Extending Profits Tax Exemption for Offshore Private Equity Funds

A Hong Kong Inland Revenue bill to provide tax exemption for offshore private equity funds holding private equity portfolios was enacted as of 17 July 2015.

To qualify for the tax exemption, offshore funds must at all times after the final closing sale of interests have more than four investors and the capital commitments made by all investors must exceed 90% of aggregate capital commitments. The portion of the net proceeds to be received by the originator and the originator’s associates must also not exceed 30% of the net proceeds arising out of the transactions of the fund.

Moreover, investments must be in portfolio companies incorporated outside Hong Kong that have not carried out business in Hong Kong or hold any immovable property in Hong Kong, subject to a de minimis rule.

The objective of the bill amendment is to strengthen Hong Kong’s position as a premier international asset management center and to facilitate development of the private equity sector. The amendment will no doubt attract more private equity fund managers to set up or expand their business in Hong Kong, hire local expertise and drive the demand for other relevant professional services.

The legislation also extends tax exemption for special purpose vehicles (SPV) established for the purpose of holding directly or indirectly one or more portfolio companies.

At the end of 2014, the total capital under management in private equity funds operating in Hong Kong was US$114.6 billion with a year on year growth of 16%. This accounts for 21% of capital invested in private equity across Asia. Currently, around 390 private equity companies operate in Hong Kong.