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					                                                        Inland Revenue Department
                                                                Hong Kong




 DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES


                              NO. 43 (REVISED)

                                 PROFITS TAX

        PROFITS TAX EXEMPTION FOR OFFSHORE FUNDS


            These notes are issued for the information of taxpayers and their tax
representatives. They contain the Department’s interpretation and practices in
relation to the laws as it stood at the date of publication. Taxpayers are reminded
that their right of objection against the assessment and their right of appeal to the
Commissioner, the Board of Review or the Court are not affected by the
application of these notes.

          These notes replace those issued in September 2006.



                                                      CHU Yam-yuen
                                                Commissioner of Inland Revenue


February 2010




                              Our web site : www.ird.gov.hk
   DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES

                             No. 43 (REVISED)

                                 CONTENT

                                                                      Paragraph

Introduction                                                                  1

Background
   Before the 2006 Ordinance                                                  4
   After the 2006 Ordinance                                                   6

Resident person / Non-resident person                                         8
    Individuals                                                               9
    Non-individual entities                                                  12
    Central management and control                                           13
    Split year residence                                                     21

The Exemption Provisions
    Exemption criteria                                                       22
    Scope of Exemption                                                       23
    Specified Transactions                                                   24
    Transaction in securities                                                26
    Transaction in futures contracts                                         29
    Transaction in foreign exchange contracts                                32
    Transaction consisting in the making of a deposit other than by          33
       way of a money-lending business
    Transaction in foreign currencies                                        34
    Transaction in exchange-traded commodities                               35
    Incidental transactions                                                  36
    Specified person                                                         39
    Loss from exempt transactions                                            41
    Effective date                                                           42
The Deeming Provisions
    General                                                       45
    Direct beneficial interest                                    47
    Indirect beneficial interest                                  50
    Control of a trust estate                                     53
    Associate                                                     54
    Examples on applying the Deeming Provisions by reference to   57
       beneficial interests
    Ascertainment of deemed profits                               58
    No deemed loss for resident persons                           61
    Deeming Provisions not to apply in certain circumstances      63
    Reporting requirements                                        67
    Effective date                                                70

Tax Avoidance                                                     71

Appendices A - E




                                    ii
INTRODUCTION

            Hong Kong is a major international financial centre (IFC) in the Asia
Pacific region. The financial services industry plays an important role in the
Hong Kong economy and contributes to a significant percentage of Hong
Kong’s GDP.        It is vital to maintain and strengthen Hong Kong’s
competitiveness as an IFC. A substantial portion of the total assets managed
by the fund management industry in Hong Kong is sourced from overseas
investors 1 . Hong Kong is facing keen competition from other IFCs in
attracting foreign investments. In terms of tax treatment of offshore funds,
major IFCs, including New York, London and Singapore, all exempt offshore
funds from tax. In order to reinforce the status of Hong Kong as an IFC and
enhance its competitiveness among other IFCs, the Government proposed in
the 2003-04 Budget to exempt offshore funds from profits tax. Offshore
funds, for the purposes of these Practice Notes, refer to non-resident entities,
whether individuals, corporations, partnerships or trustees of trust estates.
The proposal will help attract new offshore funds to Hong Kong and encourage
existing offshore funds to continue investing in Hong Kong. Anchoring
offshore funds in the Hong Kong market will help maintain international
expertise, promote new products and further develop the local fund
management business. The proposal will also benefit other downstream
services sectors such as brokers, accountants, bankers and lawyers.

2.        In March 2006, the Legislative Council passed the Revenue (Profits
Tax Exemption for Offshore Funds) Ordinance 2006 (the 2006 Ordinance) to
implement the proposal. The 2006 Ordinance adds new sections and
schedules to the Inland Revenue Ordinance (the Ordinance), which in brief are:

            (a)     Section 20AB contains provisions for use in the interpretation
                    of sections 20AC to 20AE and Schedule 15, which include
                    provisions in determining the residency status of an individual,
                    a corporation, a partnership and a trustee of a trust estate and
                    the extent of a person’s direct or indirect beneficial interest in
                    another person.



1
    According to the Fund Management Activities Survey 2004 conducted by the Securities and
    Futures Commission, funds sourced from overseas investors accounted for 62.7% (amounting to
    $2,269 billion) of the fund management business in Hong Kong.
          (b)    Section 20AC stipulates that the exemption will apply
                 retrospectively from the year of assessment 1996-97 onwards
                 and the circumstances in which the exemption can be allowed
                 (the Exemption Provisions).

          (c)    Section 20AD provides that losses arising from the exempt
                 transactions carried out by an offshore fund cannot be used to
                 set off against its future assessable profits.

          (d)    Section 20AE stipulates the circumstances in which the
                 assessable profits of a tax-exempt offshore fund are to be
                 regarded as the assessable profits of a resident person (the
                 Deeming Provisions).

          (e)    Section 70AB contains provisions for the revision of an
                 assessment necessitated by the retrospective application of the
                 Exemption Provisions.

          (f)    Schedule 15 contains the formula for ascertaining the amount
                 to be regarded as the assessable profits of a resident person
                 under the Deeming Provisions.

          (g)    Schedule 16 lists the specified transactions that are covered
                 by the exemption.

For ease of reference, the relevant provisions of the 2006 Ordinance are
annexed as Appendix A.

3.         These Practice Notes set out the views of the Department regarding
the tax treatment of offshore funds and the administration of the related issues
after the enactment of the 2006 Ordinance.



BACKGROUND

Before the 2006 Ordinance

4.         The Ordinance imposes profits tax on every person carrying on a
trade, profession or business in Hong Kong in respect of his assessable profits



                                       2
arising in or derived from Hong Kong from such trade, profession or business,
but excluding profits arising from the sale of capital assets. Before the
enactment of the 2006 Ordinance, a person, resident or non-resident, was
chargeable to profits tax in respect of his trading profits derived from securities
transactions carried out in Hong Kong if those transactions amounted to the
carrying on of a trade or business. However, profits tax was not (and still is
not) chargeable in respect of offshore profits or capital gains, including those
derived from securities transactions.

5.         Certain specified investment funds are already exempt from profits
tax under section 26A(1A) of the Ordinance. These include mutual funds,
unit trusts and similar investment schemes which are authorized under the
Securities and Futures Ordinance (SFO) (Cap. 571), and those investment
schemes where the Commissioner of Inland Revenue (the Commissioner) is
satisfied that they are bona fide widely held (see paragraphs 63-65 below) and
comply with the requirements of a supervisory authority within an acceptable
regime. Mutual funds, unit trusts and other similar investment schemes,
including offshore funds, which are neither authorized nor “bona fide widely
held and supervised” do not qualify for the tax exemption under section
26A(1A).

