The Hong Kong tax system is relatively straight forward. Exposure to Hong Kong profits tax will arise if a person (including a fund) is treated as carrying on a trade or business in Hong Kong either on its own account or through an agent. Further, Hong Kong profits tax will only be levied if Hong Kong sourced profits were derived from such trade, profession or business. The current rate of Hong Kong profits tax is 16.5%.
From the perspective of an investment fund, Hong Kong tax exposure can be divided into two main categories – SFC authorised funds and private funds. It has been well established that SFC authorised funds are specifically exempt from Hong Kong profits tax under the Inland Revenue Ordinance. With respect to private funds or unauthorised funds, pursuant to the Revenue (Profits Tax Exemption for Offshore Funds) Ordinance 2006, unauthorised funds that are resident outside Hong Kong are also exempted from Hong Kong profits tax provided that certain conditions are met.
Capital gains are specifically excluded from Hong Kong profits tax, and capital gains arising from the sale or disposal of shares by an investor would normally be non-taxable. However, in the case of a Hong Kong domiciled unit trust, or other investors such as securities dealers, financial institutions and insurance companies carrying on a business in Hong Kong, such gains may be considered to be trading gains rather than capital gains and potentially subject to Hong Kong profits tax if the gains are Hong Kong sourced unless the above exemptions apply.
With respect to shares that are listed on an overseas stock exchange, the gains from the sale or disposal of the shares on the overseas stock exchange will be considered as sourced outside of Hong Kong and not chargeable to Hong Kong profits tax. In the event that the shares are listed but not traded through an overseas stock exchange, the gains from the sale or other disposal of shares will not be taxed in Hong Kong if the relevant transactions are effected outside Hong Kong.
Interest derived from outside Hong Kong will not be chargeable to tax in Hong Kong (whether by way of withholding or otherwise) under current law. Similarly, interest derived from deposits placed with authorised institutions in Hong Kong is also exempt from the payment of Hong Kong profits tax. Dividend income is not chargeable to Hong Kong profits tax.