HONG KONG (HedgeWorld.com)–Hong Kong's recently adopted ordinance to exempt from taxation offshore funds drew more a sigh of relief from the hedge fund industry than a joyous celebration. For years, hedge fund managers that could stomach the uncertainty of where they stood with the Inland Revenue Department carried out activities in Hong Kong, while those that required certainty stood on the sidelines or went elsewhere in the region.
While it's still early to judge the impact of the legislation, the move is seen as necessary in maintaining Hong Kong's competitiveness as a regional financial center. Passed in March after originally being announced in the 2003?? 1/2 2004 budget, the Revenue Ordinance 2006, effective retrospectively from April 1, 2006, exempts non-resident funds (individuals, partnership, trustee or corporation) from profits tax on certain transactions.
Exempt transactions are defined broadly, intending to cover most types of transactions carried out by investment funds, including transactions in securities, futures, currency contracts, options and exchange-traded commodities.
Hedge funds and traditional long-only funds are going to benefit from the rule, with most hedge fund trading strategies exempt under the new legislation, according to Deloitte's senior manager of the International Tax Services Group, Jesse Kavanagh.
There are some exceptions, though, such as strategies that involve direct lending and hedge funds branching out into private equity-like investment. "These give rise to concern whether they will be covered or not by the rule, as the rule has not been tested yet," Mr. Kavanagh said.
Generally, his hedge fund clients are happy because the ordinance provides a lot more certainty for them in about 95% types of trades they do.
A few other items barred by the Hong Kong government are insurance products, Hong Kong private companies and real estate, which is mentioned but not written in the law, according to Florence Yip, a partner at PricewaterhouseCoopers.
In the new legislation the government also has completely redefined the term "securities" for exemption purposes. Whereas the government originally wanted to borrow the definition of securities as defined in the Securities and Futures Ordinance, it heeded to industry protests that this definition was for regulatory purposes, and the scope too narrowly defined.
Since the enactment of the rule, both Mr. Kavanagh and Ms. Yip have seen more fund managers include Hong Kong in their research for locations in which to set up, but there are still no hard figures as to fund flows, since it is still early.
