Profits tax exemption for offshore funds extended to private equity funds
24-07-2015
Profits tax exemption for offshore funds extended to private equity funds – law enacted

 

The long-awaited HK profits tax exemption law for offshore PE funds was enacted on last Friday. HKPEFA’s technical committee members discussed extensively with the government during the consultation period for the purpose of promoting the development of the Hong Kong PE industry. Furthermore our committee member who serves on the Tax Study Working Group of the Policy Research Committee of Financial Services Development Council will continue to advocate sensible tax legislations and new DIPN for the benefits of our PE practitioners in Hong Kong.

 

We set out below some salient points for your perusal:

 

The long-awaited HK Profits tax exemption law for offshore private equity (PE) fund exemption legislation was enacted on 17 July 2015 which applies retrospectively to transactions carried out after 1 April 2015.  The new amendment purports to extend the original profits tax exemption to the inclusion of the offshore private equity funds.  The main salient points are set out below:

 

l   Non-resident PE funds: A nonresident PE fund that is not managed by a SFC Licensee may enjoy the profits tax exemption if it is a “Qualifying Fund”.

l   Specified Transactions now include excepted private companies (EPC) in its definition of “securities”.

l   No exclusion for real estate funds/Real Estate Investment Trusts (REITs).

 

There are more detailed requirements and definitions for “Qualifying Fund”, “Excepted Private Companies (EPC)”, and “Special Purpose Vehicles (SPV)”.  However, the main intention of the new profits tax exemption for private equity funds is to enhance Hong Kong’s attractiveness to be a competitive international asset management centre.  This new PE exemption provides more certainties to alleviate offshore private equity funds Hong Kong profits tax exposure by allowing more flexibility for certain fund management activities to be undertaken in Hong Kong.  However, this increased level of fund manager activities in Hong Kong may also complicate the allocation method of management fees and its taxability in Hong Kong. 

 

It is anticipated that the existing DIPN 43 on the offshore fund regime will be modified to accommodate this new PE fund exemption.  The new DIPN should provide more guidance on this new exemption.  As every fund’s set up is different, the new PE fund exemption could have different impact during practical implementation. 

 

HKPEFA Technical Committee