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The Hong Kong Government
published the Revenue (Profits Tax Exemption
for Offshore Funds) Bill (the "Bill")
on 30 June 2005. The Bill seeks to give
legal effect to the Government's proposal
to exempt offshore funds from Hong Kong
Profits Tax after two rounds of consultation.
It is scheduled for first reading by the
Legislative Council on 6 July 2005.
Key Provisions in the Bill
The Bill proposes to introduce five new
sections and a new Schedule into the Inland
Revenue Ordinance ("IRO"). The
key provisions are outlined below:
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Exemption
Provisions
Exemption from Hong Kong profits tax
will be granted to non-resident persons
(including natural persons, corporations,
trustees and partnerships) in respect
of certain profits from dealing in securities,
dealing in futures contracts and leveraged
foreign exchange trading in any year
of assessment commencing on or after
1 April 1996. These activities must
be carried out through registered brokers,
authorised financial institutions, automated
trading service providers and asset
managers and the non-resident must not
carry on any other business in Hong
Kong. Income from transactions which
are "incidental" to the carrying
out of the exempt transactions will
also be exempt from tax provided such
income does not exceed 5% of the total
income earned by the non-resident from
the exempt and incidental transactions
in Hong Kong.
- Losses from Exempt Transactions
Losses sustained by a non-resident person
from exempt transactions in a year of
assessment will not be available for set
off against assessable profits for tax
purposes.
- Deeming Provisions
The Deeming Provisions provide that (i)
a resident person who, together with his
associates, holds a direct or indirect
interest of 30% or more in an exempt non-resident
person or (ii) a resident person who holds
any interest, direct or indirect, in an
associated exempt non-resident person
will be subject to Hong Kong profits tax
on its share of the non-resident's exempt
profits. The purpose of the Deeming Provisions
is to avoid abuse of the Exemption Provisions
by Hong Kong residents. The Deeming Provisions
will apply from the date of enactment
of the Bill. The Deeming Provisions will
not apply however in cases where the beneficial
interest in the non-resident is regarded
by the Commissioner of Inland Revenue
as "bona fide widely held".
PricewaterhouseCoopers' Initial
Comments on the Bill
- A new definition of Hong Kong "resident"
has been introduced to the IRO and a number
of clarifications are required in relation
to this definition.
- Only income from Types 1 (dealing in
securities), 2 (dealing in futures contracts)
and 3 (leveraged foreign exchange trading)
activities as listed in the Securities
and Futures Ordinance is exempted. This
exemption does not appear to apply to
income from trading in shares of private
companies. It is also uncertain as to
whether income from derivative transactions
will fall under the above three categories.
- There is no definition of what constitutes
activities "incidental" to the
exempt transactions. It will be difficult
to distinguish between "incidental"
activities which may not taint the exemption
and "other business" which will
cause the entire exemption to be lost.
- The definition of "associate"
in the Deeming Provisions is very broad
and complex and may have implications
for common fund structures. In addition,
the Deeming Provisions will catch individual
resident investors who are now generally
not taxed on their securities trading
profits. These implications need to be
carefully reviewed.
- The Deeming Provisions as currently
drafted may result in double taxation
issues and other inequitable taxation
results arising for Hong Kong resident
investors in certain circumstances. In
addition, the Deeming Provisions only
address the situation where the non-resident
has exempt profits, but are silent on
the situation where the non-resident has
derived loss from the exempt transactions.
- A record of the beneficial interests
held by Hong Kong resident investors in
the non-resident must be kept for each
day in a year of assessment. This is a
very onerous administrative obligation
and there are practical difficulties for
Hong Kong resident investors with how
they can determine when they exceed the
30% threshold.
Further Information
To read more, please download the Revenue
(Profits Tax Exemption for Offshore Funds)
Bill 2005 from the Hong Kong Government
website.
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