Signs of room to grow

China Daily (Canada) - - CHINESE TRAIN PROJECTS AROUND THE WORLD - By OSWALD CHAN in Hong Kong oswald@chi­nadai­

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

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