Tax Incentive of Investment Funds in Hong Kong

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Tax Incentive of Investment Funds in Hong Kong

The Inland Revenue Department (“IRD”), Hong Kong’s tax authority, issued the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019. This new unified tax regime applies from 1 April 2019 and replaces previous tax exemptions separately applied to offshore funds, offshore private equity funds and open-ended fund companies. It now extends profits tax exemption to all funds, provided the following three conditions are satisfied.

 

  1. An entity must qualify the definition of “fund”. According to the Inland Revenue Ordinance (“IRO”), the term “fund” should be encompassed the concepts of arrangements that carry the nature of a pooled investment;

 

  1. A “fund” is exempt from payment of tax in respect of its assessable profits for a year of assessment if the profits are earned from:-

(1)   qualifying transactions; or

(2)   incidental transactions [profits derived from the incidental transactions provided that the trading receipts from the incidental transactions do not exceed 5% of the total trading receipts]; or

(3)   if the fund is an Open-ended fund company (“OFC”).

 

  1. At all times during the basis period for a year of assessment either–

(1)   the qualifying transactions are carried out in Hong Kong by or through, or arranged in Hong Kong by a specified person [A corporation licensed or an authorized financial institutions registered under the Securities and Futures Ordinance (“SFO”) to carry on a business in any regulated activity as defined under the SFO]; or

(2)   the fund is a qualified investment fund [the number of investors exceeds 4; the capital commitments made by the investors exceed 90% of the fund’s aggregate capital commitments; and an agreement that the originator and its associates will not receive more than 30% of the net proceeds arising out of the transaction of the fund].

 

Tax Incentive of Investment Manager/Entity in Hong Kong

 

Unlike Singapore, there is no specific tax incentives as investment/fund manager in Hong Kong. However, Hong Kong adopts a territorial source principle of taxation. Only profits arising in or derived in Hong Kong from carrying on a trade or business in Hong Kong, either on its own account or through an agent, are taxable here. In simple terms, this means that profits a person who carries on a business outside Hong Kong will not be chargeable to Hong Kong profits tax.

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