After the 2006 Ordinance

6.         Broadly speaking, two sets of provisions are introduced into the
Ordinance – the Exemption Provisions and the Deeming Provisions. The
Exemption Provisions exempt non-resident persons (including individuals,
corporations, partnerships and trustees2 of trust estates) from tax in respect of
profits derived from certain specified transactions carried out through or
arranged by specified persons. To qualify for the exemption, a non-resident
person must not carry on any other business in Hong Kong other than the
specified transactions, or transactions incidental to the carrying out of the
specified transactions.      The Exemption Provisions will apply with
retrospective effect from the year of assessment 1996-97. A non-resident
person may apply for revision of an otherwise finalized assessment for a year
of assessment if he qualified for the exemption for that year.


2
    Under the Ordinance, tax liability is imposed on the trustee of a trust estate as the chargeable
    person - section 2 of the Ordinance includes “trustee” as a person. Therefore, the Exemption
    Provisions seek to exempt the trustees of trust estates from tax where appropriate.


                                                 3
7.         The exemption is intended for non-resident persons only. The
Deeming Provisions are enacted to prevent abuse, or round-tripping, by
resident persons disguised as non-resident persons to take advantage of the
exemption. In appropriate circumstances, a resident person will be deemed to
have derived assessable profits in respect of the trading profits earned by an
offshore fund from the specified transactions and incidental transactions in
Hong Kong. The Deeming Provisions, however, will not apply if the
Commissioner is satisfied that the beneficial interests in the tax-exempt
offshore fund are bona fide widely held. Unlike the Exemption Provisions
which take retrospective effect, the Deeming Provisions only apply from the
year of assessment 2006-07.



RESIDENT PERSON / NON-RESIDENT PERSON

8.         Section 20AB contains the definitions of “resident person” and
“non-resident person”. Different legal tests are prescribed for individuals and
non-individual entities (which include corporations, partnerships and trustees
of trust estates 3 ) in determining whether they are resident persons. By
definition, a non-resident person is a person who is not a resident person. The
definitions of resident person and non-resident person apply equally to both the
Exemption Provisions and the Deeming Provisions.

Individuals

9.        In relation to a year of assessment, an individual is regarded as a
resident person if he (a) ordinarily resides in Hong Kong in that year of
assessment; or (b) stays in Hong Kong for a period or a number of periods
amounting to more than 180 days during that year of assessment or more than
300 days in two consecutive years of assessment one of which is that year of
assessment. These provisions are the same as those under section 41 of the
Ordinance on the meanings of a “permanent resident” and a “temporary
resident” who are eligible for election for Personal Assessment.

10.       For the purposes of determining an individual’s residency, it is
generally considered that an individual “ordinarily resides” in Hong Kong if he
has a permanent home in Hong Kong where he or his family lives. The mere

3
    See footnote 2 above.


                                       4
fact that a person holds a Hong Kong identity card is inconclusive in showing
that he ordinarily resides in Hong Kong. In this respect, the Board of Review
in its decision D57/02, 17 IRBORD 829 applied the Court of Appeal case
Director of Immigration v. Ng Shun-loi in deciding whether an individual was
ordinarily resident in Hong Kong:

       “The Hong Kong Court of Appeal has defined the term ‘ordinarily
        resident’ in Director of Immigration v. Ng Shun-loi [1987] HKLR 798,
        per Hunter J:

              ‘The words “ordinarily resident” mean that the person must be
               habitually and normally resident here apart from temporary or
               occasional absences of long or short duration’ (Levene v. IRC
               [1928] AC 217 applied).

              ‘A person is resident where he resides. … When is he ordinarily
               resident? I think that is when he resides there in the ordinary
               way. That must be the meaning of the adverb. The expression
               is therefore contemplating residence for the purposes of
               everyday life. It is residence in the place where a person lives
               and conducts his daily life in circumstances which lead to the
               conclusion that he is living there as an ordinary member of the
               community would live for all the purposes of his daily life’
               (R v. Barnet London Borough Council, ex parte Nilish Shah
               [1982] 1 QB 688 applied).”

11.         In ascertaining the number of days a person stays in Hong Kong, part
of a day will be counted as one day. This practice is consistently adopted in
applying the 60-day rule under salaries tax (section 8(1B)), in deciding the
eligibility for election for Personal Assessment and in determining residency
for tax treaty purposes.

Non-individual entities

12.       Non-individual entities, which include corporations, partnerships and
trustees of trust estates, are subject to the same legal test in determining
whether they are resident persons. In relation to a year of assessment, a
corporation, a partnership or a trustee of a trust estate is regarded as a resident


                                        5
person if the central management and control of the corporation, partnership or
trust estate is exercised in Hong Kong in that year of assessment.

Central management and control

13.        The “central management and control” test is a well-established
common law rule adopted in many jurisdictions, such as Singapore, the UK and
Australia, in determining the residence of a company and other non-individual
entities. The common law rule was enunciated by Lord Loreburn in De Beers
Consolidated Mines, Limited v. Howe (5 TC 198 at page 213):

          “… a company resides, for purposes of Income Tax, where its real
           business is carried on. … I regard that as the true rule; and the real
           business is carried on where the central management and control
           actually abides.”

14.       The central management and control refers to the highest level of
control of the business of a company. The exercise of central management
and control does not necessarily require any active involvement. The place
where the central management and control is exercised is not necessarily the
place where the main operations of the business are to be found, though the two
places may often coincide. Further, the place of registration or incorporation
of a company is not in itself conclusive of the place where the central
management and control is exercised, and is therefore not conclusive of the
place where the company is resident (Todd v. Egyptian Delta Land and
Investment Co. Ltd., 14 TC 119).

15.       The location of central management and control is wholly a question
of fact. Each case must be decided on its own facts. Factors that are
decisive in one case may carry little weight in another. In general, if the
central management and control of a company is exercised by the directors in
board meetings, the relevant locality is where those meetings are held. In
many cases, the board meets in the country where the business operations take
place, and central management and control is clearly located in that country.
In other cases, central management and control may be exercised by directors
in one jurisdiction though the actual business operations may take place
elsewhere. It should be noted that the residence of individual directors is
generally not relevant in determining the locality of a company’s central


                                       6
management and control (see, however, the comments in paragraph 16 below).
Therefore, the mere fact that the majority of the directors of the management
board of a company are resident in Hong Kong does not of itself mean that the
company is centrally managed and controlled in Hong Kong, and hence would
not adversely affect the application of the tax exemption.

