Hong Kong - Option

Recent action by the Organization for Economic Cooperation and Development and the G-20 industrialized nations have targeted tax haven countries, focusing primarily on evasion issues. The HIRE Act (P.L. 111-147) included a number of anti-evasion provisions, and P.L. 111- 226 included foreign tax credit provisions. Some of these proposals, and some not adopted, are in the American Jobs and Closing Loopholes Act (H.R. 4213); the Stop Tax Haven Abuse Act (S. 506, H.R. 1265); draft proposals by the Senate Finance Committee; two other related bills, S. 386 and S. 569; the Bipartisan Tax Fairness and TAX HAVENS TARGETED.Simplification Act (S. 3018) and proposals by President Obama Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Since tax on the income of foreign subsidiaries (except for certain passive income) is deferred until repatriated, this income can avoid current U.S. taxes and perhaps do so indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of “hybrid entities” that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed “check-the-box”) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed can often be shielded by foreign tax credits on other income. On average very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary from about $10 billion to $60 billion per year.
Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, since interest paid to foreign recipients is not taxed, individuals can also evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds.
There is no general third party reporting of income as is the case for ordinary passive income earned domestically; the IRS relies on qualified intermediaries (QIs) who certify nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion. Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obama’s proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income and restrictions on the use of hybrid entities. Provisions to address individual evasion include increased information reporting and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the HIRE Act, the proposed Stop Tax Haven Abuse Act, and the Senate Finance Committee proposals; some revisions are also included in President Obama’s plan.

Embrace Hong Kong’s low rate

Forget the parallel life you might be living elsewhere and embrace Hong Kong. It has much to offer, financially. You won’t be able to resist.Make sure you have slipped off the shackles of tax-residency elsewhere, taking expert advice on this if necessary.US citizens have a hard time, as American shackles are tight wherever they live. For the rest of us, once we are no longer tax resident elsewhere, it is only income and gains on assets left behind that might be subject to tax there.
For those assets left behind, out of sight is not out of mind. File any required home tax returns each year, and budget for supporting cash and tax flows, especially on rented properties.
Once you are clear of other jurisdictions, Hong Kong is refreshing Sure, accommodation is expensive, but you are only taxed on income earned in the SAR, not elsewhere.
Income tax, at a maximum of 15 %, is strikingly modest. Added to that is the delight of completing a Hong Kong salaries tax return in a mere 15 minutes. It is also not uncommon for the government to pay a dollop of cash back to everyone.A pitfall is spending your tax money, as employers are not required to remit tax as you earn. You can use the tax reserve certificate scheme to pay tax as you earn to keep things clear.It takes a little while to appreciate those taxes on investment earnings here are almost non-existent.You might consider moving your assets to Hong Kong. This can be done easily and without a wicked tax backlash at home. It is also a reason to keep savings and investments here.Paymaster in Hong Kong operates a Holding Account which is similar to that of a numbered Swiss account without the high fees to open your numbered account, or to maintain it. We do not need to provide reports to foreign countries searching for tax haven accounts, and even if someone is looking for their citizens off-shore accounts, your funds are hidden under our account numbering system and not listed openly in your name, all the account holders names are private and confidential and only can be disclosed by Court Order specifically targeted at your account.
Many of our clients utilize our Holding Account instead of opening their own Hong Kong or other Off-Shore account, since there are no set up costs and only 0.25% of account balance per month in holding fees. That is only 3% per year which depending on the country you live in, is more than likely a substantial amount less that you would otherwise pay in tax in your own country which range from 30% to 49.5% depending on where you reside.If you only wish to utilize our holding account until you establish your own Off-Shore account elsewhere, that is entirely your decision, we do not have a minimum or maximum time to leave your funds in our Holding Account;
Some of the advantages are:-

• We do not need to provide reports to foreign countries searching for tax haven accounts, and even if someone is looking for their citizens off-shore accounts, your funds are hidden under our account numbering system and not listed openly in your name, all the account holders names are private and confidential and only can be revealed by Court Order specifically targeted at your account.

