Deacons
  September 17, 2006 - Hong Kong

Hong Kong: Profits Tax Exemption for Offshore Funds - Practice Note Issued

Following the amendments to the Inland Revenue Ordinance earlier this year, the Inland Revenue Department ("IRD") issued its Departmental Interpretation and Practice Notes ("DIPN") No. 43 on 6 September 2006. Whilst the Inland Revenue Ordinance ("IRO") laid down the legal foundation in respect of the Hong Kong profits tax exemption for unauthorised funds, DIPN 43 provides some practical guidance on the application of the exemption. DIPN 43 highlights various issues, including the IRD's interpretation of the exemption provisions and the deeming provisions, the residency of different entities (e.g. an individual, partnerships, unit trusts and mutual fund corporations), the concept of central management and control, the different types of investments and transactions exempted under the IRO and the related tax implications. Helpfully, the appendices to DIPN 43 sets out some practical examples of the IRD's interpretation on the tax implications for different structures. DIPN 43 specifically considers the situation where trustees domiciled overseas delegate back office functions to a Hong Kong based service provider and whether this arrangement will affect the residence of a trust, thereby exposing the trust to Hong Kong profits tax. DIPN 43 confirms that "The mere outsourcing of back office administrative work to a service provider in Hong Kong will not affect the taxable entity's residence". Also helpful is the guidance as to the IRD's approach to determining whether a fund is bona fide widely held, an important concept in the context of the application of the deeming provisions, under which Hong Kong sourced profits of an exempt fund can in certain circumstances be attributed to Hong Kong resident investors pro rata to their holdings in the fund if the fund is not bona fide widely held. DIPN 43 can be accessed from the IRD's website at: http://www.ird.gov.hk/eng/pdf/e_dipn43.pdf. © September 2006 For more information, please contact Rory Gallaher, Partner Email: [email protected] Telephone: +852 2825 9697