Hong Kong’s new unified tax exemption for onshore and offshore privately-offered funds.

Added on 28/02/2019

As published on, Wednesday 27th February, 2019.


Hong Kong’s Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 (the “Bill”), which will take effect on 1 April 2019, represents a significant development for Hong Kong’s privately-offered funds industry by amending the Hong Kong profits tax exemption regime to “unify” the tax exemption treatment for onshore and offshore privately-offered funds operating out of Hong Kong. The new tax regime is structured to address the concerns of the Council of the European Union (“EU”) in respect of the perceived “ring-fencing features” of Hong Kong’s tax regime, as well as enhance the competitiveness of Hong Kong’s fund industry, by creating a level playing field for all privately-offered funds operating in Hong Kong and subject to Hong Kong income tax, whether offshore or onshore.

The most noteworthy aspects of the Bill include:

  • Extending Hong Kong’s current tax exemption regime for offshore funds to onshore funds.
  • Providing more flexibility for funds to invest in Hong Kong private companies.
  • Eliminating “tainting concern”, as only profits from “non-qualifying” transactions will be taxable (i.e., a fund will not lose its full tax exempt status for engaging in “non-qualifying” transactions).

This new regime is not only relevant to onshore funds currently subject to Hong Kong profits tax, but also provides offshore funds subject to Hong Kong profits tax [1] with more flexibility in their investment policies.

Under the existing law, the profits tax exemption is only applicable to funds with central management and control outside Hong Kong (“Offshore Funds”) that do not invest in Hong Kong private companies. The exclusion of onshore funds from the profits tax exemption and the prohibition on Offshore Funds from investing in Hong Kong private companies in order to be eligible for the profits tax exemption was identified by the EU as an objectionable “ring-fencing" feature. As such, to prevent Hong Kong from being added to the black list of the EU's non-cooperative jurisdictions and exposed to defensive measures, the Hong Kong government proposed this new unified tax exemption regime.

Under the new regime, the profits tax exemption will apply to transactions in qualifying assets as defined in the Bill [2] (the “Qualifying Transactions”) and to transactions incidental to the carrying out of the Qualifying Transactions (“Incidental Transactions”), provided that the receipts from such Incidental Transactions do not exceed 5% of the aggregate trading receipts from both the Qualifying Transactions and the Incidental Transactions, failing which the entire amount of the trading receipts from the Incidental Transactions will be subject to profits tax.

In addition to extending the tax exemption to onshore privately-offered funds, the new unified tax exemption regime also provides more flexibility to funds that may invest in Hong Kong companies in that it clarifies and removes the “tainting concern” that the fund will lose its full tax exemption treatment if any one or more of its transactions is non-qualifying. As such, this new unified tax regime brings the Hong Kong tax environment in line with European standards and, to the extent a fund is subject to Hong Kong tax, it should assess its current structure, operations and investment focus and portfolio to determine if the new profits tax exemption applies to it or, if not, if it can and should restructure itself so that it may best benefit from it.