PwC Tax Insights
Hong Kong Private Equity Tax News Flash
Profits tax exemption for offshore
funds extended to private equity
funds – amendment bill gazetted
March 2015
In brief
The Hong Kong Government published the Inland Revenue (Amendment) Bill (t
he Bill) 2015, which
extends the current profits tax exemption for offshore funds to private equity (PE) funds in the Gazette
on 20 March 2015. The Bill will be introduced into the Legislative Council on 25 March 2015.
In detail
The current profits tax exemption for offshore
funds as it is currently drafted and interpreted
by the Inland Revenue Department does not
include transactions in private companies,
putting Hong Kong in a relatively
disadvantaged position in attracting PE fund
business to Hong Kong. Recognising this
weakness, the Hong Kong government
proposed in its 2013/14 Budget “to extend the
profits tax exemption to include transactions in
private companies, which are incorporated or
registered outside Hong Kong and do not hold
any Hong Kong properties nor carry out any
business in Hong Kong”. Hong Kong’s Financial
Services and Treasury Bureau (FSTB)
presented its proposals (t
he Legislat
ive
Proposals) to extend the profits tax exemption
for offshore funds to the Legislative Council on
5 January 2015. These proposals allowed
offshore PE funds managed by SFC licensed
managers as well as unlicensed managers to
enjoy the profits tax exemption, and also
included various definitions and conditions the
PE fund would need to meet before qualifying
for the exemption. On 20 March 2015, two
years after the 2013/14 Budget announcement,
the Bill was finally gazetted and will be
introduced into the Legislative Council on 25
March 2015.
An overview of the tax exemption framework
for offshore PE funds
While the Bill does not contain any material
changes from those foreshadowed in the
Legislative Proposals, it does set out some
additional technical details.
We outline the key features of the Bill, together
with the key changes from the Legislative
Proposal (please refer to our News Flash on the
key Legislative Proposals2) in this News Flash.
The key features of the Bill are:
 To provide a profits tax exemption for nonresident funds by amending the definition of
“securities” in Schedule 16 of the Inland
Revenue Ordinance (I
RO) such that
transactions in shares of certain private
companies (or “excepted private companies”
(EPCs), previously referred to in the
Legislative Proposals as “eligible portfolio
companies) are included as “specified
transactions”.
 To provide a profits tax exemption for nonresident funds engaged in specified
transactions even though they are not
managed by specified persons (i.e. SFC
licensed fund managers), provided that they
are a “Qualifying Fund” as defined in the
IRO.
 A Qualifying Fund has to satisfy all of the
following conditions at all times after the
date on which the fund originator last
accepts subscriptions from investors for
making capital commitments:
− the number of investors (other than the
originator and its associates) exceeds 4
(i.e. 5 investors at a minimum,
previously referred to as “five or more
investors” per the Legislative Proposals).
− the capital commitments made by the
investors exceeds 90% of the aggregate
capital commitments.
− an agreement that the originator and its
associates will not receive more than
30% of the net proceeds arising out of
the transactions of the fund (after
deducting the portion attributable to
their capital contributions to the fund).
www.pwchk.com
Hong Kong Private Equity Tax News Flash
 To provide a profits tax exemption in
respect of a disposal of an EPC or an
interposed special purpose vehicle (SPV) by
a Hong Kong or non-Hong Kong
incorporated SPV that is set up solely for the
purpose of holding (directly or indirectly) or
administering one or more EPCs and does
not carry on any other trade or activities.
shareholders and restrictions on the transfer
of shares have also been removed.
 The exemption will apply in respect of tax
chargeable for any year of assessment
commencing on or after 1 April 2015.
What else has changed?
− is incorporated outside Hong Kong;
 A section has been added, which specifically
provides that the profits tax exemption for
offshore funds does not apply to nonresident SPVs. The tax exemption specific to
SPVs is provided for in another section.
− did not carrying on any business through
or from a permanent establishment
(specifically defined) in Hong Kong at all
times within the 3-year look back period;
 The terms “capital commitment”, “aggregate
capital commitment”, “net proceeds”, etc. in
relation to a Qualifying Fund are defined
and set out in Section 20AC(6).
 To qualify for the tax exemption, the
underlying portfolio companies (i.e. the
EPCs) must be a private company that:
− did not hold one or more private
companies carrying on a business
through or from a permanent
establishment in Hong Kong, or the
aggregate value of such holding does not
exceed 10% of the value of the EPC’s own
assets, at all times within the 3-year look
back period; and
− did not hold any immovable property in
Hong Kong or one or more private
companies with holding of immovable
property in Hong Kong, or the aggregate
value of such holding does not exceed
10% of the value of the EPC's own assets,
at all times within the 3-year look back
period.
 The definition of “private company” does
not follow the definition in the Companies
Ordinance. Rather, the definition has been
relaxed, and is now defined as a company
incorporated in or outside Hong Kong that
is not allowed to issue any invitation to the
public to subscribe for any shares or
debentures of the company. The
requirements on the number of
 A special purpose vehicle is exempt, to an
extent corresponding to the percentage of
shares or interest the offshore PE fund holds
in the SPV.
 An additional category of exempted
transactions carried out by an SPV is added,
being “transactions in certificates of interest
or participation in, temporary or interim
certificates for, receipts for, or warrants to
subscribe for or purchase, such shares,
stocks, debentures, loan stocks, funds,
bonds or notes.”
 The term “interposed SPV” is defined for
clarity.
 Section 20ACB sets out the definition of a
“permanent establishment”, to include a
fixed place of business and dependent agent
but exclude auxiliary activities, such as a
buying office and facilities for storage,
display or delivery of goods, etc.
