LCQ6: Attracting private equity funds to be domiciled and to operate in Hong Kong
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Question:
The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021, which was passed in 2021, seeks to amend the Inland Revenue Ordinance (Cap. 112) (the Ordinance) to provide tax concessions for carried interest distributed by eligible private equity (PE) funds operating in Hong Kong, thereby enhancing Hong Kong's attractiveness in the choice of jurisdiction for the domiciliation and operation of PE funds. However, some members of the industry have pointed out that the Government does not fully understand the operation of funds and carried interest and, as a result, the details and procedures for applying for tax concessions are complicated and the vetting standards are overly stringent. These have undermined the effectiveness of the concessionary measures, and caused many PE funds to choose Hong Kong's competitors such as Singapore as their base. In this connection, will the Government inform this Council:
(1) as there are views that re-domiciliation of PE funds to Hong Kong involves additional operating costs such as those for applying for licences, renting offices and recruiting local staff, as well as alteration of articles and arrangements for the distribution of carried interest, and concessionary measures are also in place in overseas regions to attract the formation of PE funds there, whether the Government has assessed if the tax concession measures implemented after the Ordinance was amended are attractive enough to bring about re-domiciliation of PE funds to Hong Kong;
(2) whether it has any plans to maintain close communication with the industry so that the implementation of the tax concession measures can better suit the needs of the industry, thereby enhancing Hong Kong's competitiveness as a jurisdiction for the domiciliation and operation of PE funds; if so, of the details; if not, the reasons for that; and
(3) as the Government expects that with the amendments made to the Ordinance, more PE funds can be attracted to operate and be managed in Hong Kong, and more investment management and related activities can be boosted, thereby creating business opportunities and job opportunities for different professional services in Hong Kong, whether the Government has any plans to coordinate the cooperation between relevant government departments and the industry and, on the basis provided after the Ordinance was amended, further introduce measures conducive to the development of PE funds in Hong Kong, so as to generate induced economic benefits; if so, of the details; if not, the reasons for that?
Reply:
President,
My reply to various parts of the question raised by the Hon Adrian Ho is as follows:
(1) and (2) The Government is committed to providing a facilitative tax environment for the industry to attract more funds to set up and operate in Hong Kong. Funds re-domiciled to Hong Kong (including private equity (PE) funds) fulfilling the relevant conditions under the unified tax exemption regime for funds can enjoy profits tax exemption. In addition, the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 (the Amendment Ordinance) effective from May 7, 2021 provides tax concessions for carried interest distributed by eligible PE funds operating in Hong Kong.
Under the Amendment Ordinance, eligible carried interest (carried interest) received by or accrued to a qualifying person (i.e. an investment manager) will be charged at profits tax rate of 0 per cent. Carried interest accrued to an individual (qualifying employee) who is employed by a qualifying person and provides investment management services in Hong Kong for, or on behalf of, the qualifying person for an eligible PE fund will be excluded from the assessable income of the individual for the calculation of salaries tax.
In compliance with the latest international taxation standards promulgated by the Organisation for Economic Co-operation and Development, a qualifying person shall meet the substantial activities requirements, including hiring an adequate number of full-time qualified employees and incurring an adequate amount of operating expenditure for carrying out the core income generating activities (CIGAs) in Hong Kong. Meanwhile, to ensure that both the qualifying person and the qualifying employee have sufficient connection and nexus with the CIGAs conducted in Hong Kong, and to ensure that the qualifying employee provides investment management services for, or on behalf of, the qualifying person and earns income (including carried interest) in return for the services, the carried interest accrued to the qualifying employee shall be paid out of the carried interest received by or accrued to the qualifying person.
The Government has been maintaining communication with the industry and listening to their views. The Inland Revenue Department is consulting the industry on the Departmental Interpretation and Practice Notes being prepared, and will study their feedback in detail for considering how to facilitate the industry to benefit from the tax concession.
(3) Hong Kong is an international asset and wealth management centre. As at end-2021, the asset and wealth management business of Hong Kong amounted to HK$35.5 trillion, with 65 per cent of the funding sourced from non-Hong Kong investors. Hong Kong's PE capital under management as at end-2022 amounted to US$208.3 billion, ranking second in Asia. Apart from providing a facilitating tax environment, the Government has proactively implemented various measures to further enhance the competitiveness of the asset and wealth management industry (including the PE fund sector).
Specifically, the Government offers diversified fund structures. The open-ended fund company (OFC) regime has been in operation since July 2018, allowing funds to be set up in the form of a company, with flexibility of creating and cancelling shares for investors' subscription and redemption in the funds. As at end-January 2023, around 120 OFCs were established in Hong Kong. The Government has introduced the limited partnership fund (LPF) regime from August 2020 to attract private investment funds to set up and operate in Hong Kong in the form of limited partnerships. As at end-January 2023, over 580 LPFs were registered in Hong Kong. The Government has also introduced a re-domiciliation mechanism for foreign funds since November 2021 to attract foreign funds to re-locate their registration and operation to Hong Kong.
As for promoting family office business, the Government has introduced an amendment bill into the Legislative Council in December 2022, which proposes to provide tax exemption for eligible family-owned investment holding vehicles with a view to attracting more family offices to set up and operate in Hong Kong, thereby channeling capital to Hong Kong's venture capital market and generating demand for financial and related professional services.
Furthermore, the Government and the Shenzhen Qianhai Authority jointly announced 18 Measures for Supporting the Linked Development of Shenzhen and Hong Kong Venture Capital Investments in Qianhai in September 2022, providing facilitation and preferential policies for Hong Kong's PE fund sector, and promoting the linked development of venture capital in Shenzhen and Hong Kong. The Government will explore with Qianhai more opportunities for financial development, such that the two places can serve as "dual engines" in the Greater Bay Area.
Ends/Wednesday, February 22, 2023
Issued at HKT 14:25
Issued at HKT 14:25
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