Executive summary

On 28 February 2018, Hong Kong released the budget proposal for the country's tax year beginning 1 April 2018 (the Budget). The Budget includes a proposal of super tax deductions for expenditures on qualifying research and development (R&D) activities, relaxation of the proposed tax exemption to onshore privately-offered open-ended fund company (OFC), introducing a limited partnership regime for private equity funds, and extension of the tax exemption to cover debt securities among other measures.

Detailed discussion

Proposed super tax deductions for expenditures on qualifying R&D activities

To promote innovation and technology in Hong Kong, the Financial Secretary announced that draft legislation will be presented to the Legislative Council as soon as possible on proposing super tax deductions for expenditures on qualifying R&D activities. Under the proposal, the first HK$2 million (US$256,000) of eligible R&D expenditure will enjoy a 300% tax deduction and the remainder, a deduction at 200%.

It is understood that the proposed super tax deductions would only apply to expenditures incurred for R&D activities undertaken in Hong Kong. The super deductions may not cover R&D activities which have been subcontracted out, whether performed inside or outside Hong Kong.

Further strengthening Hong Kong's asset management industry

To strengthen the ability of the Hong Kong fund industry to compete in the market and to diversify the management platform, a legislative bill was introduced to grant a profits tax exemption to resident privately-offered OFCs incorporated in Hong Kong.¹ To ensure that the proposed tax exemption regime for OFCs complies with international standards, it is understood that the Government is considering removal of the potential ring-fencing features of the proposed regime.

Furthermore, to facilitate Hong Kong's development into a full-fledged fund service center, the Financial Secretary also announced that the Government will examine the feasibility of introducing a limited partnership regime in Hong Kong for private equity funds and the related tax arrangements.

Developing Hong Kong's bond markets

Under the current Qualifying Debt Instrument (QDI) program, interest income and trading profits arising from QDIs will be exempt from Hong Kong taxation if the terms of maturity of the QDIs are not less than seven years. QDIs with a shorter term of maturity can also enjoy a 50% concession from the normal profits tax rate.

In order to promote the bond market in Hong Kong, the Financial Secretary announced in the Budget that the QDI program will be extended to cover debt securities which are listed on the Stock Exchange of Hong Kong. In addition, the scope of tax exemption will also remove restriction on the debt instruments' term of maturity.

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ENDNOTE

¹ See EY Global Tax Alert, Hong Kong proposes profits tax exemption for resident privately-offered open-ended fund companies, dated 12 July 2017.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

• Tracy Ho
  tracy.ho@hk.ey.com
• Florence Chan, Financial Services
  florence.chan@hk.ey.com

Ernst & Young LLP, Hong Kong Tax Desk, New York

• Charlotte Wong
  charlotte.wong1@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty
  chris.finnerty@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee-Khun Yap
  bee-khun.yap@ey.com

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ATTACHMENT

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