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PRESS RELEASE

(Source : Government Information Centre)

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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