Hong Kong Gives Funds Tax Concession to Bolster Finance Center

Hong Kong passed a tax concession bill for funds to bolster its competitiveness as an investment management hub.

The Hong Kong Legislative Council approved a bill on Wednesday granting tax concessions for carried interest distributed by private equity funds operating in the city. The relief also applies to related remuneration paid to employees of such firms.

Passing the long-awaited bill is expected to fortify Hong Kong’s fund industry, helping the city preserve its edge as a financial center in a race against Singapore and Shanghai. Lawmakers are seeking to attract the growing number of buyout and venture capital firms -- many benefiting from China’s tech and startup boom -- and their staff and managers to settle in the city.

The tax concession will “boost Hong Kong’s private equity and venture capital industry,” said Josephine Kwan, a Hong Kong-based partner with PricewaterhouseCoopers. PE and VC funds “growing in China will find it attractive to set up a base in Hong Kong and have their general partners based in the city.”

A typical setup might involve investment funds having professionals sourcing deals on the ground in China, while more senior managers who make investment decisions would be based in Hong Kong to enjoy the tax benefits. Hong Kong’s capital markets may also benefit because the city will become a natural choice for the funds to list the companies in their portfolios, Kwan added.

Carried interest is a share of profits that the general partners of private equity or venture capital funds receive in return for their investment management services, regardless of whether they contribute any initial cash.

‘Pressing Need’

Both fund managers and employees carrying out relevant investment management services will benefit from the tax concession, which will be retroactively applied from April 1, 2020.

Hong Kong had about 560 private equity firms as of 2019, and they managed about $170 billion as of the third quarter of last year, according to a legislative council paper.

While the city’s lawmakers said it would be difficult to quantify the benefits of the move, “Hong Kong had already lagged behind its competitors including Singapore in the development of PE fund industry,” the paper said. “There was a pressing need to introduce the proposed tax concession regime to sharpen Hong Kong’s competitive edge on this front.”

The step provides a welcome boost to Hong Kong at a time when China’s tightening grip in the city risks undermining its status as a global financial center.

“The tax change will help cement Hong Kong’s position as Asia’s leading investment funds hub,” said Wilber Chiu, Hong Kong-based managing director of financial services provider Apex Group.

The development could present challenges for competitors like Singapore, which currently has no equivalent tax policies, said Kwan.

“It would be interesting to see what Singapore will do to keep its competitiveness, as it watches Hong Kong’s development closely,” she said.

©2021 Bloomberg L.P.

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