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." A government source said both measures aimed to encourage more fund houses to set up here, to boost the city's status as a fund management centre. The source, who did not want to be named, said that among the roughly 1,700 authorised funds in the city, only about 300 were domiciled here. Half of all funds sold in the city are domiciled in Dublin or Luxemburg. Tsang said the government was also in the process of negotiating with mainland authorities to establish mutual recognition, so as to allow Hong Kong-domiciled funds to be sold on the mainland and mainland funds to be sold in Hong Kong. He did not give a timetable, however. Sally Wong, chief executive of the Hong Kong Investment Funds Association, said mutual recognition with the mainland and the expanded tax exemption would boost the local industry. "These measures, if implemented successfully, would attract fund houses which are eyeing Asian and mainland companies. This will benefit the Hong Kong fund industry substantially in the long term," Wong said. George Leung, of HSBC, said the new measures were in line with industry views. "This should put us on a more level playing field with other regional competitors." Davy Yun, a tax partner at Deloitte China, said the local fund industry had been seeking an expansion of the tax exemption for private equity funds for a long time. "The move will help position Hong Kong as an international asset management centre. However, we believe the government can consider further extending the exemption to include local funds as well, in order to truly enhance the industry in the territory," Yun said.