Hong Kong | Bill may hand tax exemptions to local hedge funds

Hong Kong has proposed widening tax breaks to include hedge and private equity funds that are domiciled in the city in a move market watchers say should encourage more of them to move there.

Locally domiciled vehicles that can only be sold to qualified institutions and wealthy individuals – such as hedge and private equity funds – will be eligible for an exemption from a 16.5 percent profits tax for the first time, according to a council brief posted on the website of the city’s legislature. The government has recommended the change take effect on April 1.

Hong Kong has long been locked in a battle with Asian peers such as Singapore and Shanghai for the title of the region’s premier financial center. The proposed change came after many years of lobbying by Hong Kong’s local asset management industry, and after the European Union labeled the city’s current profits tax regime for funds as “harmful.”

This would “put us on a level playing field with Singapore,” Paul Ho, Ernst & Young’s financial services Hong Kong tax market leader, said in a telephone interview. It may also “attract more overseas asset managers to consider setting up their platforms here in Hong Kong,” he said.

Hong Kong’s asset management and fund advisory industry totaled HKD17.5 trillion (USD2.2 trillion) at the end of 2017, up 23 percent from a year earlier.

Under the current rules, locally and overseas domiciled funds that are authorized for sale to retail, or individual, investors in Hong Kong are eligible for a profits-tax exemption, as are funds that have been established in offshore centers such as the Cayman Islands and that are only available for sale to institutional investors and wealthy individuals.

Even when they’re ultimately run by managers in Hong Kong, most hedge and private-equity funds have their legal home in an offshore tax haven for economic reasons. There are conditions that locally established funds will have to meet to qualify for the proposed tax exemption, such as managers having a license from the local securities regulator, or a minimum number of investors. Bloomberg