Hong Kong Profit Tax

Under the current Hong Kong tax legislation (Section 14(1) of the Inland Revenue Ordinance ("IRO") refers), the following three conditions must be satisfied before a person can be liable to profits tax: -

1. the person carries on a trade, profession or business in Hong Kong;
2. the person derives profits from that trade, profession or business, other than profits arising from the sale of capital assets; and
3. those profits arise in or are derived from Hong Kong.

As can be seen, a foreign investor will not be subject to Hong Kong profits tax if it does not carry on a business in Hong Kong. However, even if an investor carries on a business in Hong Kong, it would not be subject to tax on gains from the sale of a capital asset. We note that there are some considerations in determining whether an entity is carrying on a business in Hong Kong and whether an asset is on capital account. These factors are not addressed in this report.

In addition to the above, it is worth noting that, in the Financial Secretary's Budget Speech on 5 March 2003, the Financial Secretary advised that the Government wanted to reinforce Hong Kong's status as an international financial centre. Therefore to address the concerns of fund managers, they will amend the IRO (probably Section 26A or enact a new section) to exempt offshore funds from profits tax to bring Hong Kong in line with other major financial markets such as New York and London. (Emphasis added). As of the date of preparing this addendum, the form this exemption will take is not known.

Taxation of Offshore Venture Capital and Private Equity Funds
(“Offshore Funds”) in Korea

The Hong Kong Venture Capital Association ("HKVCA") is concerning about the continuing uncertain situation in respect of the imposition of capital gains tax and, more recently, dividend withholding tax on investments made by Offshore Funds in Korea.

As the main business of our members is the management of Offshore Funds. HKVCA had 120 members managing in excess of USD25 billion. Our members manage a mixture of country specific and regional funds and Korea is an important destination for many of our members, particularly in the latter category which represents by far the largest of the two. In fact, HKVCA members would almost certainly be the largest manager community anywhere of Offshore Funds active in Korea.

Over the past few months, many of our members have expressed their concern over possible retroactive changes in the taxation status (as regards both capital gains tax and withholding tax on dividends) of their investments arising from an initiative currently being taken by the NTS against Offshore Funds and the continuing unresolved outcome of certain pilot cases.

Offshore Funds enjoy an exemption to capital gains tax in all the major investment destinations in Asia targeted by our members. We, therefore, believe it would be very unwise for Korea to make itself uncompetitive by seeking to impose capital gains tax and altering the dividend withholding tax rate on investments made in Korea by Offshore Funds.

We are therefore writing to urge the Korean government to take prompt action in resolving this matter in favour of the Offshore Funds because we are of the view that an unfavourable outcome for the Offshore Funds would have a very material negative impact on not only our member's enthusiasm for investment in Korea but also on inward FDI generally into Korea.