Hong Kong Enacts New Tax Break for Offshore Private Equity Funds
Author: Chris Clifton
On July 13, 2015, the Hong Kong Legislative Council approved the Inland Revenue (Amendment) (No. 2) Ordinance 2015, which extends the exemption from Hong Kong income taxation for offshore funds to private equity (PE) funds. The ordinance took effect July 17, 2015, when published in Hong Kong’s office gazette. The ordinance is intended to encourage PE funds to set up or expand businesses in Hong Kong and further develop Hong Kong’s asset management industry.
The new ordinance has two features that could benefit PE funds:
- It waives the registration requirement and grants the tax exemption to PE funds managed by unlicensed managers.
- It extends the tax exemption to special purpose vehicles (SPV) established to hold offshore investments.
Prior to the enactment of the revenue ordinance, PE funds had to restrict their Hong Kong activities to advisory services while keeping their management activities outside Hong Kong to be eligible for the offshore funds tax exemption. With the new legislation, PE funds can perform management activities in Hong Kong.
Exempting gains derived from transactions with SPVs also allows PE funds to potentially access the tax treaty network of an SPV’s jurisdiction to enjoy lower withholding tax rates on dividends and capital gains. (Hong Kong does not have an income tax treaty with the U.S.)
The Hong Kong tax exemption is available to offshore PE funds licensed with the Hong Kong Securities and Futures Commission and to unlicensed funds meeting certain requirements, including those that have more than four investors who commit more than 90 percent of the capital of the fund and have originators that receive less than 30 percent of the fund’s net proceeds.
For more information on how these changes could affect your organization, contact your BKD advisor.