Hong Kong's New Limited Partnership Fund Regime for ......Hong Kong's New Limited Partnership Fund Regime for Funds 8 Deeming provisions Attribution of taxable income to certain HK

Hong Kong's New Limited Partnership Fund Regime for FundsA new opportunity for private equity market18 May 2020

2Hong Kong's New Limited Partnership Fund Regime for Funds© 2020. For information, contact Deloitte China.

Agenda

Topic Speakers

Introduction Anthony Lau

Hong Kong: Asia’s Premier Private Equity Hub Anson Law

Unified Fund Exemption Regime Roy Phan

Panel Discussion All speakers

Q & A All speakers

3Presentation title© 2020. For information, contact Deloitte China.

Unified Fund Exemption Regime Roy Phan


Features of the “unified” fund exemption regime

“Unified” fund exemption regime

A “fund” as defined (regardless of location of its

central management and control)

Transactions in “qualifying assets” (include private

companies incorporated in HK subject to conditions)

and incidental transactions (with a threshold)

Qualifying transactions carried out or arranged in HK by a “specified person”

or

the “fund” is a qualified investment fund


Features of the “unified” fund exemption regime Decision tree for tax exemption on PE investment

Yes

(a) The private company holds

>10% of its assets in immovable

property in Hong Kong

(b) The private company is

controlled by the fund or a

special purpose entity

No tax exemption

Yes No

Tax-exempted

No

(c)(i) The private company has

been held by the fund or a

special purpose entity for

less than 2 years

Yes

Tax-exempted(c)(ii) The private company holds

more than 50% value of its assets

in short-term assets

Yes

No tax exemption Tax-exempted

No

No

• Not a “qualifying asset”

• Not immoveable property in HK

• Held for less than 3 consecutive years before disposal


“Specified person” or “qualified investment fund”Features of the “unified” fund exemption regime

Satisfy either:

(i) Qualifying transactions carried out or arranged by a “specified person” (i.e. corporation or authorized financial institution registered under the SFO for carrying out any regulated activity)

or

Originator Investor InvestorInvestor Investor Investor

Fund

Capital commitments < 10%Net proceeds

≤ 30%

Qualified investment fund

(ii) The fund is a “qualified investment fund”


Features of the “unified” fund exemption regime No tainting effect

With tainting

Fund

Fund

Qualifying

transactions

Non-qualifying

transactions

All or nothing

No tax exemption; general tax rules apply

Without tainting

Fund

Qualifying

transactions

Non-qualifying

transactions

Tax-exempt No tax exemption; general tax rules apply


Deeming provisions

Attribution of taxable income to certain HK resident investors who hold a benefit interest in the tax-exempt fund, if:

• The HK resident investor, either alone or jointly with his associates (whether resident or not), holds direct and/orindirect beneficial interest of ≥ 30% in the fund; or

• The HK resident investor has direct and/or indirect beneficial interest in the fund and the fund is an associate of the HKresident person


Taxation of management fee and carried interestPotential impact of the “unified” fund exemption regime

Management fee

•Annual meetings between IRD and HKICPA

− Functions, assets and risks attributed to the HK operations?

− Challenge service fees received by HK fund managers or advisers if not on an arm’s length basis

− Potential partial offshore claim

Carried interest

•DIPN

− Could be service fee/ employment income; may seek to tax if not an arm's length return on a genuine investment

•2020/21 Budget

− Tax concession on carried interest

More fund management

activities in Hong Kong?

How would this impact the

taxation of management

fee and carried interest?

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Hong Kong's New Limited Partnership Fund Regime for ......Hong Kong's New Limited Partnership Fund Regime for Funds 8 Deeming provisions Attribution of taxable income to certain HK