Submissions by HKEx 

Financial Services and the Treasury Bureau's response to HKEx's submission on exempting securities dealings from profits tax

In response to our letter of 28 October 2004, which raises a host of issues relating to profits tax on securities transactions, the Financial Services and the Treasury Bureau replied on 7 January 2005, saying that,

"The objective of the proposed exemption for offshore funds from profits tax was to remove the concerns of offshore fund managers relating to their profits tax liability, and to reinforce the status of Hong Kong as an international financial centre.  This proposal will bring us on a par with major financial centres, including New York and London, as well as our regional competitors, such as Singapore, which also exempt offshore funds from profits tax.

On your suggestion that the profits tax exemption should be extended to all income arising from the investment in securities transactions including that of local residents (we assume that you are referring to exemption for income arising from securities transactions including trading profits because income arising from investments does not fall into our tax net), we do not find it appropriate.  As far as we are aware, no major financial centre exempts residents from securities trading profits.  There would be significant tax revenue implications associated with this proposal.

You remarked that to tax the increase in value of a stock upon disposal is a form of double taxation and that treating the gains from stock market and dividends differently amounts to inconsistent treatment.  On the latter point, Hong Kong's policy is not to levy any tax on capital gains or dividends.  We only tax trading profits.  The trading/capital distinction is not unique to securities transactions.  It applies to all profits derived by any business carried out in Hong Kong.  There is an established and effective mechanism in making the distinction.  The policy about not to tax dividends or interests or capital gains is indeed one of Hong Kong's greatest advantages over other financial centres on attraction to investors.

There is also no question of double taxation, as they are taxes on income in different hands.  As mentioned above, other financial centres do not provide exemption from profits tax for local residents' income arising from securities transactions.

The financial services sector is no doubt a major pillar of our economy.  We constantly review Hong Kong's competitiveness and explore ways to maintain our position as an international financial centre.  The proposed exemption of offshore funds from profits tax is a measure in that direction.  Taking into account the views collected during the consultation with the industry earlier this year, we are working on a detailed proposal to implement the exemption.  Our plan remains to be introducing the legislation into Legco within its current session."