16.        The place of board meetings also is not necessarily conclusive. It is
significant only in so far as those meetings constitute the medium through
which central management and control is exercised. In cases where central
management and control of a company is in fact exercised by an individual (for
example, the board chairman or the managing director), the relevant locality is
the place where the controlling individual exercises his power. As central
management and control is a question of fact and reality, when reaching a
conclusion in accordance with the case law principles, only factors which exist
for genuine commercial reasons will be accepted.

17.       The asset portfolios of many overseas funds operating in Hong Kong
are managed by fund managers in Hong Kong who are given full discretion to
manage the asset portfolios. There may be concerns that the central
management and control of those funds might in the circumstances be regarded
as being exercised in Hong Kong, and they might be caught as resident persons
and hence not qualify for the tax exemption. The Department considers that
the residence of the person who manages the asset portfolios on behalf of a
fund is not a conclusive factor in determining the residence of the fund. If the
central management and control of a fund is not exercised in Hong Kong, the
fund can qualify for the exemption notwithstanding that its asset portfolios are
managed by a Hong Kong fund manager under his full discretion.

18.       Appendix B sets out the Department’s views on the residency status
of various forms of investment vehicles commonly adopted in holding and
managing investment portfolios.

19.       It is reckoned that there is a practice of setting up an offshore fund
by incorporating a company in an overseas jurisdiction, appointing two Hong
Kong fund managers as the company’s only directors and granting the
managers full discretion to deal in Hong Kong securities. The Department’s
view is that, under such a setup, the “Hong Kong based fund” with its directors
and principal officers exercising central management and control of the fund in


                                       7
Hong Kong is no different from a normal resident company. Such a “Hong
Kong based fund” is not the intended beneficiary of, and hence is not entitled
to claim for, the exemption.

20.         The Department would like to reiterate that adopting the “central
management and control” test for the purposes of the exemption will not
impose any new tax liabilities on a “Hong Kong based fund”. Before the
implementation of the exemption, a “Hong Kong based fund” was chargeable
to tax in respect of its trading profits derived from Hong Kong, but not offshore
profits or capital gains. The “central management and control” test will not
alter this position. Even if a “Hong Kong-based fund” is determined to be a
resident person by the “central management and control” test, and hence does
not qualify for the exemption, it will only continue to be chargeable to tax in
respect of its Hong Kong trading profits, and not offshore profits or capital
gains. The Exemption Provisions only exempt profits which are otherwise
chargeable to tax. They are not a new charging section and do not affect the
existing territorial source principle of taxation.

Split year residence

21.        Funds or other entities may change their residence during a year of
assessment, i.e. from a non-resident person to a resident person or vice versa.
Whilst cases of this type should be rare, the residence of the fund concerned
will be determined on a year-of-assessment basis by reference to the respective
periods during which the fund is a resident or non-resident of Hong Kong.
For a fund which is newly set up during a year of assessment, its residence will
be determined by reference to the period from its set-up date to the end of the
year of assessment.



THE EXEMPTION PROVISIONS

Exemption criteria

22.        The Exemption Provisions are contained in the newly added section
20AC. Generally speaking, to qualify for the exemption, a person has to
satisfy two conditions:




                                       8
          (a)    he is a non-resident person; and

          (b)    he does not carry on any trade, profession or business in Hong
                 Kong involving transactions other than the specified
                 transactions (carried out through or arranged by specified
                 persons) and transactions incidental to the carrying out of the
                 specified transactions.

Scope of Exemption

23.        A person eligible for the exemption is exempt from profits tax in
respect of the profits derived from the specified transactions. The exemption
also covers profits derived from the incidental transactions provided that the
trading receipts from the incidental transactions do not exceed 5% of the total
trading receipts from both the specified transactions and the incidental
transactions. If the 5% threshold is exceeded, the whole trading receipts from
the incidental transactions will be chargeable to profits tax. However, profits
from the specified transactions will remain fully exempt.

Specified Transactions

24.        Specified transactions are widely defined in the Ordinance to cover
typical transactions carried out by offshore funds in Hong Kong. Schedule 16
to the Ordinance contains the list of specified transactions which include six
categories of transactions:

          (a)    a transaction in securities;

          (b)    a transaction in futures contracts;

          (c)    a transaction in foreign exchange contracts;

          (d)    a transaction consisting in the making of a deposit other than
                 by way of a money-lending business;

          (e)    a transaction in foreign currencies; and

          (f)    a transaction in exchange-traded commodities.

Appendix C sets out the Department’s views on whether particular transactions
are covered by the specified transactions.


                                        9
25.      To cater for changes in the financial products traded in the market, the
Commissioner is empowered to amend Schedule 16 by notice published in the
Gazette (section 20AC(7)).

Transaction in securities

26.            “Securities” is defined to mean:

               (a)      shares, stocks, debentures, loan stocks, funds, bonds or notes
                        of, or issued by, a body, whether incorporated or
                        unincorporated, or a government or municipal government
                        authority;

               (b)      rights, options or interests (whether described as units or
                        otherwise) in, or in respect of, such shares, stocks, debentures,
                        loan stocks, funds, bonds or notes;

               (c)      certificates of interest or participation in, temporary or interim
                        certificates for, receipts for, or warrants to subscribe for or
                        purchase, such shares, stocks, debentures, loan stocks, funds,
                        bonds or notes;

               (d)      interests in any collective investment scheme; and

               (e)      interests, rights or property, whether in the form of an
                        instrument or otherwise, commonly known as securities,

               but does not include shares or debentures of, or rights, options or
               interests (whether described as units or otherwise) in, or in respect of,
               shares or debentures of, a company that is a private company within
               the meaning of section 29 of the Companies Ordinance (Cap. 32)4.

27.        Schedule 16 also contains consequential definitions of “collective
investment scheme”, “debenture” and “share” in relation to the meaning of
“securities”.


4
      Under section 29 of the Companies Ordinance (Cap. 32), “private company” means a company
      which by its articles - (a) restricts the right to transfer its shares; and (b) limits the number of its
      members to 50, not including persons who are in the employment of the company and persons who,
      having been formerly in the employment of the company, were while in that employment, and
      have continued after the determination of that employment to be, members of the company; and (c)
      prohibits any invitation to the public to subscribe for any shares or debentures of the company.


                                                      10
28.        Shares, debentures and the related rights, options, etc. of a private
company are specifically excluded from the definition of “securities”. This is
to avoid non-residents dealing in underlying assets of a private company (such
as landed property) through the transaction in shares of that company. In
consequence, the exemption does not cover profits derived from transactions in
the shares, debentures or the related rights, options, etc. of a private company.
Note that any company, irrespective of its place of incorporation or registration,
is regarded as a private company if it falls within the meaning of “private
company” under section 29 of the Companies Ordinance. However, it may be
necessary to mention that the exclusion of the shares of a private company
from the exemption will not affect the non-taxability of any offshore profits or
capital gains derived by a person, which all along are not chargeable to tax in
Hong Kong. Hence, any offshore profits or capital gains derived from
transactions in shares, debentures or the related rights, options, etc. of a private
company will continue to be tax-exempt without relying on the Exemption
Provisions.

