In our February 2022 edition, we will continue to study three issues about Hong Kong Certificate of Residence (CoR) in the 2020 Annual General Meeting between the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Inland Revenue Department (“IRD”).
1. Certificate of Residence (“CoR”) for Special Purpose Entities (“SPE”) under fund structure
The requirements for fund tax exemption qualification for special purpose entity may hinder its application for certificate of residence
Under a private equity fund structure, it is common to use a Hong Kong entity as an SPE to hold the target investment, particularly for investments in those jurisdictions which had signed the Comprehensive Double Taxation Agreements (“CDTAs”) with Hong Kong (e.g., the PRC).
Under the fund exemption requirements, an SPE has to be established for the sole purpose of holding and administering a private company and is not allowed to carry out any other trade or activity after incorporation. In particular, an SPE is only permitted to conduct the following business activities:
- reviewing the financial statements of portfolio investment companies;
- attending shareholder meetings of the portfolio investment companies;
- opening bank accounts to enable the receipt of dividends and investment disposal proceeds; and
- appointing a company secretary and auditor.
However, the above requirements for fund exemption qualification would hinder the SPE from obtaining a CoR for the tax treaty benefits under the CDTAs with different jurisdictions. According to the current practice, the IRD generally would not issue a CoR if the entity does not maintain sufficient economic substance and carry out managerial activities in Hong Kong.
The contradiction here is that the SPE has to limit its business activities in order to be qualified for profits tax exemption, while, the CoR requires the SPE to carry out substantial activities in Hong Kong.
The IRD responded in the 2020 Annual General Meeting that it would not only consider the economic substance of the SPE itself, but also examine all the facts and circumstances of the PE fund, including the activities rendered by the fund manager in Hong Kong.
In other words, if the fund manager maintains sufficient economic substance and manages the PE fund substantially in Hong Kong, the chance for the SPE to obtain the CoR to enjoy the CDTA benefits is still high.
Points to note
To promote the development of asset management industry, the Hong Kong Government is now providing subsidies for the set-up of qualified open-ended fund companies (OFCs) in Hong Kong.
The grant scheme covers eligible expenses incurred in relation to the incorporation or re-domiciliation of an OFC and paid to Hong Kong-based service providers. For example, legal fees for the preparation of incorporation; accounting and tax advisory fees; fees charged by fund administrators, company secretaries, corporate service providers and regulatory consultants. The scheme covers 70% of eligible expenses, subject to a cap of HK$1 million per OFC.
As most of the OFCs cannot fully utilise the HK$1 million government subsidy, it is advisable to engage a tax advisor to carry out the following tax advice in relation to the set-up of OFC:-
- Fund Profits Tax Exemption
- Carried Interest Tax Concession available to Fund Manager
- Tax Implications on fund re-domicilisation from other jurisdictions (e.g., Cayman Island SPC) to OFC
- Hong Kong CoR Tax Planning
We are one of the few tax advisory teams in Hong Kong experienced in fund tax advisory. Our firm also has tremendous experience in performing fund audit too.