-cement its position as the premier hub for alternative assets in Asia and globally. To achieve this, the city must embrace a future sculpted by clear policies and decisive actions. As investors' appetites evolve, so too must Hong Kong's regulatory frameworks to ensure that the flourishing alternative asset class continues to find a competitive and robust home in Hong Kong. Through modernising Hong Kong’s tax regimes for carried interest and investment funds, we believe the city can compete more effectively and retain its allure as an alternative investment management location in Asia, especially in the post-COVID landscape.”

The Hong Kong government has made it clear that it wants to support the asset management sector and has launched a number of incentives and policies over the past few years, under the UFE regime. In its 2023 Budget, the government announced it would review the existing tax concession measures applicable to funds and carried interest. In order for funds to consider using Hong Kong as a management and investment holding jurisdiction for their investments in the region, it needs to be very clear and certain that the gains made on such investment holdings do not suffer any further incidence of tax in Hong Kong upon repatriation of such gains to the fund investors.

Firstly, the Carried Interest Tax Concession has been a rather contentious issue in Hong Kong, arising from the difference between the industry’s views of carried interest compared to that of the Inland Revenue Department, and needs to be addressed. Additionally, the government would benefit from making reforms to the UFE regime by providing more certainty of the tax exemption for investments managed from Hong Kong, as while the UFE provides a clear exemption for public or retail funds and most hedge funds, it is less clear for other asset classes. Having a list of investments, such as property, that do not qualify as exempt would provide more clarity and certainty. The government could make it clear that interest and other returns for private credit and debt funds fall within the UFE regime.

Moreover, to facilitate the licensing of private equity managers and in recognition of the fact that such entities are only dealing with professional investors, it would be helpful if the SFC could streamline the licensing process for private funds and other similar alternative asset managers. KPMG and AIMA also recommend the government to include investments in Open-ended Fund Companies (OFC) and Limited Partnership Funds (LPF) in the new Capital Investment Entrant Scheme, to further boost the private funds industry and encourage the establishment of such vehicles in Hong Kong as well as their management entities.

Paul Ho, Co-Chair, Hong Kong Tax Committee, AIMA concludes: “As one of the major global financial centres and a key asset management hub in Asia, Hong Kong has a well-established ecosystem including professional services, funds services, robust financial system and diverse talent to support the growth of the alternative asset management industry.  While Hong Kong has made positive steps in the past few years to enhance the competitiveness of its tax rules for funds, certain aspects of the rules should be refined to provide more tax certainty and hence confidence to managers to set up and manage more funds in Hong Kong.”