Hong Kong may hand tax breaks to woo hedge and private equity funds to its shores

[HONG KONG] Hong Kong has proposed widening tax breaks to include hedge and private equity funds that are domiciled in the city in a move market watchers say should encourage more of them to move there.

Locally domiciled vehicles that can only be sold to qualified institutions and wealthy individuals - such as hedge and private equity funds - will be eligible for an exemption from a 16.5 per cent profits tax for the first time, according to a council brief posted on the website of the city's legislature. Lawmakers are scheduled to have a first reading of the bill on Wednesday, and the government has recommended the change take effect on April 1.

Hong Kong has long been locked in a battle with Asian peers such as Singapore and Shanghai for the title of the region's premier financial center. The proposed change came after many years of lobbying by Hong Kong's local asset management industry, and after the European Union labeled the city's current profits tax regime for funds as "harmful."

This would "put us on a level playing field with Singapore," Paul Ho, Ernst & Young's financial services Hong Kong tax market leader, said in a telephone interview. It may also "attract more overseas asset managers to consider setting up their platforms here in Hong Kong," he said.

Hong Kong's asset management and fund advisory industry totaled HK$17.5 trillion (S$3.07 trillion) at the end of 2017, up 23 per cent from a year earlier.

Under the current rules, locally and overseas domiciled funds that are authorized for sale to retail, or individual, investors in Hong Kong are eligible for a profits-tax exemption, as are funds that have been established in offshore centers such as the Cayman Islands and that are only available for sale to institutional investors and wealthy individuals.

Even when they're ultimately run by managers in Hong Kong, most hedge and private-equity funds have their legal home in an offshore tax haven for economic reasons. There are conditions that locally established funds will have to meet to qualify for the proposed tax exemption, such as managers having a license from the local securities regulator, or a minimum number of investors.

Sovereign wealth funds also could be covered by the proposed change, Ernst & Young's Ho said. The loosened regulations will also likely be a boon for tech startups in the city trying to attract capital from money managers, he added.

Currently, offshore private funds cannot claim a profits-tax exemption for their investments in privately held, Hong Kong-domiciled companies, such as technology firms.