PRESS RELEASE

(Source : Government Information Centre)

Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 to be gazetted on Thursday

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The Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005, which seeks to amend the Inland Revenue Ordinance (Cap. 112) (IRO) to implement the proposal to exempt offshore funds from profits tax, will be gazetted on Thursday (June 30).

To reinforce the status of Hong Kong as an international financial centre (IFC) and enhance our competitiveness vis-á-vis other IFCs, the Government proposed in the 2003-04 Budget to exempt offshore funds from profits tax.

"The proposed exemption will help attract new offshore funds to Hong Kong and to encourage existing ones to continue to invest here. Anchoring offshore funds in Hong Kong markets could also help maintain international expertise, promote new products, and further develop the local fund management industry. The proposal would lead to an increase in market liquidity and employment opportunities in the financial services and related sectors," a government spokesman said.

"Hong Kong is facing keen competition from other major IFCs in attracting foreign investments. Major financial centres such as New York and London as well as the other major player in the region, Singapore, all exempt offshore funds from tax. The financial services industry has expressed the view that it is vital for us to provide tax exemption for offshore funds, or otherwise some of these funds may relocate away from Hong Kong, leading to loss of market liquidity and a negative read-across impact on other financial services, including downstream services such as those provided by brokers, accountants, bankers and lawyers," the spokesman added.

It is believed that the actual cost to revenue of the proposal should not be significant. This is because due to difficulties in obtaining details of securities transactions involving non-resident persons, the Inland Revenue Department has not been in a position to enforce the relevant provisions effectively in practice in respect of cases where the persons carrying out securities transactions in Hong Kong are non-residents. Besides, even if an assessment is raised on a non-resident, the Administration would have practical difficulty in recovering the tax from the non-resident who is outside the reach of legal action initiated in Hong Kong.

"The Administration has conducted two rounds of consultation with the industry, interested parties and the public in early 2004 and early 2005 on the approach for effecting the proposed profits tax exemption for offshore funds. Respondents generally consider that the Administration's proposed approach is the correct one," the spokesman said.

Under the proposal in the Bill, offshore funds, i.e. non-resident entities (which can be individuals, partnerships, trustees of trust estates or corporations) administering a fund, are exempt from tax in respect of profits derived from dealings in securities, dealings in futures contracts and leveraged foreign exchange trading [as defined in the Securities and Futures Ordinance (Cap. 571) (SFO)] in Hong Kong carried out by specified persons such as corporations and authorized financial institutions licensed or registered under the SFO to carry out such transactions.

To prevent abuse or round-tripping by local funds disguised as offshore funds seeking to take advantage of the exemption, the Government proposes to introduce as a deterrent measure specific anti-avoidance provisions to deem a resident holding a beneficial interest in a tax-exempt offshore fund to have derived assessable profits in respect of profits earned by such offshore fund in Hong Kong. These deeming provisions will not apply if the offshore fund is bona fide widely held. Considering that a resident may have difficulty in obtaining information from an offshore fund in which he only holds a small percentage of beneficial interest, the deeming provisions would also not apply if the resident (alone or with his associates) holds less than 30% of the offshore fund unless such offshore fund is his associate.

"Profits derived by offshore funds from securities trading transactions in Hong Kong are currently liable to profits tax. The effect of the deeming provisions is merely to recoup the tax amount in the hands of residents holding substantial interests in the offshore funds which would become tax-exempt under the proposal. There are other deeming provisions in the IRO for tax collection and anti-avoidance purposes," the spokesman explained.

The exemption provisions would apply with retrospective effect to the year of assessment commencing on 1 April 1996, in order to provide legal certainty on the tax liability of offshore funds in respect of past years, which is much called for by the industry as otherwise there would be huge problems for offshore funds to finalise their tax liabilities for past years. The deeming provisions would apply upon enactment of the Bill.

The Bill will be introduced into the Legislative Council on July 6, 2005.

Ends/Tuesday, June 28, 2005
Issued at HKT 17:08

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