A bill allowing the exemption of offshore funds from profits tax will be tabled at the Legislative Council on July 6. The Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 aims to amend the Inland Revenue Ordinance to implement the proposal, which will reinforce Hong Kong's status as an international financial centre and enhance the city's competitiveness.

The exemption will attract new offshore funds and encourage existing ones to continue investing here. Anchoring offshore funds in Hong Kong markets could also help maintain international expertise, promote new products, and further develop the local fund management industry.

The Financial Services & the Treasury Bureau said the proposal will lead to a surge in market liquidity and job opportunities in the financial services and related sectors. Under it, offshore funds are exempt from tax in respect of profits derived from dealings in securities, dealings in futures contracts and leveraged foreign exchange trading in Hong Kong, conducted by corporations and authorised institutions registered under the Securities & Futures Ordinance.

Curbing abuse

To prevent abuse or round-tripping by local funds disguised as offshore funds seeking to take advantage of the exemption, it has been proposed to introduce as a deterrent measure specific anti-avoidance provisions to deem a resident holding a beneficial interest in a tax-exempt offshore fund to have derived assessable profits in respect of profits earned by such offshore funds in Hong Kong.

Considering that a resident may have difficulty in obtaining information from an offshore fund in which they only hold a small percentage of beneficial interest, the deeming provisions would not apply if the resident holds less than 30% of the offshore fund.

The exemption provisions will apply with retrospective effect to the year of assessment starting April 1, 1996, to provide legal certainty on the tax liability of offshore funds in the past years. The deeming provisions will apply upon enactment of the bill, which will be gazetted June 30.