Hong Kong strives to be a leading asset and wealth management hub and attract more funds to be established in the jurisdiction. As such, Hong Kong has extended the scope of funds taxation exemptions by introducing the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019.
Pursuant to this Ordinance, all funds, including Limited Partnership Funds (LPFs), can be exempt from Hong Kong profits tax – regardless of their structure, their central management and control location, their size, and the purpose that they serve. It should be provided that the definition of funds (e.g. a genuine collective investment scheme) and certain other exemption conditions can be satisfied.
Limited Partnership Funds Taxation
Generally, profits of an LPF can potentially be tax exempt in Hong Kong if:
- they are earned from ‘qualifying transactions’, such as
- securities;
- shares, debentures, funds, bonds, or notes of/issued by a private company;
- future contracts.
- they are carried out in Hong Kong by, or through, or arranged by an authorized financial institution or a licensed corporation
- the LPF is a qualified investment fund
The exemption also covers profits derived from the incidental transactions, provided that the fund’s trading receipts from the incidental transactions do not exceed 5% of the total of the fund’s trading receipts from both the qualifying and the incidental transactions.
Furthermore, the profits tax exemption also applies to the special purpose entities (SPEs) wholly or partially held by the tax-exempted LPF, provided that the prescribed conditions can be satisfied.
Stamp duty exemption
Apart from profits tax, funds registered under the Limited Partnership Fund Ordinance benefit from not being charged with stamp duty when the interests in the LPFs are contributed, transferred or withdrawn. This is because the interests in an LPF do not fall within the definition of stock under the Stamp Duty Ordinance.
Carried interests
Regarding the carried interests earned by qualifying persons/employees in respect of the qualifying investment management services provided to the funds, as from 1 April 2020, they will be taxed at 0% in Hong Kong. However, certain conditions have to be met; for example, the carried interest is required to be a ‘profit-related return’ and the fund involved is required to be certified by the Hong Kong Monetary Authority.
For the purpose of the certification, the investment by the fund has to be made in certain assets, such as shares, debentures, funds, bonds or notes of/issued by a private company. In addition, economic substance (in terms of number of staff and operating expenditure) is required to be maintained in Hong Kong.
Management fees taxation
There is no specific tax exemption granted on management fees received from the funds. Does the investment manager not carry on a trade or business in Hong Kong? Or are the earned management fees not airing in or derived from Hong Kong? Then such management fees can potentially be claimed as offshore sourced and non-taxable in Hong Kong because of the territorial source system. Having said that, it is suggested to ascertain the corporate income tax exposures of the management fees in the relevant foreign tax jurisdiction(s).
HKWJ can help with taxation for Limited Partnership Funds
Our HKWJ tax team can provide further detailed tax advice for Limited Partnership Funds as well as other types of funds. For example, the eligibility of the profits tax exemption in Hong Kong and the possible ways to achieve tax efficiency.
If you intend to set up a fund or already have established a fund in Hong Kong, please feel free to contact our tax team for consultation via the form below.