 An anti-abuse provision has been added in
Section 20AF to tax the residents’ share of
profits in exempted SPVs. Details are
provided in the new Schedule 15A.
PwC observations
This Bill has been a long time coming for the PE fund industry and will no doubt enhance Hong Kong’s
position as an attractive and competitive international asset management centre. It is evident that the
Legislature has made extensive efforts to address the majority of questions stemming from the
Legislative Proposals, including providing clarity on previously uncertain areas, and definitions in the
Bill. We set out some of our observations below.
 It seems that while the scope of the profits tax exemption for offshore funds has been extended, the
Bill has also refined, expanded, and/or added the definitions of certain terms like “associates”,
“associated partnerships”, “control”, “principal officer”, etc. By doing so, the legislature has
recognised the inherent complexities pertaining to the structure of PE funds, which may have
significant implications to fund structures and carried interest vehicles. Industry players should
carefully examine their existing structures in light of these changes.
 It will also be interesting to see how these changes reconcile with the Inland Revenue Department’s
current view that “the mere facts that the resident person is a partner in the offshore fund and that
the other partners in the offshore fund are fellow partners of the resident person would not render
the offshore fund or the other partners in the offshore fund “associates” of the resident person” as
set out in Departmental Interpretation and Practice Notes No. 43 (Revised) (DIPN 43), and whether
the IRD’s view still stands after these changes.
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PwC
Hong Kong Private Equity Tax News Flash
 In respect of excepted private companies, it is unclear as to how one would compute the “aggregate
value” of Hong Kong immovable property held or determine whether a private company carried on
business in Hong Kong or had a permanent establishment in Hong Kong within the three year
timeframe – and if this would be on a rolling three year period. Other ambiguities include, whether
the “exceeds 4” investor number condition in defining a “qualifying fund” would lend itself to the
definition of “bona fide widely held” under the current deeming provision (i.e. the anti-avoidance
provision).
 The new provisions, so far as they apply to exempt the profits of an SPV, appear to address the
problem which exists under the current exemption provisions whereby an offshore fund risks losing
the benefit of the exemption entirely if it enters into any transactions which are not “specified
transactions”. In particular, the new provisions have no requirement that an SPV engage only in
specified transactions; rather, the exemption appears intended to apply to all of an SPV’s profits from
transactions described in the relevant provision, even if other transactions are undertaken. It is to be
hoped that in due course and in the interests of clarity and consistency, the government will adopt
this same approach for the existing exemption for offshore funds.
 We applaud the Government’s move to broaden the exemption available to offshore funds in respect
of debentures, loan stocks, bonds and notes of, or issued by an SPV or an EPC. Nonetheless, the
current (and in our opinion questionable) view of the IRD that interest on such instruments is not a
profit from a transaction in such an instrument still remains a major obstacle to the development of a
credit fund management industry in Hong Kong. It is hoped that given the current mood of the
Government to take steps to encourage the asset management industry in Hong Kong, this is an issue
which they may choose to revisit now, or in the immediate future, through a revision of the relevant
Departmental Interpretation and Practice Note.
 Despite these uncertainties and ambiguities requiring clarification, we do applaud the Legislature for
clarifying that a SPV although needing to be “established solely for the purpose of holding, directly or
indirectly” one or more excepted private companies, it can also perform administering functions.
This confirms that the SPV can have commercial substance, which would be helpful in claiming tax
treaty benefits.
 Also, we are pleased to see that a resident person would not be liable to tax in respect of its profits if
an interposed person is already taxed on the same profits.
 We expect that the existing DIPN 43 on the offshore fund regime will be modified to provide
clarification on the application of the extended regime once the Bill is passed.
What’s next?
The Bill will need to be scrutinised by the Legislative Council before being enacted into Law. We will
continue to monitor this development.
Endnotes
1.
http://www.gld.gov.hk/egazette/pdf/20151912/es3201519127.pdf
2.
http://www.pwchk.com.hk/home/eng/pe_tax_news_jan2015.html
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PwC
Hong Kong Private Equity Tax News Flash
Let’s talk
If you would like further advice or information in relation to the issues outlined above, please contact any of PwC’s
financial services tax specialists listed below:
Florence Yip
Asia Pacific Financial Services Tax Leader,
Asia Pacific Asset Management Tax Leader
China/Hong Kong Private Equity Tax Leader
T: +852 2289 1833
florence.kf.yip@hk.pwc.com
KK So
Asia Pacific Real Estate Tax Leader
T: +852 2289 3789
kk.so@hk.pwc.com
RexHo
Hong Kong Financial Services Tax Leader,
Asia Pacific Insurance Tax Leader
T: +852 2289 3026
rex.ho@hk.pwc.com
Phillip Mak
China and Hong Kong Financial Services
Transfer Pricing Leader
T: +852 2289 3503
phillip.mak@hk.pwc.com
David Kan
Financial Services Tax Partner
T: +852 2289 3502
david.kh.kan@hk.pwc.com
David McDonald
Financial Services Transfer Pricing Partner
T: +852 2289 3707
david.mcdonald@hk.pwc.com
David Smit
h
Senior Advisor
T: +852 2289 5802
Clarence Leung
Financial Services Tax Director
T: +852 2289 3599
david.g.smith@hk.pwc.com
clarence.kf.leung@hk.pwc.com
Sandy Lau
Financial Services Tax Director
T: +852 2289 3526
sandy.wh.lau@hk.pwc.com
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March 2015 and were based on the law enforceable and information available at that tim e.
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