The Inland Revenue (Amendment) (No.2) Ordinance 2015 were gazetted on 17 July 2015, which seeks to extend profits tax exemption for offshore funds to private equity funds. With the implementation of the Amendment Ordinance, transactions conducted by offshore private equity funds in respect of securities of eligible overseas portfolio companies will be able to enjoy profits tax exemption.
Through providing clear tax exemption to specified transactions conducted by offshore private equity funds or their special purpose vehicles, more private equity fund managers are keen to expand their business in Hong Kong and hire local asset management, investment and advisory services, which will be conducive to the further development of our asset management industry.
Under the Amendment Ordinance, to qualify for profits tax exemption, offshore private equity funds must carry out specified transactions through corporations licensed by the Securities and Futures Commission, or they must fulfill the following conditions: (a) they have more than four investors; (b) the capital commitment made by investors must exceed 90 per cent of aggregate capital commitments; and (c) the portion of net proceeds arising from the fund's transactions to be received by the originator must not exceed 30 per cent.
To prevent abuse by local companies by simply converting their taxable profits to non-taxable income via an offshore fund structure, an eligible portfolio company should be an overseas incorporated private company, and it must not hold any Hong Kong properties or carry out any business in Hong Kong within a stipulated time limit. Moreover, the existing deeming provisions, which provide that a resident person holding a beneficial interest of 30 per cent or more in a tax-exempt private equity fund will be deemed to have derived assessable profits in respect of profits earned by the fund in Hong Kong, will equally apply to offshore private equity funds.