Hong Kong’s participation and membership in the Asian Infrastructure Investment Bank
Benefits for Hong Kong as a member of the Asian Infrastructure Investment Bank
Mr CHAN Chun-ying supported the Administration’s funding proposal for Hong Kong to become a member of AIIB. Noting that Hong Kong’s companies and consultants had benefited from Hong Kong’s membership in the Asian Development Bank (“ADB”), he enquired how Hong Kong’s participation in AIIB would help the local industries and business sector. Mr CHAN also enquired whether Hong Kong’s subscription of AIIB’s callable shares would need to be guaranteed by the Central People’s Government (“CPG”).
Proposed amendments to the Inland Revenue Ordinance to extend profits tax exemption to onshore privately offered open-ended fund companies
Conditions for profits tax exemption
Mr CHAN Chun-ying expressed support for the legislative proposal. Noting that subject OFCs were required to meet the “not closely held” condition (“NCH condition”) for a further 24-month period after the first 24-month period, he enquired how the Inland Revenue Department (“IRD”) would monitor compliance with the proposed NCH condition. He also asked if IRD would consider issuing certificate of resident status to the subject OFCs with a view to facilitating them in seeking tax benefits in other tax jurisdictions which had signed Comprehensive Double Taxation Agreements with Hong Kong.
DS(FS)1 explained that the proposed 24-month-plus-24-month ownership requirement under the NCH condition had been formulated taking into account the industry’s views that a reasonable period should be allowed for a subject OFC to meet the NCH condition since a fund would take some time to establish a track record and attract investors. The first 24-month period would start counting from the date the fund accepted its first investors. Further, to prevent a subject OFC from abusing the exemption from tax payment, it would be required to continue to meet the NCH condition for a further period of 24 months after the first 24–month start-up period. The second 24-month period aimed to prevent individuals or entities from taking advantage of the tax exemption in the first 24-month period by repeatedly opening and closing a subject OFC every 24 months. She added that there would be safe harbour rules allowing a subject OFC to seek tax exemption from the Commissioner of Inland Revenue if it failed to meet the NCH condition owing to certain circumstances, such as winding down of activities and investments and market fluctuations. With regards to tax residence, DS(FS)1 said that the subject OFCs would generally be regarded as tax residents of Hong Kong as their central management of control was exercised in Hong Kong and their regulated activities were carried out or arranged in Hong Kong by an investment manager. She added that the Organisation for Economic Co-operation and Development (“OECD”) was formulating its position regarding tax treaty entitlements of investment vehicles in connection with the initiative to combat base erosion and profit shifting. The Government would monitor international developments in this regard to ensure that the issue of certificate of residence status to the subject OFCs was in accordance with international law.
Noting that the structure of funds varied, for instance, pension funds and sovereign wealth funds usually had a large fund size and a large number of investors, Mr CHAN Chun-ying enquired if the Administration would review the ownership requirement under the NCH condition in future, such as reducing the minimum number of investors in the subject OFC and relaxing the maximum 30% participation interest by the originator and the originator’s associates in the OFC. He also asked whether the Administration would consider granting stamp duty exemption to OFCs.
DS(FS)1 responded that the Government’s intention was to attract funds with a larger number of investors and a reasonably large fund size to domicile in Hong Kong. The Government would review the effectiveness of the proposal in attracting the domiciliation of OFCs in Hong Kong at an appropriate juncture in future, and, if necessary, might consider adjusting the NCH condition as the circumstances might warrant. On the issue of stamp duty, she said that OFCs would be subject to the same stamp duty arrangements as unit trusts. Like transfer of units in non-listed unit trust schemes, transferring shares of non-listed OFCs by way of allotment and redemption would not be subject to stamp duty.
Profits tax treatment for open-ended fund companies
Discussion
Mr CHAN Chun-ying noted that as a measure to prevent abuse, consideration or remuneration received by investment managers for providing investment services to tax-exempt OFCs in the course of a trade or business carried on in Hong Kong would be subject to profits tax. He asked whether such consideration or remuneration would be regarded as capital gain and hence could exempt from profits tax.
Senior Assessor (Research)1 said that section 26(a) of the Inland Revenue Ordinance (Cap. 112) (“IRO”) provided for profits tax exemption of dividends received from corporations which were chargeable to profits tax. Given that a subject OFC (which was a corporation) was chargeable to tax in respect of profits derived from transactions in “non-permissible asset classes”, section 26(a) of IRO would apply which might create a loophole by which performance fees and carried interest paid out to investment managers in the form of dividends would be exempt from tax, when in fact such fees and interest were essentially income or profits (and hence should be chargeable to tax). The proposed provision was intended to plug this possible loophole.
Proposed amendments to the Banking Ordinance to enable the implementation of international standards for banking regulation in Hong Kong
Discussion
Mr Chan Chun-ying recognized the need to amend BO to bring Hong Kong’s regulatory regime in line with the latest standards of BCBS. He urged HKMA to take into account views of the banking industry in drafting the new subsidiary legislation, and align the new requirements and implementation according to BCBS standards and timetable. He further called on the Government to make reference to the approach and time frame of other jurisdictions in implementing the new BCBS framework so that AIs in Hong Kong could maintain their competitiveness vis-à-vis their counterparts in other jurisdictions.
DS(FS)1 responded that it was the Government’s target to introduce the relevant amendment bill into LegCo by the fourth quarter of 2017. This would allow time for the development of the necessary rules (i.e. subsidiary legislation under BO) by MA. ED(BP)/HKMA added that HKMA intended to align the reforms with the BCBS timetable and set the new framework generally in line with the exposure limits set by BCBS. It should facilitate the development by internationally active banks of the systems necessary to make the relevant calculations if the standards were consistent across different jurisdictions. HKMA would also observe the implementation of the new BCBS framework by other jurisdictions, and would further consult the banking industry when drafting the rules.
Update on Implementation of automatic exchange of financial account information in tax matters
Discussion
Mr CHAN Chun-ying asked about the Administration’s criteria and approach in identifying AEOI partners, in particular measures taken or to be taken in minimizing compliance burden to FIs. PS(Tsy) clarified that the current proposal was to add 72 confirmed or prospective AEOI partners as Hong Kong’s reportable jurisdictions. Since Hong Kong was not a party of the Multilateral Convention, Hong Kong had to take bilateral approach for discussing and signing BCAA. PS(Tsy) further said that having automatic exchange of information among tax authorities in September each year was a common timeframe for all jurisdictions taking part in the AEOI initiative.