In order to further develop the asset management and the related service industries, the Hong Kong Government on 17 July 2015 published in the Gazette, the Inland Revenue (Amendment) (No. 2) Ordinance 2015 (‘Amendment Ordinance’), under which the profits tax exemption for offshore funds shall be extended to private equity funds.

Pursuant to the Amendment Ordinance, transactions conducted by offshore private equity funds in respect of securities of the eligible overseas portfolio companies are entitled to profits tax exemption in Hong Kong, provided that either one of the following criteria is met:

1. The offshore private equity funds carry out specified transactions through corporations licensed by the Securities and Futures Commission of Hong Kong; OR
2. The following 3 points:

• • The offshore private equity funds have more than four investors; and
  • The capital commitment made by the investors exceeds 90% of the total capital commitments; and
  • The portion of net proceeds arising from the transactions of the offshore private equity funds to be received by the originator does not exceed 30%.

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Moreover, in view of the possible abuse of the profits tax exemption by local Hong Kong companies, it is required for the eligible portfolio company to be a private company incorporated overseas such as a Dutch bv, and the eligible portfolio company is not allowed to hold any Hong Kong properties or carry out any business activities in Hong Kong within a stipulated time limit.

In addition, the existing deeming provisions, which provide that a resident person holding a beneficial interest of 30% or more in a tax-exempt private equity fund will be deemed to have derived assessable profits in respect of profits earned by the fund in Hong Kong, will equally apply to offshore private equity funds.

Please note that this is not a general exemption all trading securities and commodities tax income as evidenced by several court cases in Hong Kong.