Hong Kong urged to cut tax for asset management
Hong Kong’s Financial Services Development Council (FSDC) has released a number of research reports, including one that addresses tax issues relating to open-ended fund companies (OFCs) and private equity (PE) investments, reports Tax News.
One report entitled “A Paper on the Tax Issues on OFCs and Profits Tax Exemption for Offshore PE Funds” is a follow-up to the FSDC’s report on “Proposals on Legal and Regulatory Framework for Open-ended Investment Companies in Hong Kong,” published in November 2013.
The FSDC said that, “drawing on the experience and expertise of market participants, each report contains an in-depth discussion of the respective topic and sets out recommendations for the Government, regulators, and industry to consider in further developing Hong Kong’s asset management business.”
The report sets out recommendations relating to the tax regime for OFCs, which is currently under review by the Government, as well as the profits tax exemption criteria for offshore PE funds introduced on July 17, 2015.
Regarding OFCs, the FSDC recommends that there should not be any restriction or stipulation on the residency of directors on the board of any private OFC to be eligible for tax breaks. This would allow an OFC that is centrally managed and controlled in Hong Kong to claim the profits tax exemption. It has also recommended that both public and private OFCs should be exempt from stamp duty.
“The above two recommendations are important for Hong Kong’s OFC tax framework,” the FSDC said. “The OFC tax framework should create competitive conditions for setting up the OFCs in Hong Kong compared to other global investment fund centers. To achieve this, the OFC tax framework should be tax neutral, [and] maintain a level playing field with other types of investment vehicle commonly used by fund managers, particularly unit trusts.”
With regard to the profits tax exemption for offshore PE funds, the FSDC makes another two recommendations. First, it recommends that the criteria for determining whether or not a PE fund is “bona fide widely held” should be relaxed. Under its proposals, a PE fund would be regarded as “bona fide widely held” if no person holds a participation interest of 20 per cent or more in the non-resident fund; or if no five or fewer persons have a combined participation interest of at least 50 per cent in the non-resident fund.
Second, it recommends that the “bona fide widely held” concession should be extended to the following specified types of entities: sovereign wealth funds, pension funds that comply with the requirements/regulations of certain stipulated jurisdictions, central banks, and government agencies, as well as to special purpose vehicles for investments set up and controlled by these entities.