• Many of our clients utilize our Holding Account instead of opening their own Hong Kong or other Off-Shore account, since there are no set up costs and only 0.25% of account balance per month in holding fees. That is only 3% per year which depending on the country you live in, is more than likely a substantial amount less that you would otherwise pay in tax in your own country which range from 30% to 49.5% depending on where you reside.

• If you only wish to utilize our holding account until you establish your own Off-Shore account elsewhere, that is entirely your decision, we do not have a minimum or maximum time to leave your funds in our Holding Account.

• There are no Account Opening Fees.

• No travel needed to Hong Kong to open your holding account

• It’s quick, easy and safe.

• We operate under the tight security of HSCB Bank Hong Kong

• Funds can be Held in any of our 19 different currencies including Indian INR

• Funds can be received in one currency and then re-sent to your client’s desired destination in another different currency under our unique Private Cash Conversion Services.

The Paymaster in Hong Kong also offer Multi Currency Accounts so you do not lose money on Currency exchange rates unless you choose to change the currency yourself. Multi Currency Account can handle the following Currencies: RMB (CNY), USD, EUR, AUD, GBP, NZD, CAD, SGD, HKD, JPY, CHF, THB.By using the unique services you’ll never need to worry about the security of your funds; we can offer two different locations for your transactions both of which are top Banks within their respective regions.  We receive and disburse funds for individuals and corporate entities alike.

Private Equity Fund tax exemption for Hong Kong

Hong Kong’s position as Asia’s leading hub for Private Equity should be given a significant boost once the Government legislates the proposed new PE fund tax exemption in 2015. The Hong Kong Government recently completed industry consultation in relation to these proposed changes.
The new rules are designed to exempt offshore PE funds from tax in Hong Kong in respect of investments made outside of Hong Kong. The changes are also expected to contain an exciting development to promote the use of Hong Kong companies as an investment holding platform. SPVs established in Hong Kong to hold offshore investments should be exempt from tax in Hong Kong on the investment returns made by a PE fund. This is something which the industry has been seeking for some time, and the proposed changes are likely to be wider reaching than an equivalent exemption which applies in Singapore.The proposed changes were initially announced by the Financial Secretary in his 2013/14 budget speech. It is expected that draft legislation will be introduced to the Legislative Council in coming months.

Existing Offshore Funds tax exemption

Hong Kong’s existing Offshore Funds tax exemption has been in place since 2008 and generally works well for hedge funds which operate in Hong Kong. However, for PE funds, the existing exemption has not been as effective because the exemption did not apply to investments in private companies.Briefly the qualifying conditions for the existing offshore funds tax exemption include:

• The fund is a non-resident fund;
• The profits of the fund result from transactions in specified (section-type) transactions or transactions incidental to specified transactions; and
• The transactions are carried out through or arranged by a specified person.

Where all of the qualifying conditions are satisfied, the investment profits of the offshore fund would be exempt from Hong Kong profits tax.The existing requirements contain a few key limitations which affect the ability of PE funds to rely on the exemption. In particular, gains from investments in private companies are not covered by the exemption.A further limitation is that the investments need to be arranged by a person licensed with the Securities and Futures Commission (SFC) of Hong Kong. In practice, many PE funds are not required to obtain an SFC license so would need to enter into an arrangement with a licensed person in order to satisfy this requirement.

Expected changes

Following the completion of the consultation process, it is expected that the current exemption will be broadened to cover most types of transactions entered into by PE funds. The key changes proposed by the Government include:

• Amending the scope of the exemption to cover transactions in private companies incorporated outside of Hong Kong. • Waiving the requirement for transactions to be carried out through or arranged by a person with an SFC license, if the PE fund is a bona fide private equity fund. • Extending the scope of the offshore funds exemption to cover profits from investments made by SPVs owned by an offshore PE fund, including SPVs established in Hong Kong.

