3 January 2025
Mr. Christopher Hui, GBS, JP Secretary for Financial Services and the Treasury Financial Services and the Treasury Bureau 24/F, Central Government Offices 2 Tim Mei Avenue Tamar, Hong Kong
Dear Chris,
Industry Consultation on Preferential Tax Regimes for Privately-offered Funds, Family-owned Investment Holding Vehicles and Carried Interest
The Hong Kong General Chamber of Commerce welcomes the opportunity to respond to the captioned consultation.
We support the proposed enhancements to the preferential tax regimes for the asset and wealth management industry, which will further solidify Hong Kong’s position as a premier international financial centre. To encourage greater usage of these enhanced regimes, we reiterate our call to expand the scope of qualifying assets to meet the evolving demands of investors.
We hope you will find our comments useful.
Yours sincerely,
Patrick Yeung CEO
Encl.
Submission by The Hong Kong General Chamber of Commerce
1. The Hong Kong General Chamber of Commerce (HKGCC) welcomes the opportunity to comment on this consultation paper (CP). We welcome the Government’s proposal aimed at enhancing the preferential tax regime for family-owned investment holding vehicles (FIHVs). These enhancements are crucial for maintaining Hong Kong’s competitiveness as a global financial hub. We believe, however, that there is still room for further refinements to the proposed measures. 2. These are (1) expanding the definition of qualified assets to include commodities like gold, which would be in line with the 2024 Policy Address’ initiative to bolster Hong Kong’s standing as an international centre for commodity trading. Additionally, we reiterate our call to further diversify the scope of qualified assets to include virtual assets and collectible assets such as art pieces, antiques, classic cars and wine, which are popular investment choices; and (2) applying these enhancements on a retrospective basis, ideally from the year of assessment commencing on or after 1 April 2024. This approach would not only provide immediate benefits to existing investment vehicles but also demonstrate the Government’s commitment to supporting family-owned offices. By implementing these enhancements retroactively, the Government can foster a sense of confidence and certainty among FIHVs, which would in turn have the positive knock-on effect of attracting local and international investors to engage more actively and fully in the Hong Kong market.
3. The following sets out our responses to, what we believe to be, the salient issues raised in the CP:
Response to selected CP questions
Question 4: Do you consider that there are other types of arrangements which may not fulfill the general conditions of “fund” but should be covered by the UFR? If yes, what is the rationale?
4. We suggest that Decentralised Autonomous Organisations (DAOs), which may not fulfill the general conditions of a “fund”, be covered by the unified tax regime for funds (UFR). The rationale is as follows:
i. Collective Investment: DAOs often pool resources from multiple participants to pursue common investment goals, similar to traditional funds. This collective nature aligns with the spirit of the UFR, which aims to protect investors and ensure transparency. ii. Innovative Structure: DAOs operate through smart contracts based on blockchain technology, to enable decentralised governance and decision-making. While this structure differs from traditional funds, it entails collective investment and risk-sharing, which aligns with the fundamental principles of a fund. iii. Economic Participation: DAOs enable a wide range of participants to contribute to and benefit from investment opportunities in a transparent manner. Including them under the UFR would recognise their role in fostering economic participation and innovation albeit in the virtual asset space. iv. Global Leadership: By incorporating DAOs into the UFR, Hong Kong would position itself as a pioneer in the global promotion of virtual assets. This forward-thinking approach would attract investment, enhance regulatory clarity, and solidify Hong Kong’s status as a leading hub for digital finance.
5. In summary, recognising DAOs under the UFR not only aligns with the evolving financial landscape but also underscores the Government's commitment to embracing innovation in the realm of virtual assets. Question 11: Do you agree with the proposed inclusion of loans and private credit investments?
6. We agree with the proposed inclusion of loans and private credit investments. To further enhance the scheme, we suggest that Section 16(2) of the Inland Revenue Ordinance also be amended so that interest paid by a borrower to an entity engaged in loans and private credit investments be deemed deductible for profits tax purposes. Question 12: Do you agree with the proposed scope of “virtual asset” below?
Proposed scope of “virtual asset”: A virtual asset has the meaning given by section 53ZRA(1) of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“the Ordinance”) with the modification such that section 53ZRA(2)(a)(i) of the Ordinance does not apply, but does not include a cryptographically secured digital representation which provides a holder with an interest in any underlying asset other than Schedule 16C assets.
7. We agree with the proposed scope of “virtual asset”. To provide further clarity, we recommend explicitly including derivatives (futures contracts, options, etc.) under the meaning of virtual assets. Question 13: Do you have any suggestions on other assets to be included as permissible assets? If yes, please provide the suggested coverage/definitions of the assets, preferably with source reference. 8. We suggest consideration be given to the inclusion of disposal gains arising from the holding of operating assets such as data centers, logistics warehouses, and hotels. The rationale behind this is that, although Hong Kong does not tax capital gains, prolonged discussions with the Inland Revenue Department are the norm to ascertain disposal gains are of a capital nature. By including gains from the disposal of operating assets as a permissible asset, this would not only be conducive to strengthening Hong Kong’s standing as an asset management hub, but also boost the local property market, which is an integral aspect of our economy. 9. To deter abuse, we recommend that operating assets be held by funds for no less than five years to qualify for UFR status. Question 20: Do you agree with the proposed exclusions from the anti-round tripping provisions? Do you have any other suggestions on the persons to be excluded?
10. The wording of the proposed exclusions from the anti-round tripping provisions appears cumbersome and unclear. We recommend that more concise language be provided and, where possible, examples be included to promote clarity and improve understanding. Question 21: What is your view on the proposed features of the tax reporting mechanism? Do you have any suggestions on the design features of the tax reporting mechanism which will facilitate ease of compliance?
11. We propose minimising the tax reporting requirements. This is because most UFR funds typically do not have reporting obligations. Imposing additional tax reporting requirements could discourage funds from using this tax exemption under the UFR. Question 23: Do you agree with the proposed changes to the tax concession regime for FIHVs? 12. We agree with the proposed amendments to the tax concession regime for FIHVs. Furthermore, we recommend the inclusion of the foundation structure within the framework of the proposal. A foundation is a legal entity established to hold assets, manage investments, and conduct business activities. Unlike corporations or trusts, foundations are typically used for estate planning, asset protection, and philanthropic purposes. They offer several unique features:
i. Perpetual Existence: Foundations can exist indefinitely, beyond the lifespan of their founders, ensuring long-term management and preservation of assets. ii. Asset Protection: Assets held within a foundation are generally protected from personal liabilities of the founder or beneficiaries, providing a layer of security. iii. Separation of Control and Ownership: Foundations allow for the separation of control and ownership, meaning the founder can set the foundation's objectives and governance without directly owning the assets. iv. Flexibility: Foundations can be tailored to meet specific needs, whether for managing family wealth, supporting charitable activities, or other purposes.
13. In summary, a foundation provides a flexible and efficient structure for managing and protecting assets, making it a valuable tool in various financial and estate planning strategies.
14. Incorporating the foundation structure into the tax concession regime could significantly enhance its attractiveness and utility for investors. This inclusion would provide a more comprehensive set of benefits, allowing for greater flexibility in wealth management and investment strategies. By doing so, the regime would not only cater to a broader range of investment vehicles but also align with international best practices, thereby making Hong Kong more competitive on a global scale.
HKGCC Secretariat January 2025
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