HK plans to widen tax breaks for hedge, private equity funds

Hong Kong has been locked in a battle with Asian peers such as Singapore and Shanghai for the title of the region's premier financial centre.
Hong Kong has been locked in a battle with Asian peers such as Singapore and Shanghai for the title of the region's premier financial centre.PHOTO: REUTERS

City aims to draw more of such funds, to compete with rivals

HONG KONG • Hong Kong has proposed widening tax breaks to include hedge and private equity funds that are domiciled in the city, which market watchers say should encourage more of them to move there.

Locally domiciled vehicles that can be sold only to qualified institutions and wealthy individuals - such as hedge and private equity funds - will be eligible for an exemption from a 16.5 per cent profits tax for the first time, according to a council brief posted on the website of the city's legislature. Lawmakers were scheduled to have a first reading of the Bill yesterday, and the government has recommended the change take effect from next April.

The city has long been locked in a battle with Asian peers such as Singapore and Shanghai for the title of the region's premier financial centre. The proposed change comes after years of lobbying by Hong Kong's local asset management industry, and after the European Union labelled the city's current profits tax regime for funds as "harmful".

This would "put us on a level playing field with Singapore", Mr Paul Ho, Ernst & Young's financial services Hong Kong tax market leader, said in a telephone interview. It may also "attract more overseas asset managers to consider setting up their platforms here", he said.

Hong Kong's asset management and fund advisory industry totalled HK$17.5 trillion (S$3.1 trillion) at the end of last year, up 23 per cent from a year earlier.

Under current rules, locally and overseas domiciled funds that are authorised for sale to retail or individual investors in Hong Kong are eligible for a profits-tax exemption, as are funds that have been established in offshore centres such as the Cayman Islands and that are available for sale only to institutional investors and wealthy individuals.

Even when they are ultimately run by managers in Hong Kong, most hedge and private equity funds have their legal home in an offshore tax haven for economic reasons.

 
 
 

There are conditions that locally established funds will have to meet to qualify for the proposed tax exemption, such as managers having a licence from the local securities regulator, or a minimum number of investors.

Sovereign wealth funds also could be covered by the proposed change, Mr Ho said.

The loosened regulations will also likely be a boon for tech start-ups in the city trying to attract capital from money managers, he added.

Currently, offshore private funds cannot claim a profits tax exemption for their investments in privately held, Hong Kong-domiciled companies, such as technology firms.

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A version of this article appeared in the print edition of The Straits Times on December 13, 2018, with the headline 'HK plans to widen tax breaks for hedge, private equity funds'. Print Edition | Subscribe