Transaction in futures contracts

29.       “Futures contract” is defined to mean:

          (a)     a contract or an option on a contract that is listed or traded on
                  the Hong Kong Futures Exchange Limited; or

          (b)     any other contract for differences-

                  (i)     that is listed on a specified stock exchange, or traded
                          on a specified futures exchange, within the meaning of
                          section 1 of Part 1 of Schedule 1 to the SFO (see
                          Appendix D);

                  (ii)    that an authorized institution within the meaning of the
                          Banking Ordinance (BO) (Cap. 155) may enter into
                          under that ordinance; or

                  (iii)   the transaction in respect of which is regulated by or
                          under, or is carried out in compliance with, the SFO.




                                        11
30.        “Contract for differences” is defined to mean an agreement the
purpose or effect of which is to obtain a profit or avoid a loss by reference to
fluctuations in the value or price of property of any description or in an index
or other factor designated for that purpose in the agreement. In general terms,
a contract for differences is a contract which rides on the differences in the
value of the underlying property or index, which is commonly used for hedging
purposes in the financial market. It covers a wide range of contracts,
including the common types of financial derivatives traded by offshore funds
(e.g. cash-settled commodity futures contract, Hang Seng Index futures
contract, etc.).

31.        The definition of “futures contract” covers contracts for differences
that may be properly carried out through a specified stock exchange or a
specified futures exchange, as well as those entered into by an authorized
institution under the BO and those that are regulated by or carried out in
compliance with the SFO.

Transaction in foreign exchange contracts

32.        “Foreign exchange contract” is defined to mean a contract other than
a futures contract and an options contract, whereby the parties to the contract
agree to exchange different currencies at a future time. It covers both
leveraged and non-leveraged foreign exchange transactions. The transactions
may involve entirely foreign currencies, or foreign currencies and Hong Kong
dollars. Spot transactions in foreign currencies are discussed in paragraph 34
below.

Transaction consisting in the making of a deposit other than by way of a
money-lending business

33.       “Deposit” is defined to mean a loan of money (a) at interest; or (b)
repayable at a premium or repayable with any consideration in money or
money’s worth. Offshore funds in the normal course of business may hold
money deposits in their asset portfolios. This type of specified transaction
covers the holding of such money deposits, which may be in any currency, by
offshore funds. As clearly provided, this type of specified transaction does
not cover cases where a person makes deposits in the ordinary course of
carrying on a money-lending business. The term “money-lending business” is


                                       12
not defined and would be accorded its ordinary meaning. It is a question of
fact whether a money-lending business is carried on. In the context of the
Ordinance, it has been decided in tax cases that in determining if a
money-lending business is carried on, whether there is a money-lender’s
licence granted under other ordinances is not conclusive. See Shun Lee
Investment Co., Ltd. v. CIR, 1 HKTC 322 and Board of Review Decision
D38/89, 4 IRBORD 433.

Transaction in foreign currencies

34.        “Transaction in foreign currencies” covers spot transactions in
foreign currencies (transactions in exchanging currencies at a future time are
covered by “transaction in foreign exchange contracts” - see paragraph 32) and
transactions in exchanging foreign currencies from or to Hong Kong dollars.

Transaction in exchange-traded commodities

35.       “Exchange-traded commodity” is defined to mean gold or silver
traded on a commodity exchange in Hong Kong to which the Commodity
Exchanges (Prohibition) Ordinance (CEPO) (Cap. 82) does not apply by virtue
of section 3(d) of that ordinance. The CEPO in general prohibits the
operation of commodity exchanges in Hong Kong with the exception of those
provided in section 3 thereof. Section 3(d) refers to a commodity exchange
which was in operation on 20 June 1973. The Chinese Gold & Silver
Exchange Society is a commodity exchange in Hong Kong to which the CEPO
does not apply by virtue of section 3(d). This type of specified transaction
therefore covers transactions in gold or silver traded on the Chinese Gold &
Silver Exchange Society.

Incidental transactions

36.        An offshore fund may carry out transactions in Hong Kong which
are not specified transactions but incidental to the carrying out of the specified
transactions. Under the Exemption Provisions, incidental transactions will not
be regarded as “any other business” carried on in Hong Kong. An offshore
fund still qualifies for the exemption even if it carries out incidental
transactions in the relevant year of assessment. Subject to a 5% threshold, tax
exemption is to be allowed in respect of the profits derived from the incidental
transactions. The 5% threshold refers to the situation where the trading
receipts from the incidental transactions do not exceed 5% of the total trading

                                        13
receipts from the specified transactions and the incidental transactions taken
together. If the 5% threshold is exceeded, the whole trading receipts from the
incidental transactions (i.e. not just the amount in excess of the 5% threshold)
will be chargeable to profits tax. Profits derived from the specified
transactions, however, will remain fully exempt from tax.

37.        The term “incidental transaction” is not defined. The word
“incidental” will be accorded its common meaning5, which should cover the
various modes of operation of different offshore funds. Whether particular
transactions carried out by an offshore fund are “incidental transactions” is a
question of fact, which can only be determined by reference to the particular
mode of operation of the offshore fund concerned. Typical incidental
transactions include custody of securities, and receipts of interest or dividend
on securities acquired through the specified transactions.

38.       “Trading receipts” for the purposes of applying the 5% threshold
mean gross receipts that should have been chargeable to tax but for the
exemption. Hence, receipts that all along are non-taxable without relying on
the Exemption Provisions [e.g. tax-exempt dividends or interest income] are
excluded in applying the 5% threshold.

            Example 1

            A-Fund Limited is a non-resident company. It had the following
            business receipts in the year of assessment 2006-07:
                                                                                    $

                  Dividends from Hong Kong listed companies                     300,000

                  Receipts from other incidental transactions                   260,000

                  Receipts from specified transactions                       5,000,000

            The 5% threshold will be applied by reference to the “receipts from
            other incidental transactions” and the “receipts from specified
            transactions”. The dividends, which all along are tax-exempt, will
            not be taken into account. As the “receipts from other incidental
            transactions” only represent 4.94% of the total receipts
5
    According to the Shorter Oxford English Dictionary, “incidental” means “occurring or liable to
    occur in fortuitous or subordinate conjunction with something else”.


