Private equity industry participants have welcomed the Hong Kong government’s Budget pledge this week to provide tax concessions for carried interest to bring the city in line with other jurisdictions.
And there are expectations that the move will result in a broad takeup – initially by local asset managers – of Hong Kong’s planned limited partnership regime, a new framework for investment funds.
“[The tax concession] is the key piece that has been missing that required clarification before the new limited partnership [LP] regime for funds can be implemented,” said Effie Vasilopoulos, a Hong Kong-based partner at law firm Sidley Austin.
The tax concession proposal has boosted interest in the new framework from Hong Kong-based firms, she added. But multinationals with offices in Hong Kong and substantial operations in Asia are also expressing interest, Vasilopoulos said, declining to identify any names.
“Tax and regulatory transparency are vital to the success of the new regime,” she added.
Sidley Austin has been commissioned to draft the new fund law and Vasilopoulos has been closely involved in the consultation process. The plan is for the the legislation to be proposed to Hong Kong's Legislative Council in by the end of June.
PE HUB PUSH
Hong Kong has been working to create a more favourable environment for private equity managers in recent years to attract them to domicile funds locally, having fallen behind arch-rival Singapore on this front.
Last year Hong Kong introduced a profit tax exemption for both onshore and offshore funds provided certain conditions were met. But its tax treatment of carried interest as income – rather than as an exempt gain or distribution – still made it less attractive than rival hubs.
In March last year financial secretary Paul Chan promised to review the arrangement and on Wednesday (February 26) he confirmed he would do so.
“With a view to attracting more private equity funds to domicile and operate in Hong Kong, we plan to provide tax concession for carried interest issued by private equity funds operating in Hong Kong subject to the fulfilment of certain conditions,” Chan said in his budget speech.
He added that the authority would consult the industry on the proposal and that the relevant arrangement would apply from 2020-21.
A review of Hong Kong’s treatment of carried interest will help make the city a more competitive base for private equity activities, said John Levack, vice-chairman of the Hong Kong Private Equity and Venture Capital Association (HKVCA), in a statement yesterday.
In the same release, HKVCA chairman Chin Chou commented that the introduction of the LP regime “fits with global tax trends encouraging the combination of form and substance in legal domicile and… should see more private equity activities brought onshore in Hong Kong”.
He is referring to the push by numerous jurisdictions to have private equity fund domiciles and operations located together.
Another Hong Kong-based lawyer supported this view. “I expect widespread adoption as many Hong Kong-based firms recognise that this is part of a general regulatory direction that is here to stay,” he said.
Meanwhile, it may also make sense for international PE managers to make use of the new framework if Hong Kong and Chinese state institutions show a preference for allocating to funds structured under the local regime, as Sidley Austin’s Vasilopoulos has suggested is likely.
Asked whether she thought the months of protests in Hong Kong and now the coronavirus outbreak would dampen interest in the new structure, at least for the time being, Vasilopoulos was sanguine.
"There is a widespread view that these issues will have a short-term impact and then subside," she said. "A significant majority of industry participants continue to plan projects for launch later this year when it is assumed that the current epidemic will have subsided."