Extension of profits tax exemption encourages PE managers to relocate to Hong Kong

Tax concerns which gave rise to complicated structures to avoid managing (with full investment discretion) offshore private equity funds from Hong Kong, were swept away by the introduction of the Inland Revenue (Amendment) (No.2) Ordinance in July 2015, but industry players may have had some doubts as to whether this would lead to any changes in the most-commonly seen PE fund structures: offshore funds managed by offshore GPs/managers having onshore advisers.

The amendment expanded the definition of “specified transactions” which would not be taxable to include most private companies (including a Hong Kong SPV), which may encourage Hong Kong investment holding platforms as Hong Kong SPVs may benefit from Hong Kong’s rapidly expanding double tax treaty network.

Even before the first anniversary of the amendment it is encouraging to see signs that Asian PE players, in particular, are embracing the opportunity to manage their funds from Hong Kong, by structuring funds with onshore managers and relocating teams to set up these management entities. These full-service management companies will usually need to be SFC licensed (although an SFC licence is not a prerequisite for tax exemption purposes).