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Hong Kong

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Profits tax exemption for offshore funds enacted

The Hong Kong Legislative Council passed the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 on 1 March 2006. The new law will amend the Inland Revenue Ordinance, whereby:

-   an offshore fund entity (which covers individuals, partnerships, corporations and trustees of trust estates) would be exempt from profits tax if it is a non-resident entity and does not carry on any business in Hong Kong other than "qualifying transactions" or transactions that are incidental to these;
-   "qualifying transactions" are transactions that are typically carried out by offshore funds in Hong Kong including transactions in securities, futures contracts, foreign exchange contracts, foreign currencies, exchange-traded commodities etc;
-   the tax residence of an offshore fund entity would be determined by using the "central management and control" test; and
-   to prevent the possibility of Hong Kong tax residents abusing the exemption by transferring funds to non-resident entities that in turn carry out qualifying transactions in Hong Kong and distribute non-taxable dividends to the resident, deeming provisions are included in the new law. The deeming provisions would apply to residents who, alone or jointly with associates, hold a beneficial interest of 30% or more in an exempt offshore fund, or, any amount where the exempt fund is an associate of the resident. When applied, the deeming provision will deem the resident to have derived taxable income in respect of profits earned by the offshore fund. Additionally, the deeming provision would not apply or be invoked with regard to (i) funds that are authorized by the Securities and Futures Commission, (ii) bona fide widely-held funds, and (iii) offshore profits, capital gains and dividends which are normally tax exempt in Hong Kong.

The exemption will apply retrospectively from the year of assessment 1996/97 and the tax authorities are expected to issue a Departmental Interpretation and Practice Note soon.

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