The Financial Services Development Council (FSDC), an advisory body for the Hong Kong government, has proposed to include Hong Kong portfolio companies and non-Hong Kong private companies (with substantial operations in in Hong Kong) in the Offshore Private Equity Fund Tax Exemption, according to a paper published on Wednesday.
Currently under Amendment Ordinance 2015, private equity funds are exempt from the 16.5 percent profits tax in Hong Kong in respect of their overseas investments. The FSDC would like to extend this tax exemption to Hong Kong-based companies, which it said currently discourages investments in Hong Kong start-ups, infrastructure projects and commercial properties.
“There is room for further enhancement of the tax exemption regime. Private equity and venture capital funds' investments in Hong Kong and non-Hong Kong portfolio companies should be placed on a level playing field,” Laura Cha, chairman of the FSDC, said.
Aside from extending the tax exemption, the FSDC also proposed a number of refinements including removing certain tax implications relating to “tainting” and expanding the scope of allowable activities for tax exempt special purpose vehicles. Tainting occurs when an offshore private equity fund invests in a number of overseas private companies, one of which is carrying on business or holding an immoveable property in Hong Kong. Transacting in the securities of that overseas private company will taint the whole fund, resulting in the private equity fund becoming ineligible for tax exemption.
Eric Mason, chairman of Hong Kong Venture Capital and Private Equity Association and managing director for the Church Pension Fund commented: “HKVCA believes that this proposal will help cement Hong Kong’s leadership role as the largest cross-border private equity centre in Asia, whilst allowing capital to be invested in Hong Kong businesses.”
Total assets under management by the private equity industry reached nearly $800 billion last year, with Hong Kong as the preferred headquarters for the majority of the regional as well as mainland China private equity firms. Hong Kong-based private equity firms accounted for 30 percent of total Asian private equity fundraising, according to PEI data.
Private equity firms such as Baring Private Equity Asia, Affinity Equity Partners, KKR and Blackstone have their main regional outpost in Hong Kong.