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21 May 2019 | by LexisNexis Hong Kong
The Legislative Council passed the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2018 (“Ordinance”) on 20 February 2019 to amend the profits tax exemption regime for privately offered funds. The new tax regime came into force on 1st April, 2019.
The previous tax regime
Under the previous tax regime, both onshore and offshore publicly offered funds could be exempted from profits tax. However, as for privately offered funds, profits tax exemption was only offered to offshore funds and onshore open-ended fund companies. Other onshore privately offered funds could not enjoy tax concession. In order to qualify for the profits tax exemption, offshore funds with investment in private companies could only invest in companies incorporated overseas but not in Hong Kong. These restrictions were regarded as harmful to global tax competition by the Council of the European Union as ring-fencing.
The new Ordinance now provides profits tax exemption to both onshore and offshore privately offered funds operating in Hong Kong, regardless of their structure, their size or the purpose they serve, for their transactions in specified assets subject to meeting certain conditions. The profits tax exemption is now applicable to eligible fund’s investments in both overseas and Hong Kong private companies. It provides greater flexibility for tax concession for investments both in and out of Hong Kong and addresses the concerns of the Council of the European Union over the ring-fencing comments.
What are some of the new features of the new profits tax exemption for funds?
Definition of fund
The Ordinance introduces the definition of fund. Funds that are within the definition of section 20AM and meeting the conditions, for example under section 20AN, would be eligible for profits tax exemption.
Special Purpose Entity (“SPE”)
The Ordinance extends the profits tax exemption to SPE. SPE is a legal entity that is wholly or partly owned by a fund. If a fund is tax exempt under the new Ordinance, the SPE would also be tax exempt corresponding to the percentage of shares or interests that the fund holds in the SPE. The SPE should be established solely for the purpose of holding and administering investee private companies.
Reduce the risk of tax evasion by funds
For anti-avoidance measure, a fund may invest in any private company as long as it satisfies the immovable property test and the holding period test or the short-term asset test under sections 20AP and 20AQ. The new sections aim to reduce the risk of tax evasion by funds through investments in private companies.
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