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Revenue (Profits Tax Exemption for Offshore Funds) Bill

The Hong Kong Government published the Revenue (Profits Tax Exemption for Offshore Funds) Bill (the "Bill") on 30 June 2005. The Bill seeks to give legal effect to the Government's proposal to exempt offshore funds from Hong Kong Profits Tax after two rounds of consultation. It is scheduled for first reading by the Legislative Council on 6 July 2005.

Key Provisions in the Bill

The Bill proposes to introduce five new sections and a new Schedule into the Inland Revenue Ordinance ("IRO"). The key provisions are outlined below:

  • Exemption Provisions
    Exemption from Hong Kong profits tax will be granted to non-resident persons (including natural persons, corporations, trustees and partnerships) in respect of certain profits from dealing in securities, dealing in futures contracts and leveraged foreign exchange trading in any year of assessment commencing on or after 1 April 1996. These activities must be carried out through registered brokers, authorised financial institutions, automated trading service providers and asset managers and the non-resident must not carry on any other business in Hong Kong. Income from transactions which are "incidental" to the carrying out of the exempt transactions will also be exempt from tax provided such income does not exceed 5% of the total income earned by the non-resident from the exempt and incidental transactions in Hong Kong.

  • Losses from Exempt Transactions
    Losses sustained by a non-resident person from exempt transactions in a year of assessment will not be available for set off against assessable profits for tax purposes.

  • Deeming Provisions
    The Deeming Provisions provide that (i) a resident person who, together with his associates, holds a direct or indirect interest of 30% or more in an exempt non-resident person or (ii) a resident person who holds any interest, direct or indirect, in an associated exempt non-resident person will be subject to Hong Kong profits tax on its share of the non-resident's exempt profits. The purpose of the Deeming Provisions is to avoid abuse of the Exemption Provisions by Hong Kong residents. The Deeming Provisions will apply from the date of enactment of the Bill. The Deeming Provisions will not apply however in cases where the beneficial interest in the non-resident is regarded by the Commissioner of Inland Revenue as "bona fide widely held".

PricewaterhouseCoopers' Initial Comments on the Bill

  1. A new definition of Hong Kong "resident" has been introduced to the IRO and a number of clarifications are required in relation to this definition.

  2. Only income from Types 1 (dealing in securities), 2 (dealing in futures contracts) and 3 (leveraged foreign exchange trading) activities as listed in the Securities and Futures Ordinance is exempted. This exemption does not appear to apply to income from trading in shares of private companies. It is also uncertain as to whether income from derivative transactions will fall under the above three categories.

  3. There is no definition of what constitutes activities "incidental" to the exempt transactions. It will be difficult to distinguish between "incidental" activities which may not taint the exemption and "other business" which will cause the entire exemption to be lost.

  4. The definition of "associate" in the Deeming Provisions is very broad and complex and may have implications for common fund structures. In addition, the Deeming Provisions will catch individual resident investors who are now generally not taxed on their securities trading profits. These implications need to be carefully reviewed.

  5. The Deeming Provisions as currently drafted may result in double taxation issues and other inequitable taxation results arising for Hong Kong resident investors in certain circumstances. In addition, the Deeming Provisions only address the situation where the non-resident has exempt profits, but are silent on the situation where the non-resident has derived loss from the exempt transactions.

  6. A record of the beneficial interests held by Hong Kong resident investors in the non-resident must be kept for each day in a year of assessment. This is a very onerous administrative obligation and there are practical difficulties for Hong Kong resident investors with how they can determine when they exceed the 30% threshold.

Further Information

To read more, please download the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 from the Hong Kong Government website.