                                               14
             (i.e. $260,000 / ($5,000,000 + $260,000)), the “receipts from other
             incidental transactions” together with the “receipts from specified
             transactions” will be exempt from profits tax under section 20AC.

             If the dividends had been taken into account, the percentage of
             “receipts from incidental transactions” would have become 10.07%
             (i.e. ($300,000 + $260,000) / (5,000,000 + 300,000 + 260,000)),
             which exceeds the 5% threshold. However, such computation is
             wrong as explained in paragraph 38 above.

             Example 2

             Same facts as those in Example 1, but the amount of the “receipts
             from other incidental transactions” is $270,000.

             As the 5% threshold has been exceeded (i.e. $270,000 / ($5,000,000
             + $270,000) = 5.12%), the “receipts from other incidental
             transactions” of $270,000 will be chargeable to profits tax. The
             “receipts from specified transactions”, however, will remain
             tax-exempt under section 20AC.

Specified person

39.       Tax exemption is allowed in respect of specified transactions carried
out through or arranged by a “specified person”. The words “arranged by”
cover cases where a specified transaction is not carried out by a specified
person but arranged by the specified person to be carried out by another person.
For example, the fund manager of an offshore fund, who is a specified person,
can arrange to buy/sell stocks traded on the Tokyo Stock Exchange through an
intermediary in Tokyo. A specified person normally is a corporation licensed
or an authorized financial institution registered under the SFO for carrying on a
business in any regulated activity within the meaning of the SFO6.

6
    Schedule 5 to the SFO stipulates the following regulated activities -
    Type 1 : dealing in securities;
    Type 2 : dealing in futures contracts;
    Type 3 : leveraged foreign exchange trading;
    Type 4 : advising on securities;
    Type 5 : advising on futures contracts;
    Type 6 : advising on corporate finance;
    Type 7 : providing automated trading services;
    Type 8 : securities margin financing;
    Type 9 : asset management.


                                                   15
40.        The SFO only came into operation on 1 April 2003. Before the
enactment of the SFO, a “specified person” licensed to carry out the specified
transactions should include a dealer, an investment adviser, a commodity
trading adviser, etc. licensed or registered under certain repealed ordinances.
To apply the Exemption Provisions retrospectively from 1 April 1996, a
specified person in relation to a specified transaction carried out before 1 April
2003 is defined to mean-

          (a)    a bank within the meaning of section 2(1) of the BO;

          (b)    a person registered as a dealer or commodity trading adviser
                 under Part IV of the Commodities Trading Ordinance (Cap.
                 250) repealed under section 406 of the SFO;

          (c)    a person registered as a dealer or an investment adviser under
                 Part VI, or as a securities margin financier under Part XA, of
                 the Securities Ordinance (Cap. 333) repealed under section
                 406 of the SFO; or

          (d)    a person licensed as a leveraged foreign exchange trader
                 under Part IV of the Leveraged Foreign Exchange Trading
                 Ordinance (Cap. 451) repealed under section 406 of the SFO.

Loss from exempt transactions

41.        Profits from the specified transactions are exempt from tax. As a
matter of symmetry, losses sustained by a tax-exempt offshore fund from the
specified transactions in a year of assessment are not available for set off
against any of its assessable profits for any subsequent years of assessment.
In fact, this treatment is similar to that for offshore profits and capital gains.
Since Hong Kong does not tax offshore profits or capital gains, offshore or
capital losses are not allowed to set off against a person’s assessable profits.

Effective date

42.        The Exemption Provisions will apply with retrospective effect from
the year of assessment commencing on 1 April 1996.




                                        16
43.        By virtue of section 70AB, a non-resident person eligible for the
exemption for a year of assessment that expires before the date of
commencement of the 2006 Ordinance, can make an application for revision of
an otherwise finalized assessment to give effect to the exemption. Such
application should be made within 12 months after the date of commencement,
or within 6 years after the end of the relevant year of assessment, whichever is
the later. The date of commencement of the 2006 Ordinance was 10 March
2006. In other words, an application under section 70AB in relation to the
years of assessment 1996-97 to 1999-2000 should be made not later than 12
months after 10 March 2006 (i.e. on or before 10 March 2007), and an
application in relation to the years of assessment 2000-01 to 2004-05 should be
made not later than 6 years after the end of the relevant year of assessment.
For the year of assessment 2005-06 and subsequent years, section 70AB is not
applicable; any claim for revision for these years will be governed by the
correction provisions under section 70A, or the objection provisions under
section 64, whichever are applicable.

44.        If an assessor refuses to revise an assessment in accordance with an
application, he shall give a notice of the refusal in writing to the person who
made the application. The person thereupon has the same rights of objection
and appeal under Part XI of the Ordinance as if the notice of refusal were a
notice of assessment.



THE DEEMING PROVISIONS

General

45.        The exemption is intended for non-resident persons only. The
Deeming Provisions are enacted to prevent abuse, or round-tripping, by
resident persons disguised as non-resident persons to take advantage of the
exemption. A resident person who, alone or jointly with his associates, holds
direct and/or indirect beneficial interest of 30% or more in a tax-exempt
offshore fund, or any percentage if the offshore fund is the resident person’s
associate, will be deemed to have derived assessable profits in respect of the
trading profits earned by the offshore fund from specified transactions and
incidental transactions carried out in Hong Kong. The application of the
Deeming Provisions would not by itself alone render the resident person to be


                                       17
deemed to be carrying on a business in respect of his other activities. The
amount of deemed profits is ascertained by taking into account the percentage
of the resident person’s beneficial interest in the offshore fund and the length of
ownership within the relevant year of assessment.

46.       Section 20AB sets out the definitions of “direct beneficial interest”
and “indirect beneficial interest”.

Direct beneficial interest

47.        Section 20AB(4) provides that a person is to be regarded as having a
direct beneficial interest in a corporation, a partnership or a trustee of a trust
estate if:

           (a)    he holds any of the issued share capital (however described)
                  of the corporation (where the corporation is not a trustee of a
                  trust estate);

           (b)    he, as a partner in the partnership, is entitled to any of the
                  profits of the partnership (where the partnership is not a
                  trustee of a trust estate); or

           (c)    he, otherwise than through another person -

                  (i)    benefits under the trust estate; or

                  (ii)   not being a trustee of the trust estate (or a director of
                         the trustee where the trustee is a corporation), is able or
                         might reasonably be expected to be able to control the
                         activities of the trust estate or the application of its
                         corpus or income.

48.      In Schedule 15 to the Ordinance, the extent of a person’s direct
beneficial interest in a corporation, a partnership or a trustee of a trust estate is
defined to mean:

           (a)    the percentage of the issued share capital (however described)
                  of the corporation held by the person;


                                         18
          (b)    the percentage of the profits of the partnership to which the
                 person is entitled; or

          (c)    the percentage in value of the trust estate in which the person
                 is interested.

