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Publications and Press Releases :
Press Release
: News Archives
LegCo passes the Revenue (Profits Tax Exemption
for Offshore Funds) Bill 2005
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The Legislative Council today (March 1) passed the Revenue (Profits
Tax Exemption for Offshore Funds) Bill 2005 which seeks to amend
the Inland Revenue Ordinance to implement the proposal to exempt
offshore funds from profits tax.
The Secretary for Financial Services and the Treasury,
Mr Frederick Ma, when moving the resumption of the Second Reading
of the bill, said the proposed exemption was vital for Hong Kong
to reinforce its status as an international financial centre and
enhance Hong Kong's competitiveness among other international financial
centres.
Noting that other major international financial centres,
such as New York and, London, all exempted offshore funds from tax,
Mr Ma said Hong Kong's fund industry was facing keen competition
from other international financial centres for foreign investments.
"The proposed exemption will strengthen Hong Kong's competitiveness
in attracting new offshore funds to come here and encourage existing
funds to continue to invest in Hong Kong. It will lead to an increase
in market liquidity and employment opportunities in the financial
services and related sectors. Downstream service sectors such as
brokers, accountants, bankers, lawyers, etc., will also benefit
from the proposal," Mr Ma said.
Under the proposal, an offshore fund entity (which
covers individuals, partnerships, corporations and trustees of trust
estates) would enjoy tax exemption by satisfying two conditions
- it is a non-resident entity and it does not carry on any business
in Hong Kong other than the qualifying transactions or transactions
incidental to these.
The well-established common law rule of "central
management and control" adopted in many other jurisdictions
will be used to determine whether a non-individual entity is resident
in Hong Kong or not for the purpose of the proposed exemption. The
currently proposed scope of the qualifying transactions includes
the typical transactions carried out by offshore funds in Hong Kong,
namely transactions in securities, in futures contracts, in foreign
exchange contracts, in the making of a deposit other than by way
of a money-lending business, in foreign currencies and in exchange-traded
commodities. The scope of exemption has been generally accepted
by the industry.
The proposed exemption would apply with retrospective
effect to the year of assessment 1996/97.
To prevent possible abuse by residents disguised as non-residents
taking advantage of the proposed exemption by transferring funds
to non-resident companies which in turn carry on securities-trading
activities in Hong Kong and distribute non-taxable dividends to
those residents, necessary deeming provisions are contained in the
Bill. The deeming provisions would apply to a resident who, alone
or jointly with his associates, holds beneficial interest of 30%
or more in an exempt offshore fund, or holds any percentage where
the exempt offshore fund is an associate of the resident. The resident
would be deemed to have derived assessable profits in respect of
profits earned by such offshore funds in Hong Kong. The deeming
provisions would not apply where the fund concerned is a fund authorised
by the Securities and Futures Commission, or a bona fide widely-held
fund.
The deeming provisions will not impose any new tax
and will not be invoked in respect of offshore profits, capital
gains or dividend income, which are and will remain tax-exempt in
Hong Kong. Most resident investors should not be affected by the
deeming provisions.
To allow adequate time for the industry to change
its systems to facilitate provision of information to resident investors
for tax return purposes, the deeming provisions will apply from
the year of assessment 2006/07.
The Inland Revenue Department will issue a Departmental
Interpretation and Practice Note to clarify matters related to the
exemption.
Ends/Wednesday, March 1, 2006
Issued at HKT 15:32
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