Offshore Tax Planning

Hong Kong's Legislative Council yesterday passed the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 which seeks to amend the Inland Revenue Ordinance to implement the proposal to exempt offshore funds from profits tax.

Secretary for Financial Services & the Treasury Frederick Ma told lawmakers that exempting offshore funds from profits tax is vital for Hong Kong to reinforce its status as an international financial centre and enhance its competitiveness.

"The proposed exemption will strengthen Hong Kong's competitiveness in attracting new offshore funds and encourage existing funds to continue their investment," he stated.

"It will lead to an increase in market liquidity and employment opportunities in the financial services and related sectors. Downstream service sectors such as brokers, accountants, bankers, lawyers, will also benefit from the proposal," Mr Ma added.

Under the proposal, individuals', partnerships', corporations' and trust estate trustees' offshore funds will enjoy tax exemption by satisfying two conditions - the entity that owns the fund is non-resident, and does not carry on any business in Hong Kong other than the fund-related qualifying transactions.

Mr Ma said the well-established common law rule of 'central management and control' many other places adopt will be used to determine whether a non-individual entity is resident in Hong Kong or not.

He said the proposed scope of the qualifying transactions includes those in securities, futures contracts, foreign-exchange contracts, deposits other than by way of a money-lending business, foreign currencies and exchange-traded commodities.

The exemption will apply retrospectively to the year of assessment 1996/97.

To prevent possible abuse by residents disguised as non-residents, the bill contains provisions which will apply to a resident who, alone or jointly with his associates, holds a beneficial interest of 30% or more in an exempt offshore fund, or holds any percentage where the exempt offshore fund is an associate of the resident.