Hong Kong needs to take steps to draw alternative asset services in order to maintain its supremacy as a jurisdictional hub in Asia, according to a new report by the Alternative Investment Management Association and KPMG.
More clarity is necessary regarding the current government incentives, such as the Unified Fund Exemption regime, officials said in new report from AIMA, supported by KPMG, titled Action Plan for Alternatives: Strengthening Hong Kong’s status as Asia’s leading hub for alternative assets.
“With more than HK$35 trillion in assets under management, and home to the biggest concentration of investment professionals in the region, Hong Kong is well positioned as Asia’s leading asset management hub and we believe that Hong Kong’s alternatives sector has a bright future ahead,” said Darren Bowdern, head of alternative investments, Hong Kong, KPMG China. “However, if it is to continue to grow and thrive, it cannot be complacent. We believe that these issues can be remedied by some important reforms to the tax regimes and a more accommodating licensing regime, that will attract alternative asset managers to manage more funds and use more structures in Hong Kong.“
In the joint report, KPMG and AIMA evaluated the government’s current policy support for the sector and provided suggestions for the ways that the city can reinforce its foundations and prepare for the future.
Hong Kong needs to look at further reforming its fund rules in order to promote Hong Kong as a fund management hub, officials wrote.
AIMA’s co-head of APAC, Michael Bugel, said that Hong Kong’s regulatory frameworks must evolve to ensure that the hub flourishes. He specifically mentioned that Hong Kong’s tax regimes for carried interest and investment funds needs to be modernized. “…we believe the city can compete more effectively and retain its allure as an alternative investment management location in Asia, especially in the post-COVID landscape.”
In its 2023 Budget, the government announced it would review the existing tax concession measures applicable to funds and carried interest. In order for funds to consider using Hong Kong as a management and investment holding jurisdiction for their investments in the region, it needs to be very clear and certain that the gains made on such investment holdings do not suffer any further incidence of tax in Hong Kong upon repatriation of such gains to the fund investors, experts said.
Specifically, the Carried Interest Tax Concession has been a contentious issue, AIMA said. This is because of the difference between the industry’s views of carried interest compared to that of the Inland Revenue Department. KPMG and AIMA conclude that Hong Kong government would benefit from making reforms to the UFE regime by providing more certainty of the tax exemption for investments managed from Hong Kong, as while the UFE provides a clear exemption for public or retail funds and most hedge funds, it is less clear for other asset classes. Having a list of investments, such as property, that do not qualify as exempt would provide more clarity and certainty. The government could make it clear that interest and other returns for private credit and debt funds fall within the UFE regime, the groups said.
“As one of the major global financial centers and a key asset management hub in Asia, Hong Kong has a well-established ecosystem including professional services, funds services, robust financial system and diverse talent to support the growth of the alternative asset management industry,” said Paul Ho, co-chair of the Hong Kong Tax Committee at AIMA. “While Hong Kong has made positive steps in the past few years to enhance the competitiveness of its tax rules for funds, certain aspects of the rules should be refined to provide more tax certainty and hence confidence to managers to set up and manage more funds in Hong Kong.”
On the private equity side, critics say it would be helpful if the SFC could streamline the licensing process for private funds and other similar alternative asset managers. KPMG and AIMA also recommend the government to include investments in Open-ended Fund Companies (OFC) and Limited Partnership Funds (LPF) in the new Capital Investment Entrant Scheme, to further boost the private funds industry and encourage the establishment of such vehicles in Hong Kong as well as their management entities.
While the criticism continues, other cities such as Tokyo seem to be willing and able to fill the gap, as evidenced by a new government/private partnership to support local managers in the city.
