Hong Kong enacts PE tax break

Offshore private equity funds and their Hong Kong-based holding companies are now exempt from Hong Kong profits tax.

Hong Kong’s government has finally approved a long-awaited private equity profits tax exemption. The new rules, originally proposed more than two years ago, are expected to boost Hong Kong’s position as a regional financial hub in Asia.

The Inland Revenue (Amendment) (No.2) Ordinance 2015 was published in the Gazette by the Hong Kong government last week, but will apply retroactively from April 1. The bill amends the Inland Revenue Ordinance (Cap. 112) by extending profits tax exemption for offshore funds to include private equity funds.

The rules also promote the use of Hong Kong companies as investment holding platforms, permitting special purpose vehicles (SPVs) established in Hong Kong to hold offshore investments without incurring a tax charge.

To qualify for the profits tax exemption, offshore private equity funds must carry out specified transactions through corporations licensed by the Securities and Futures Commission, or they must fulfill the following conditions: (a) they have more than four investors; (b) the capital commitment made by investors must exceed 90 percent of aggregate capital commitments; and (c) the portion of net proceeds arising from the fund's transactions to be received by the originator must not exceed 30 percent.

The Hong Kong Venture Capital and Private Equity Association (HKVCA) has long been lobbying for the bill, which is expected to put Hong Kong on an equal playing field with other fund centers like Singapore that have a specific tax exemption for offshore private equity funds with deal teams based in Hong Kong.

The passage of the amendment is a “positive step to enhance the attractiveness of Hong Kong as a private equity hub for new arriving private equity firms and as a way of deepening the engagement for firms already operating in Hong Kong and simplifying their operating structure,” said John Levack, chairman of HKVCA Technical Committee, in a statement.

Hong Kong already had tax exemptions for fund managers but the requirements contained a few key limitations which affected the ability of private equity to rely on them. Namely, gains from investments in private companies were not covered by the exemption.

“By providing clear tax exemption to specified transactions conducted by offshore private equity funds or their special purpose vehicles, we hope to attract more private equity fund managers to expand their business in Hong Kong and hire local asset management, investment and advisory services, which will be conducive to the further development of our asset management industry,” said a government spokesperson in a statement.