The review will look at loosening the tax exemptions on private equity funds. It will also assess the feasibility of introducing a limited partnership structure for private equity funds.
“We must ensure that Hong Kong’s tax arrangements can compete with other asset management centres’ because once the funds are located in other areas, it is difficult for them to move their business to Hong Kong in the short term,” Chan wrote in his blog on Sunday.
He noted that major financial centres, such as the UK and Singapore, had implemented a number of tax incentives.
Limitations
Chan’s comments came after the Financial Services Development Council (FSDC) issued a report in July to extend the tax exemption on offshore private equity fund profits to Hong Kong businesses.
The FSDC outlined several limitations in the current offshore tax exemption. For example, the exemption does not allow private equity funds to invest in Hong Kong private companies. This makes the offshore private equity fund tax exemption unworkable in practice for funds with any sort of Greater China investment focus, according to the report.
“In the face of the keen competition among jurisdictions to be the leading international asset management centre in the region, Hong Kong should strive to uphold its prevailing competitive edge in the industry,” Laura Cha, FSDC’s chairman, said at the time the report was released.
The FSDC also proposed in 2015 the legal and regulatory framework for limited partnerships in Hong Kong.
Open-ended fund structure
The Securities and Futures Commission (SFC) has signaled it would enable investment funds to be established under the open-ended fund company (OFC) structure, in addition to the current unit trust form.
In June, the SFC launched a two-month consultation on the legal and regulatory requirements applicable to the OFC structure. The first consultation was conducted by the FSTB in 2014 and conclusions were issued in 2016.
Chan added in his blog that during this year’s budget meeting he had proposed to waive the profit tax on open-ended companies that are offered in the form of private funds. The government submitted a bill to the legislative council on the relevant tax amendments in June this year.
Chan wrote he expected the open-ended fund company (OFC) structure to be implemented next year, and to include the exemption for profits tax.
“The SFC is now developing subsidiary legislation and codes for relevant operations and procedures, to be submitted to the legislative council for scrutiny as soon as possible,” he added.
“If Hong Kong is not perfect for tax arrangements, even if the legal framework of Hong Kong permits the manufacture of different fund products, it will only be futile,” Chan said.
He noted, however, that Hong Kong would also ensure that any measures or changes in any tax incentives would not be “damaging” to other economies, especially since international tax cooperation has been increasing, with particular emphasis on tax transparency and combating cross-border tax evasion.
