In December 2020, the Office of Financial Services and the Treasury (the “FSTB“) From the HKSAR government issued the 2021 Domestic Revenue (Amendment) Bill (Tax Concessions for Deferred Interest) (the”Bill”) In the Gazette. The bill seeks to amend the Inland Revenue Ordinance (Cap. 112) to provide tax benefits for deferred interest distributed by qualifying private equity funds operating in Hong Kong.
The FSTB has proposed to define “qualifying interest bearing” as an amount received by or acquired from a person as a return linked to earnings, subject to a critical rate which is a preferred rate of return on investments in the fund which is stipulated in the agreement governing the operation of the fund. In the bill, the FSTB proposed that eligible deferred interest would be charged at a 0 percent profit tax rate, while 100 percent of eligible deferred interest would be excluded from employment income for the calculation of payroll tax.
In order to benefit from the tax advantages regime, the following conditions must be met:
1. “Eligible deferred interest payer”
Eligible interest must be distributed by a fund that falls under the term “fund” under Article 20AM of the Internal Revenue Ordinance (chap. 112). The fund must be certified by the Hong Kong Monetary Authority (the “HKMA») And, in the case of a non-resident fund, an authorized local representative must be appointed.
An application for certification can be filed with HKMA if investments and local substance requirements are met. In the year in which the eligible deferred interest distributions are made, the fund is required to engage an external auditor to verify that the substantive business requirements and the conditions of the tax benefit regime have been met.
2. “Eligible operations of certified investment funds”
It is proposed that the eligible accrued interest arises from private equity transactions and must meet the relevant requirements of the profit tax regime for funds offered by the private sector under Articles 20AM to 20AY of the IRO regime for private sector funds. funds.
3. “Eligible deferred interest recipients”
Fund managers can only benefit from the tax reduction if they provide investment management services, or cause such services to be provided, to an HKMA certified investment fund in Hong Kong from the day on which they begin to provide these services to the fund, until the day they receive the interest. Investment management services must also not be partially provided through a permanent establishment operated by the fund manager outside Hong Kong.
In the case of employees, they can only receive a tax benefit if they are employed by a qualified fund manager or a partner of such qualified fund manager who operates a business in Hong Kong. Under the “substantial activities” requirement and for preferential tax treatment to apply, it has been proposed that eligible deferred interest recipients have at least two qualified full-time employees and operating expenses. over HK $ 2 million for its investment management services. incurred in Hong Kong.
The bill was passed by the Legislative Council on April 28, 2021. The concession will have retrospective effect and will apply to eligible deferred interest received or accrued by eligible persons as of April 1, 2020. However, the bill specifies that the concession will not apply to deferred interest accrued before April 1, 2020, even if it is not received until after April 1, 2020.