49.       The following specific provisions apply in ascertaining the extent of
a person’s direct beneficial interest in a corporation or a partnership.

          (a)    A fund manager of a fund corporation may hold non-profit
                 participating shares for the sole purpose of managing the fund
                 corporation. To apply the Deeming Provisions fairly to a
                 fund manager or other persons holding such non-profit
                 participating shares, the shares comprised in the issued share
                 capital of a corporation that do not entitle their holders to
                 receive dividends, whether in cash or in kind, and a
                 distribution of the corporation’s assets upon its dissolution
                 (other than a return of capital) are excluded in computing the
                 percentage of the issued share capital of the corporation held
                 by a person (section 20AB(9)).

                 Example 3

                 B-Fund Limited has 10,000 issued shares, out of which 500
                 shares are “management shares” which entitle their holders
                 to special management rights but not dividends or
                 distributions of assets upon dissolution. L Limited, a
                 resident fund management company, was appointed as
                 B-Fund Limited’s fund manager and the 500 “management
                 shares” were allotted to it. L Limited also acquired further
                 1,500 issued shares of B-Fund Limited.

                 The extent of L Limited’s direct beneficial interest in B-Fund
                 Limited is computed as 1,500 / (10,000 – 500) = 15.79%.
                 The 500 “management shares” are excluded in ascertaining its
                 beneficial interest in the fund.




                                      19
           (b)    In computing the percentage of the profits of a partnership to
                  which a person is entitled, if the person is not entitled to the
                  partnership’s profits but entitled to a distribution of the
                  partnership’s assets upon its dissolution, a reference to the
                  entitlement to the partnership’s profits is to be construed as a
                  reference to the entitlement to a distribution of the
                  partnership’s assets upon its dissolution (section 20AB(8)).

Indirect beneficial interest

50.        Section 20AB(5) provides that a person is to be regarded as having
an indirect beneficial interest in a corporation, a partnership or a trustee of a
trust estate if, through an interposed person or a series of two or more
interposed persons:

           (a)    he is interested in any of the issued share capital (however
                  described) of the corporation (where the corporation is not a
                  trustee of a trust estate);
           (b)    he is entitled to any of the profits of the partnership (where
                  the partnership is not a trustee of a trust estate); or

           (c)    he -

                  (i)    benefits under the trust estate; or

                  (ii)   not being a trustee of the trust estate (or a director of
                         the trustee where the trustee is a corporation), is able or
                         might reasonably be expected to be able to control the
                         activities of the trust estate or the application of its
                         corpus or income.

51.         A person has an indirect beneficial interest in a corporation, a
partnership or a trustee of a trust estate, if he has a direct beneficial interest in
the first interposed person and the first interposed person has a direct beneficial
interest in the next interposed person and so on, and the last interposed person
has a direct beneficial interest in the corporation, the partnership or the trustee
of the trust estate.




                                         20
52.        The extent of a person’s indirect beneficial interest in a corporation,
a partnership or a trustee of a trust estate is arrived at by multiplying the
percentage of the person’s beneficial interest in the first interposed person by
the percentage of the first interposed person’s beneficial interest in the next
interposed person and so on, and finally by the last interposed person’s
beneficial interest in the corporation, the partnership or the trustee of the trust
estate.

Control of a trust estate

53.        A person who has the control of the activities of a trust estate can
distribute the trust estate’s income or asset according to his discretion and to
whomever he chooses including himself. To counteract opportunities for
tax-avoidance, a person who has a direct or indirect beneficial interest in a
trustee of a trust estate by reason of the fact that he is able or might reasonably
be expected to be able to control the activities of the trust estate or the
application of its corpus (i.e. capital) or income, is to be regarded as being
interested in 100% in value of the trust estate (section 20AE(5)).

Associate

54.        In administering the Deeming Provisions, provisions on “associate”
are required to prevent resident persons from circumventing the Deeming
Provisions by holding beneficial interests in offshore funds through associates.
Beneficial interests in an offshore fund held by a resident person’s associates,
resident or non-resident, will be taken into account in determining whether the
“30% or more” threshold is exceeded (section 20AE(2)). Besides, in the case
where a resident person holds a beneficial interest in a tax-exempt offshore
fund which is his associate, the Deeming Provisions will apply in respect of
any percentage of the resident person’s beneficial interest in the offshore fund
(section 20AE(3)). The adopted definition of “associate” and the related
definitions of “associated corporation”, “control”, “principal officer” and
“relative” (section 20AE(10)) are similar to those existing in other sections of
the Ordinance, e.g. sections 16E and 39E.

55.        Specific provisions on “associate” apply where the resident person is
a natural person, a corporation or a partnership. Broadly speaking, in respect
of a resident person who is a natural person, “associate” generally includes his


                                        21
“relative” and a corporation controlled by him. In respect of a resident person
which is a corporation, “associate” generally includes its “associated
corporation”, which is defined to mean a corporation over which the resident
corporation has control, a corporation which has control over the resident
corporation, or a corporation which is under the control of the same person as
the resident corporation. In respect of a resident person which is a partnership,
“associate” generally includes a partner of and a corporation controlled by the
resident partnership.

56.        For the purposes of section 20AE, where a resident person holds
beneficial interest in a tax-exempt offshore fund which is a partnership, the
Department adopts the position that the mere facts that the resident person is a
partner in the offshore fund and that the other partners in the offshore fund are
fellow partners of the resident person would not render the offshore fund or the
other partners in the offshore fund “associates” of the resident person.

Examples on applying the Deeming Provisions by reference to beneficial
interests

57.        The following examples illustrate when the Deeming Provisions will
apply by reference to a resident person’s beneficial interest in a tax-exempt
offshore fund.

          (a)    Both direct and indirect beneficial interests are taken into
                 account

                 Example 4

                 M Limited, a resident company, directly holds 20% and,
                 through other companies, indirectly holds 15% of the issued
                 shares of C-Fund Limited, a tax-exempt offshore fund.

                 The Deeming Provisions will apply to M Limited. M
                 Limited’s direct and indirect beneficial interests in C-Fund
                 Limited (i.e. 20% + 15% = 35%) exceed the “30% or more”
                 threshold. 35% of the exempt profits of C-Fund Limited will
                 be deemed to be the assessable profits of M Limited.




                                       22
(b)   Beneficial interests held by associates are taken into
      account

      Example 5

      N Limited and O Limited are resident companies. They are
      fellow subsidiaries of the same holding company. N Limited
      and O Limited respectively hold 20% and 25% of the issued
      shares of D-Fund Limited, a tax-exempt offshore fund.

