Hong Kong to get PE tax boost

Offshore private equity funds and their Hong Kong-based holding companies will soon be exempt from Hong Kong profits tax.

Hong Kong’s government will soon legislate its long-proposed private equity tax exemption in a move to further boost its position as a regional financial hub in Asia.

The new rules, which are expected to be drafted in the coming months, are designed to exempt offshore private equity funds from tax in Hong Kong.

In addition, the rules are expected to promote the use of Hong Kong companies as an investment holding platforms. The government is set to permit special purpose vehicles (SPVs) established in Hong Kong to hold offshore investments without incurring a tax charge.

Hong Kong already had tax exemptions for fund managers but the requirements contained a few key limitations which affect the ability of private equity to rely on them. Namely, gains from investments in private companies were not covered by the exemption.

The old rules also required GPs to be licensed with the Securities and Futures Commission (SFC) of Hong Kong to make use of any tax breaks but the new rules scrap this obligation.

While Hong Kong is often considered the financial hub for Asia, it has fallen behind Singapore with regard to offering tax exemptions for private equity funds.

For a number of years the Hong Kong PE fund industry has been at a competitive disadvantage when compared to other fund centres (in particular Singapore) as there has not been a specific tax exemption that has clearly applied to offshore private equity funds with deal teams based in Hong Kong, said a KPMG client alert.