The Inland Revenue (Amendment) (No. 2) Ordinance 2015 (Amendment Ordinance) was gazetted and came into force on 17 July 2015. It amends the Inland Revenue Ordinance. Before the enactment of the Amendment Ordinance, the Inland Revenue Ordinance offered a profits tax exemption for certain transactions conducted by offshore funds in respect of eligible overseas portfolio companies, but this did not include private equity (PE) funds.
The Amendment Ordinance extends the profits tax exemption to certain transactions conducted by offshore PE funds in respect of securities of eligible overseas portfolio companies.
In order to qualify for the tax exemption, there are two alternatives open to PE funds. They must either:
- carry out specified transactions through corporations licensed by the Securities and Futures Commission, or
- meet the following conditions:
- have more than four investors (which do not include the fund’s “originator” (who (in)directly originates or sponsors the fund and has investment discretion on behalf of the fund) and its associates);
- the capital commitment made by investors exceeds 90% of aggregate capital commitments; and
- the PE fund’s “originator” and its associates receive no more than 30% of the net proceeds arising from the fund’s transactions (after deductions in respect of their capital contributions).
Additionally, to prevent abuse by local companies converting their taxable profits into non-taxable income through an offshore fund structure, an eligible portfolio company must be a private company incorporated overseas and must not hold any Hong Kong property or have carried out any business in Hong Kong within 3 years prior to the relevant transactions.
This is a long-awaited and welcome piece of legislation. The impact on the industry in Hong Kong is yet to be seen, but with additional tax certainty, PE firms may decide to enhance the scale and range of their activities in and from Hong Kong.