      N Limited and O Limited are associates as they are under the
      control of the same company. As their beneficial interests in
      D-Fund Limited in total exceed the “30% or more” threshold
      (i.e. 20% + 25% = 45%), the Deeming Provisions will apply
      to both of them.        Deemed assessable profits will be
      ascertained by reference to the respective percentages of their
      beneficial interests in D-Fund Limited. Hence, 20% and
      25% of the exempt profits of D-Fund Limited will be deemed
      to be the assessable profits of N Limited and O Limited
      respectively.

      Example 6

      Same facts as those in Example 5, but O Limited is a
      non-resident company.

      The Deeming Provisions will not apply to O Limited, which is
      a non-resident company. The Deeming Provisions will still
      apply to N Limited as its beneficial interest together with that
      of O Limited (though it is a non-resident company) in D-Fund
      Limited exceed the “30% or more” threshold. 20% of the
      exempt profits of D-Fund Limited will be deemed to be the
      assessable profits of N Limited. O Limited does not have
      any tax liability since the Deeming Provisions do not apply to
      a non-resident.




                            23
          (c)    The Deeming Provisions will apply in respect of any
                 percentage of beneficial interests held in an offshore fund
                 which is an associate of a resident person

                 Example 7

                 P Limited, a resident company, holds 20% of the issued shares
                 of E-Fund Limited, a tax-exempt offshore fund and an
                 associate of P Limited.

                 Although the beneficial interest held by P Limited is less than
                 30%, the Deeming Provisions will still apply as it holds some
                 beneficial interest in E-Fund Limited which is its associate.

Ascertainment of deemed profits

58.       The amount of deemed assessable profits imposed on a resident
person for a year of assessment is ascertained in accordance with Schedule 15
to the Ordinance. The amount of deemed assessable profits will be the total
sum by adding up the amount ascertained by the formula in paragraph 59 for
each day in the period during which the resident person has the following
percentage of direct and/or indirect beneficial interest in the tax-exempt
offshore fund:

          (a)    alone or jointly with his associates, 30% or more; or

          (b)    any percentage if the offshore fund is the resident person’s
                 associate.

59.       Part 1 of Schedule 15 sets out the following formula in ascertaining
the amount of exempt profits of an offshore fund (which is the amount of the
deemed assessable profits of the resident person) for a particular day in a year
of assessment:


                                        B x C
                             A    =
                                            D




                                       24
          where : A     means the exempt profits of the offshore fund for a
                        particular day in a year of assessment
                   B    means the extent of the resident person’s beneficial
                        interest in the offshore fund on that particular day
                   C    means the exempt profits of the offshore fund for the
                        accounting period in which the particular day falls
                   D    means the total number of days in the accounting
                        period of the offshore fund in which the particular day
                        falls

Appendix E contains an example on how the deemed assessable profits are
ascertained for a resident person who holds an indirect beneficial interest in a
tax-exempt offshore fund through a number of interposed persons.

60.      The following examples elaborate some salient points in ascertaining
the deemed assessable profits.

          (a)    Only days to which the Deeming Provisions apply need be
                 included in computing the deemed assessable profits for a
                 year of assessment

                 Example 8

                 On 1 October 2006, Q Limited, a resident company,
                 purchased 20% of the issued shares of F-Fund Limited, a
                 tax-exempt offshore fund. F-Fund Limited is not Q Limited’s
                 associate. Q Limited and its associates have no other
                 beneficial interest in F-Fund Limited. On 1 January 2007, Q
                 Limited purchased further 30% of the issued shares of F-Fund
                 Limited. F-Fund Limited closes its accounts on 31 March.
                 During the year ended 31 March 2007, F-Fund Limited
                 derived assessable profits of $8M from the specified
                 transactions.

                 The deemed assessable profits of Q Limited for the year of
                 assessment 2006-07 is computed as: $8M x 50% x (90 days /
                 365 days) = $0.99M. “90 days” refer to the period from 1


                                       25
      January 2007 to 31 March 2007 and “365 days” to the year
      ended 31 March 2007. The period from 1 October to 31
      December 2006 during which Q Limited only held a
      beneficial interest of 20% (i.e. less than 30%) in F-Fund
      Limited need not be taken into account.

(b)   The tax-exempt offshore fund adopts an accounting date
      other than 31 March

      Example 9

      G-Fund Limited, a tax-exempt offshore fund, adopts 31
      December as its accounting date. It derived assessable
      profits of $10M and $12M from the specified transactions
      respectively for the years ended 31 December 2006 and 2007.
      R Limited, a resident company, held 50% of the issued shares
      of G-Fund Limited during the period from 1 October 2006
      and 30 September 2007.

      Ascertainment of deemed assessable profits is made by
      reference to the year of assessment from 1 April to 31 March
      irrespective of the accounting date of the tax-exempt offshore
      fund. The deemed assessable profits for R Limited are
      computed as follows:

      Year of assessment 2006-07: $10M x 50% x (92 days / 365
      days) + $12M x 50% x (90 days / 365 days) = $1.26M +
      $1.48M = $2.74M. (“92 days” refer to the period from 1
      October to 31 December 2006 and “90 days” to 1 January to
      31 March 2007.)

      Year of assessment 2007-08: $12M x 50% x (183 days / 365
      days) = $3.01M. (“183 days” refer to the period from 1
      April to 30 September 2007.)




                           26
(c)   The resident person adopts an accounting date other than
      31 March

      Example 10

      Same facts as those in Example 9. R Limited adopts 30 June
      as its accounting date.

      The deemed assessable profits for R Limited for the years of
      assessment 2006-07 and 2007-08 will be ascertained on the
      same basis as that in Example 9 irrespective of the accounting
      date adopted by R Limited. See paragraph 68 below on how
      R Limited should report the deemed assessable profits in its
      profits tax returns.

(d)   Non-taxable items not to be taken into account in
      ascertaining deemed assessable profits

      Example 11

      H-Fund Limited, a tax-exempt offshore fund, derived
      assessable profits of $20M from the specified transactions for
      its accounting year ended 31 March 2007. During the
      same year, it also received dividends of $1M from a Hong
      Kong listed company and interests of $2M on a long term debt
      instrument (within the meaning of section 26A of the
      Ordinance). S Limited, a resident company, held 50% of the
      issued shares of H-Fund Limited during the year ended 31
      March 2007.

      The deemed assessable profits for S Limited for the year of
      assessment 2006-07 is $20M x 50% = $10M.                   The
      non-taxable items, i.e. dividends of $1M and interests of $2M,
      should not be included in computing the deemed assessable
      profits.




