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Hong Kong to amend unpopular PE tax exemption

Tuesday, December 11, 2018

Hong Kong plans to amend the tax exemption for private equity funds, which was introduced in 2015 with a view to making it easier for GPs to operate locally but has been criticized by industry participants as unworkable.

The exemption means that PE firms with funds domiciled offshore no longer have to set up structures designed to avoid triggering permanent establishment in Hong Kong and becoming liable for local tax. As a result, more substantive activity can take place locally, rather than ancillary support work.

However, practice notes issued in 2017 created two problems. First, funds that hold Hong Kong real estate assets or shares in a company with local business operations that exceed 10% of the overall value of the target company would not qualify for the exemption. Second, special purpose vehicles (SPVs) that exist beneath a fund are only exempt if their role is limited to holding and administering investments – effectively excluding what is required to prove local substance.

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