Transactions in private companies

The current exemption will be expanded to cover a broad range of private companies. An investment in a private company incorporated outside of Hong Kong will be covered by the exemption, unless one of the following applies at any time in the three years prior to the relevant disposal of securities in that company:

• The private company carried on business in Hong Kong through a permanent establishment;

• The private company directly or indirectly held equity interests in one or more private companies which carried on business in Hong Kong through a permanent establishment and the aggregate value of those equity interests was more than 10% of the value of the private company’s total assets; or • The private company held real estate in Hong Kong, or the private company directly or indirectly held equity interests in one or more private companies’ with direct or indirect holdings of real estate in Hong Kong; in addition, the aggregate value of the Hong Kong real estate held by the private company plus the value of the equity interests held in the other private companies exceeded 10% of the value of the private company’s.

Exempt investments in private companies include:
Investments in shares, stocks, debentures, loan stocks, funds, bonds or notes. As such, this should be broad enough to cover most types of transactions typically entered into by PE funds, including many debt and hybrid debt/equity investments issued by companies.

Bona fide private equity fund

Officials have acknowledged that a significant proportion of Hong Kong based investment advisors to offshore PE funds are not licensed with the SFC as they do not fall within the licensing regime. As such, if the exemption required PE funds to be licensed by the SFC when in fact they do not need to be, this would create an un-level playing field across the PE industry.As result, the Government is looking to introduce the concept of a bona fide private equity fund.This definition should capture most genuine PE funds being defined as an offshore PE fund which at the final close of the fund has more than 5 investors (associates being aggregated) which collectively have committed more than 90% of the capital of the fund. In addition, the originator of the funds (and their associates) should not be entitled to receive more than 30% of the net proceeds arising from transactions of the fund. Funds which satisfy these requirements would not need to have transactions carried out through or arranged by a person with an SFC license in order to benefit from the offshore funds exemption.

SPVs

Perhaps the biggest opportunity for Hong Kong under the new PE fund exemption will be the ability for PE funds to use Hong Kong companies as an investment holding platform for holding their offshore investments. This will enable PE funds to make use of the substance that they already have in Hong Kong to use Hong Kong as an investment holding jurisdiction. The changes proposed in relation to SPVs represent a significant development which should help to level the playing field with Singapore when PE funds are looking at jurisdictions in which they choose to establish investment platforms. They are also complementary with the efforts being made by Hong Kong to expand Hong Kong’s double tax treaty network and promote Hong Kong as an investment holding jurisdiction. During industry consultation, officials have acknowledged that SPVs are commonly used by PE funds when structuring investments and that exit events can often involve a sale by an SPV instead of by the fund itself. They have agreed that the offshore funds exemption should also apply to both profits derived by an SPV from an investment in a private company and profits derived by an offshore fund from the disposal of an SPV which holds an investment in a private company. It is expected that SPV will be defined quite broadly to include corporations, partnerships, trustees and non-corporate bodies. However, the SPV would need to be owned by a non-resident, be established only for the purpose of investing in private companies and would not be able to carry on any other trade or activity. Importantly, an eligible SPV can include a Hong Kong incorporated company. This is a key change as such companies are already commonly used by PE funds to hold investments in China and are gradually being used more frequently to hold investments in other countries as the Government expands Hong Kong’s double tax treaty network.

Comment

The key benefit of the expected changes is that it will provide investment professionals based in Hong Kong with greater flexibility as to how they undertake their daily tasks without the concern that they may create a tax exposure in Hong Kong for the fund that they represent. This is something that will no doubt be welcomed by many deal teams across town.REGISTER WITH THE PAYMASTER IN HONG KONG TODAY AND ENJOY HUGE SAVINGS USING OUR UNIQUE HOLDING ACCOUNT AND OTHER SPECIALISED SERVICES.