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Kong Tax Exemption on Offshore Funds
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: -
- the person carries on a trade, profession or business in
Hong Kong;
- the person derives profits from that trade, profession
or business, other than profits arising from the sale of capital
assets; and
- 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.
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