Member Article

The second consultation on exemption of offshore funds from profits tax ended on 31 January 2005. Section 20A of the Inland Revenue Ordinance (IRO) provides that where a person is a non-resident and carries on business through an agent in Hong Kong, that non-resident can be charged to tax in the name of the agent and that tax can be recovered from the agent. However, section 20AA provides for an exemption whereby qualifying agents (i.e. brokers or approved investment advisers), subject to certain conditions, are relieved from the requirement to pay the potential profits tax liability of their non-resident clients (extracted from the second Consultation Paper on Exemption of Offshore Funds from Profits Tax dated December 2004). The initial proposal to exempt offshore funds from profits tax provided that not more than 20% of the fund was owned by Hong Kong residents was criticised by the industry as impractical and unduly burdensome. The revised proposal shifts the inability from the fund to resident investors who own more than 30% of the fund. Whilst this change has been welcomed in principle, a number of modifications have been suggested, including: 1. The removal of the conditions for exemption in section 20AA. 2. The extension of the exemption to all profits, rather than just those arising from securities. In view of the complexities involved, and the importance of the issue to the industry, the Government has been urged to give the industry an opportunity to comment on any draft legislative amendments before they are submitted to the Legislative Council for consideration.