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