Signs of room to grow
Hong Kong should not be complacent because more can be done to further fortify the city’s position in the private equity (PE) fund management industry, believe experts.
“While profits tax exemption for PE funds is welcome, tax incentives for PE fund management companies may also be considered,” Paul Ho Yiu-po, tax partner at Ernest & Young Asia Pacific Financial Services, told China Daily.
“When more PE fund companies come to Hong Kong, it will not only help boost the asset management industry but enhance demand for various services such as banking, legal, tax and accounting; bring in diverse financial services expertise to Hong Kong,” he said. “We hope that the government can continue to sign more double tax agreements (DTAs) with other countries. In the absence of DTAs, income earned by nonresident PE fund managers may be subject to tax in both Hong Kong and their home jurisdictions. Under the DTAs, tax paid in Hong Kong will be allowed as a credit against tax payable in their home jurisdictions and thus instances of double taxation may be avoided,” Ho added.
“Investments in Hong Kong private companies or Hong Kong real estate are excluded from the exemption if the value of those investments exceeds a certain threshold. Broadly, the value of such investments cannot exceed 10 percent of the value of the private company’s total assets. This is to ensure that Hong Kong continues to have the taxing rights over investments in Hong Kong assets that are not otherwise incidental to an offshore investment made by a PE fund,” KPMG China Tax Partner Darren Bowdern said.
John Levack, vicechairman of Hong Kong Venture Capital and Private Equity Association and co-founder of PE firm Electra Partners Asia, also believes the administration can do more to bolster the PE sector in Hong Kong, but is encouraged by progress being made.
“The government could provide a benefit to Hong Kong companies and startups by allowing PE funds to invest their capital in local companies without affecting the fund’s tax exemption for nonHong Kong investments,” Levack told China Daily. “It should also think about expanding the definition of qualifying funds (for profits tax exemption) to include sovereign wealth funds, pension funds and mainland State-owned enterprises, to enrich the investor base of PE industry in the city.”
“We believe there are even larger gains to be made by ( further) changes that allow PE funds to come onshore in Hong Kong,” Levack said. “As the mainland is transitioning from being primarily a destination for inbound investment to being a source of capital for outbound investment, (allowing tax exemption for onshore PE funds will enable) Hong Kong to play an active role in advising cross-border investments from the mainland.”
PricewaterhouseCoopers Hong Kong tax partner David Kan Kau-hang is of the same opinion. “More mainland PE fund managers are coming to establish their offices in Hong Kong and these PE firms will use Hong Kong as an investment base to invest in a diversified portfolio of private companies spanning different industries,” he said.
Darren Bowdern, tax partner, KPMG China