The Financial Services & the Treasury Bureau has launched a consultation on how to provide for exemption for offshore funds from profits tax under the Inland Revenue Ordinance.

The bureau says further to a discussion with the industry last year, the Government has refined the approach to amend the ordinance to effect the proposed exemption for offshore funds. The aim of the paper is to solicit views on the latest approach, under which profits tax exemption would be granted to non-residents on income derived from securities trading transactions undertaken in Hong Kong through an agent who is a broker or an approved investment adviser.

To prevent abuse, resident investors holding, either alone or with associates, 30% or more of the interest in the tax-exempt non-resident will be deemed to have derived taxable profits in respect of the securities trading transactions carried out by the non-resident in Hong Kong and liable to tax.

However, the profits tax charge on the resident investor will not cover any non-taxable capital gains or offshore profits of the non-resident. In addition, resident investors in a non-resident fund that is bona fide widely held or that is currently exempted from tax under the ordinance will also not be subject to the deeming provisions.

Under the latest approach, brokers and investment advisors will not be required to keep records of the residence status of the beneficial owners of the non-resident claiming the tax exemption. This is to address the industry's concern in response to the approach suggested earlier on the compliance burden on the brokers and investment advisers.

The consultation paper is available on the bureau's website, and interested parties are invited to submit comments by January 31.