Exempting offshore funds from profits tax is vital for Hong Kong to reinforce its status as an international financial centre and enhance its competitiveness, Secretary for Financial Services & the Treasury Frederick Ma says.

The Legislative Council today passed the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 which seeks to amend the Inland Revenue Ordinance to implement the proposal to exempt offshore funds from profits tax.

Mr Ma told lawmakers other international financial centres, such as New York and London, had exempted offshore funds from tax. This meant Hong Kong's fund industry is facing keen competition for foreign investments.

"The proposed exemption will strengthen Hong Kong's competitiveness in attracting new offshore funds and encourage existing funds to continue their investment.

"It will lead to an increase in market liquidity and employment opportunities in the financial services and related sectors. Downstream service sectors such as brokers, accountants, bankers, lawyers, will also benefit from the proposal," Mr Ma said.

Under the proposal, individuals', partnerships', corporations' and trust estate trustees' offshore funds will enjoy tax exemption by satisfying two conditions - the entity that owns the fund is non-resident, and does not carry on any business in Hong Kong other than the fund-related qualifying transactions.

Mr Ma said the well-established common law rule of 'central management and control' many other places adopt will be used to determine whether a non-individual entity is resident in Hong Kong or not.

Industry accepts scope of exemption

He said the proposed scope of the qualifying transactions includes those in securities, futures contracts, foreign-exchange contracts, deposits other than by way of a money-lending business, foreign currencies and exchange-traded commodities.

The industry has generally accepted the proposed scope of exemption, which will apply retrospectively to the year of assessment 1996/97.

To prevent possible abuse by residents disguised as non-residents, the bill contains provisions which will apply to a resident who, alone or jointly with his associates, holds beneficial interest of 30% or more in an exempt offshore fund, or holds any percentage where the exempt offshore fund is an associate of the resident.