On 12 December 2018, Hong Kong’s Legislative Council gave the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 (Bill) its first and second reading. The Bill aims to expand and unify the rules and application of the profits tax exemption for privately offered funds following concerns raised by the Council of the European Union on ring-fencing features exhibited in Hong Kong’s existing tax regime. The legislative initiative also supports the government’s efforts to enhance Hong Kong’s competitiveness as a regional and international asset and fund management centre.
The proposed new regime allows profits tax exemption for qualifying transactions of certain funds whether or not the central management and control of the funds is exercised in Hong Kong, and allows the exemption to apply to investments in Hong Kong and non-Hong Kong private companies. Other key features of the Bill include:
- a definition of a “fund”, which is similar to the definition of a “collective investment scheme” in the Securities and Futures Ordinance (SFO);
- the extension of the profits tax exemption to special purpose entities of a fund – such entities may be wholly or partly owned by the fund and should be established for the sole purpose of holding and administering investee private companies – to the extent of such fund’s holding or interest in such entity;
- as an anti-avoidance measure, a fund may invest in any private company provided that it can satisfy (i) theimmovable property test: the private company holds not more than 10% of its assets in immovable property (excluding infrastructure) in Hong Kong; and either(ii) the holding period test: the fund has held the private company for at least two years; or, if less than two years, (iii) the short-term asset test: the fund does not have a controlling stake in the private company or the fund has control over the private company but that company does not hold more than 50% of the value of its assets in short-term assets;
- removal of the “tainting” effect on transactions falling outside the tax exemption regime.
The new rules under the Bill will also cover open-ended fund companies. For non-fund entities, the existing profits tax exemption and its conditions will continue to apply as a separate regime. The profits tax exempt position of funds authorised under the SFO shall remain unchanged.
The Bill, when enacted, will come into operation on 1 April 2019.