HK makes 'very significant' PE tax exemptions

Hong Kong has said private equity funds will soon benefit from tax exemptions for offshore funds, which may draw firms away from traditional tax-haven domiciles like the Cayman Islands.

The Hong Kong government has announced it will extend an exemption on profits tax to include private equity firms that are incorporated or registered outside Hong Kong and do not have any Hong Kong properties or carry out business in the special administrative region. 

Industry professionals have widely welcomed the move, which should make Hong Kong a more commercially attractive jurisdiction to domicile private equity vehicles.

“I think it is very significant and it is clearing up what has been a grey area, which has put a number of GPs off setting up [funds] in Hong Kong over the years,” chief executive of Hong Kong-based GP Headland Capital Partners Marcus Thompson told Private Equity International.

“Assuming the government were to implement [this] legislation, that would mean the existing arrangement that Hong Kong GPs have, whereby you have an onshore investment advisor and an offshore investment manager, which is complicated to manage and expensive to manage, could be collapsed. [Therefore] you could have Hong Kong-domiciled investment managers managing offshore funds without the risk of those funds being subject to Hong Kong profit tax.”  

Hong Kong has responded slowly to the industry’s cries for more efficient tax policies for private equity funds.

“The existing tax exemption for offshore funds is not effective for private equity funds and has resulted in key fund personnel needing to follow onerous operating protocols if their fund is to be based in Hong Kong,” Darren Bowdern, tax partner at KPMG China said in a statement. 

In comparison, Singapore continues to make itself attractive to investors by offering more tax exemptions for Singapore-based funds. For example, in February Singapore signed a double tax agreement with popular fund domicile Guernsey, one of the UK’s Channel Islands, PEl reported earlier. The agreement gives comfort to funds with interests in both locations that they will not be taxed twice on their assets. 

Bowdern continued, “Hong Kong [has been] at a competitive disadvantage to Singapore, which has had broad-based exemptions for funds in place for a number of years and which has been successful in attracting new funds and fund platforms to Singapore.”

However, details of the regulatory changes need to be ironed out. Special provisions that appear to be aimed at the Hong Kong property industry have to be clarified so they will not adversely impact on the planned tax exemption, Bowdern said.

If the legislation is passed, which is likely to happen over one or two years, sources say the traditional fund domiciles that have overwhelmingly attracted Hong Kong GPs will lose funds to Hong Kong itself. 

“For private equity funds, fiscal transparency is key. Historically, we have used Cayman, British Virgin Islands, English limited partnerships for similar reasons. If the registration, establishment and operation of funds set up in Hong Kong are not arduous and complex, I can certainly see some movements towards reducing the use of offshore structures in Cayman or BVI,” Barry Lau, managing partner at Hong Kong-based Adamas Asset Management, explained. 

“Having Hong Kong-domiciled funds would mean a less complex set-up in terms of directorship structure and may help improve speed of execution.”