Hong
Kong Venture Capital Sector
Hong
Kong is the largest venture capital centre
in Asia, having the second largest concentration
of venture capital professionals in the region
and managing 32% of the total capital pool
in the region.
Total
funds under management by Hong Kong venture
capital firms grew to US$30 bn by early 2005,
outstripping Japan and Singapore, although
only a small proportion of this money is actually
invested inside the SAR, which acts as a regional
entrepot rather than as a destination for
investment.
Implementation
of the Mandatory Provident Fund (MPF) scheme
(which began collecting contributions in December
2000) provides ample supply of funds to the
industry. The MPF scheme is estimated to inject
an extra HK$ 30-40 billion a year of retirement
funds for the next 30 to 40 years until the
system matures. Insurance companies and pension
funds, which will play a vital role in directing
MPF funds to various investment opportunities,
represent a significant source of funds for
Hong Kong's venture capital industry.Hong
Kong is largely an administrative hub serving
the region. Over 90% of the venture funds
are sourced from overseas and then disbursed
to overseas companies, based on beneficial
tax treatment.
However,
this favourable situation seemed to come under
threat in 2003 when the government planned
to tighten the rules governing 'offshore'
funds based in Hong Kong.
The
Financial Secretary's Budget Speech on 5 March
2003 proposed to amend the IRO to exempt offshore
funds from profits tax to bring Hong Kong
in line with other major financial markets
such as New York and London. The detailed
rules as set out in a consultation paper seemed
to be more threatening than helpful, but after
much to-ing and fro-ing, in June, 2005, the
Revenue (Profits Tax Exemption for Offshore
Funds) Bill 2005 was gazetted.
"The
proposed exemption will help attract new offshore
funds to Hong Kong and to encourage existing
ones to continue to invest here," noted a
government spokesman, continuing that: "Anchoring
offshore funds in Hong Kong markets could
also help maintain international expertise,
promote new products, and further develop
the local fund management industry. The proposal
would lead to an increase in market liquidity
and employment opportunities in the financial
services and related sectors.
"Hong
Kong is facing keen competition from other
major IFCs in attracting foreign investments.
Major financial centres such as New York and
London as well as the other major player in
the region, Singapore, all exempt offshore
funds from tax. The financial services industry
has expressed the view that it is vital for
us to provide tax exemption for offshore funds,
or otherwise some of these funds may relocate
away from Hong Kong, leading to loss of market
liquidity and a negative read-across impact
on other financial services, including downstream
services such as those provided by brokers,
accountants, bankers and lawyers."
Under
the proposal in the Bill, offshore funds,
i.e. non-resident entities (which can be individuals,
partnerships, trustees of trust estates or
corporations) administering a fund, are exempt
from tax in respect of profits derived from
dealings in securities, dealings in futures
contracts and leveraged foreign exchange trading
[as defined in the Securities and Futures
Ordinance (Cap. 571) (SFO)] in Hong Kong carried
out by specified persons such as corporations
and authorized financial institutions licensed
or registered under the SFO to carry out such
transactions.
The
exemption provisions would apply with retrospective
effect to the year of assessment commencing
on 1 April 1996, in order to provide legal
certainty on the tax liability of offshore
funds in respect of past years, which was
much called for by the industry as otherwise
there would be huge problems for offshore
funds to finalise their tax liabilities for
past years.
In
March, 2006, Hong Kong's Legislative Council
finally passed the Revenue (Profits Tax Exemption
for Offshore Funds) Bill 2005.
