Hong Kong budget aims to expand fund industry with tax incentives

The government has introduced new tax incentives to encourage more overseas fund managers to set up in the city and promote Hong Kong as an international asset management centre.

To attract more private equity funds to domicile in Hong Kong, Financial Secretary John Tsang Chun-wah said the government would propose law changes to extend an exemption from profits tax for offshore funds that invest in overseas private companies and do not own property or businesses in the city.

A revision of investment laws in 2006 exempted offshore funds from paying the tax if they did no business in Hong Kong besides qualifying stock or futures transactions. That brought Hong Kong into line with other international financial centres, such as New York and London.

But Hong Kong still lagged as the exemption did not apply to offshore private equity funds that invested directly in companies.

Tsang said the proposed change would "allow private equity funds to enjoy the same tax exemption as offshore funds" and that the government would consult market participants about the law change. He also planned to allow Hong Kong funds a more flexible structure, in place of the current law that requires investment funds established in Hong Kong to take only the form of trusts.

"As an international financial centre, Hong Kong should provide a more flexible business environment for the industry to meet market demand," he said.

"To attract more traditional mutual funds and hedge funds to domicile in Hong Kong, we are considering legislative amendments to introduce the Open-ended Investment Company, an increasingly popular form used in the fund industry."