LCQ15: Attracting overseas private equity funds to re-domicile to Hong Kong
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Following is a question by the Hon Duncan Chiu and a written reply by the Acting Secretary for Financial Services and the Treasury, Mr Joseph Chan, in the Legislative Council today (March 15):
Question:
This Council passed the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the Bill) in 2021 to provide tax concessions for carried interest distributed by private equity (PE) funds operating in Hong Kong, with a view to attracting more PE funds to operate in Hong Kong and boosting more investment management and related activities, thereby creating business opportunities in related professional services and bringing economic benefits to Hong Kong. In this connection, will the Government inform this Council:
(1) whether it has comprehensively reviewed the effectiveness of the measures relating to the Bill since their implementation; if so, of the details, such as the number of enquiries received by the relevant government departments and regulatory bodies from overseas PE funds and the main contents involved in such enquiries, the number of applications from overseas PE funds for registration in Hong Kong (including the number of applications approved, rejected and automatically withdrawn), as well as the types of overseas PE funds successfully approved for registration in Hong Kong and the total value of assets under management by them; if not, the reasons for that, and whether it will conduct a review;
(2) whether it has compiled statistics on, among PE funds which have re-domiciled from overseas to Hong Kong, the number of those which have actively participated in investment business, as well as the major types of such funds, the industries and enterprises in which they have invested and the investment amounts respectively; of the major types and number of funds which have not been participating actively or have given up halfway on participating actively in investment business after re-domiciliation to Hong Kong, and how the authorities deal with and follow up the situation concerned;
(3) whether it has assessed the benefits brought by PE funds which have re-domiciled from overseas to Hong Kong to the investment management and related professional services in Hong Kong as well as to Hong Kong’s overall economy, and how the related benefits differ from the authorities’ original expectation; whether it has set clear targets and introduced new measures for further enhancing the overall benefits concerned; and
(4) given that members of the industry have quite a number of views on the existing tax concession measures for carried interest, and they consider that the relevant legislation still has room for improvement, whether the authorities will consider expeditiously launching public consultation in respect of introducing further amendments to the relevant tax legislation; if so, of the details and the timetable; if not, the reasons for that?
Reply:
President,
Hong Kong is an international asset and wealth management centre. As of end-2021, the asset and wealth management business of Hong Kong amounted to HK$35.5 trillion, with 65 per cent of the funding sourced from non-Hong Kong investors. Hong Kong’s private equity (PE) capital under management as of end-2022 amounted to US$208.3 billion, ranking second in Asia.
In consultation with the Companies Registry (CR), the Inland Revenue Department (IRD) and the Securities and Futures Commission (SFC), my reply to the question is as follows.
The open-ended fund company (OFC) regime has been in operation since July 2018, facilitating an OFC to be set up as a public or private fund. As of end-February 2023, over 120 OFCs have been established in Hong Kong, including 104 private funds. OFCs have a diversified investment portfolio which covers asset categories of equities and fixed income bonds spanning Asia, the US, Europe and emerging markets. Apart from traditional sectors, OFCs also invest in a wide range of other sectors such as technology, mining, environmental protection, healthcare, artificial intelligence, etc. Private OFCs are not required to disclose their asset size to the SFC.
The Government has introduced the limited partnership fund (LPF) regime since August 2020 to attract private investment funds to set up and operate in Hong Kong in the form of limited partnerships. As of end-February 2023, about 600 LPFs have been registered in Hong Kong. LPFs also invest in a wide range of products, including shares, bonds, notes and other securities issued by private companies, property development, education, etc. LPFs being private in nature are not required to disclose their assets under management to CR.
Given Hong Kong’s strong community of investors and professional service providers, proximity to the Mainland and active initial public offering market for conducting fundraising, deal sourcing and investment management activities, Hong Kong is an attractive domicile for funds. The Government has been proactively encouraging fund formation and operation in Hong Kong, with a view to developing Hong Kong into a preferred fund domicile, thereby inducing demand for various relevant professional services. The Government has put in place a fund re-domiciliation mechanism since November 2021 for non-Hong Kong funds set up in the form of OFCs or LPFs to re-locate to Hong Kong. As of end-February 2023, the CR and the SFC have received over 60 enquiries on fund re-domiciliation to Hong Kong, and four applications (including two OFCs and two LPFs) which were all approved.
In September 2022, the Shenzhen Qianhai Authority and the Hong Kong Special Administrative Region Government jointly promulgated the 18 Measures for Supporting the Linked Development of Shenzhen and Hong Kong Venture Capital Investments in Qianhai with a view to providing facilitation and preferential policies for the Hong Kong PE industry, including supporting eligible Hong Kong LPFs to set up qualified investment entities in Qianhai to commence onshore investment. In February 2023, the Mainland promulgated the “Opinion on Providing Financial Support for the Comprehensive Deepening Reform and Opening Up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone”, setting out 30 measures on financial reform and innovation, including measures to further support Hong Kong PE funds’ development in Qianhai. We will continue to maintain close communication with the Mainland authorities to implement the relevant measures.
The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 (the Amendment Ordinance), which has been effective from May 7, 2021, provides tax concessions for carried interest distributed by eligible PE funds operating in Hong Kong. IRD has consulted the industry on the Departmental Interpretation and Practice Notes (DIPN) being prepared for the Amendment Ordinance, and will, after careful consideration of the views collected, formally publish the DIPN to facilitate the industry’s better understanding of the application of the Amendment Ordinance.
The Financial Secretary has announced in the 2023-24 Budget that the Government will review the existing tax concession measures applicable to funds and carried interest. The Government will engage the industry, listen to their views on the tax concession regimes, and consider the need to amend the relevant legislation.