                           27
          (e)    Expenses incurred by the resident in generating deemed
                 assessable profits are not deductible

                 Example 12

                 Same facts as those in Example 11. S Limited incurred
                 general administration expenses of $1M during the year
                 ended 31 March 2007 and sought to deduct such expenses
                 against the deemed assessable profits.

                 Deduction in respect of the administration expenses cannot be
                 allowed. Any expenses incurred by H-Fund Limited in
                 earning the profits from the specified transactions would have
                 been deducted in ascertaining H-Fund’s assessable profits,
                 which are deemed to be the assessable profits of S Limited.

No deemed loss for resident persons

61.        The policy objective of the exemption is to attract foreign capital to
invest in the local market. The Deeming Provisions are intended disincentives
to resident persons for taking advantage of the exemption by carrying out
round-tripping. In this regard, the Deeming Provisions only impose deemed
profits but not losses on a resident person. A resident person, therefore, will
not be entitled to claim any proportionate amount of the losses sustained by a
tax-exempt offshore fund in which he holds a beneficial interest.

62.        A resident person may sustain losses in other businesses carried on in
Hong Kong for the relevant year of assessment. Section 20AE provides that
the deemed assessable profits “are to be regarded as the assessable profits
arising in or derived from Hong Kong of the resident person for that year of
assessment from a trade, profession or business carried on by the resident
person in Hong Kong.” Whether a resident person can set off the deemed
assessable profits, like those derived from a normal trade, profession or
business, by losses sustained in its/his other businesses in accordance with the
provisions of section 19C depends on its/his status. In the case of a resident
corporation, the set-off is allowable. In the case of a resident individual or
resident partnership, the set-off is not allowable, unless the holding of the
beneficial interest in the offshore fund is part and parcel of his/its other


                                       28
business. The individual or partners of the partnership can, however, obtain
the set-off under personal assessment, if applicable.

Deeming Provisions not to apply in certain circumstances

63.        It will be unlikely for a resident person to carry out round-tripping by
holding a beneficial interest in an offshore fund that is bona fide widely held by
investors. On this consideration, the Deeming Provisions do not apply to a
resident person if the Commissioner is satisfied that beneficial interests in the
offshore fund concerned are bona fide widely held (section 20AE(8)).

64.         The term “bona fide widely held”, which also appears in section
26A(1A), is not defined in the Ordinance. In the context of section 26A(1A),
the Departmental Interpretation and Practice Notes (DIPN) No. 20 (“Unit
Trusts, Mutual Fund Corporations and Similar Collective Investment Schemes”)
states that the “bona fide widely held” requirement is satisfied if, during the
year of assessment in question, at no time did fewer than 50 persons hold (or
have the right to become the holders of) all of the units or shares in the scheme
and at no time during the year did fewer than 21 persons hold (or have the right
to become the holders of) units or shares that entitled the holders, directly or
indirectly, to 75%, or more, of the income or property of the scheme.

65.         DIPN No. 20 further states that, where the above benchmark figures
are not met, it will still be accepted in practice that the requirement has been
satisfied if it is clear from the constitutive documents of the scheme and other
relevant material that it was established with a view to wide public
participation and that genuine efforts are being taken with the aim of achieving
that objective (i.e. there is nothing to suggest that the scheme is intended to be
a closely held investment vehicle). This situation could arise, for example,
where a scheme has only recently been established or where, despite the wishes
of the parties concerned, it has proved to be unpopular with investors. The
Department considers that, for the purposes of section 20AE(8), “bona fide
widely held” should adopt the same practice as stated in DIPN No. 20.

66.       A resident person may hold indirect beneficial interest in an offshore
fund through interposed persons who are also resident persons. In the absence
of any specific provisions, the Deeming Provisions will separately apply to the
resident person and the interposed resident persons. Double taxation of


                                        29
deemed assessable profits by reference to the profits of the same offshore fund
would thus arise. To avoid this anomaly, section 20AE(9) specifically
provides that a resident person is not liable to tax in respect of the deemed
assessable profits if any of the interposed resident persons through whom he
holds an indirect beneficial interest in an offshore fund is liable to tax under the
Deeming Provisions in respect of the assessable profits of the same offshore
fund.

                  Example 13

                  T Limited holds 90% of the issued shares of U Limited which
                  in turn holds 70% of the issued shares of V Limited. V
                  Limited holds 50% of the issued shares of I-Fund Limited, a
                  tax-exempt offshore fund. T Limited, U Limited and V
                  Limited are all resident companies.

                  Under the Deeming Provisions, deemed assessable profits
                  representing 50% of the exempt profits of I-Fund Limited
                  would be imposed on V Limited.

                  Under section 20AE(9), no deemed assessable profits would
                  be imposed on T Limited and U Limited notwithstanding that
                  they both hold indirect beneficial interests of more than 30%
                  (T Limited: 90% x 70% x 50% = 31.5%; U Limited: 70% x
                  50% = 35%) in I-Fund Limited. Deemed assessable profits
                  in respect of the same exempt profits of I-Fund Limited have
                  already been imposed on V Limited.

Reporting requirements

67.        Section 20AE imposes tax liabilities on a resident person in respect
of the deemed assessable profits. As with other persons chargeable to tax, the
resident person bears the legal obligation of complying with other provisions of
the Ordinance on reporting chargeability, lodgment of returns, providing
information, payment of tax, etc. Penalties under Part XIV of the Ordinance
may be imposed for failures to comply with the relevant statutory provisions.




                                        30
68.        Examples 9 and 10 above set out that the amount of deemed
assessable profits is to be computed on a year-of-assessment basis irrespective
of the accounting date adopted by the tax-exempt offshore fund or the resident
person. As illustrated in the examples, a resident person may be required to
report the deemed assessable profits for a year of assessment by reference to
more than one set of annual accounts of the offshore fund. It is envisaged that
the annual accounts of the offshore fund covering the later part of the year of
assessment may not have been finalized when the resident person is required to
file his tax return. In such a case, the Department accepts the arrangement
that the resident person may report in his tax return for a year of assessment
[which is to be filed within the normal time limit] only the amount of the
deemed assessable profits attributable to the annual accounts of the offshore
fund that are already closed within that year of assessment. In respect of the
remaining amount of the deemed assessable profits attributable to the next
annual accounts of the offshore fund, the resident person is required to report it
within four months after the annual accounts closing date by way of a letter to
be sent to the Department. The letter is to be treated as additional information
to the resident person’s tax return. Additional assessment for the relevant year
of assessment will be raised on the remaining amount of deemed assessable
profits as appropriate.

                 Example 14

                 Same facts as those in Example 9. Within the year of
                 assessment 2006-07, G-Fund Limited only closed its accounts
                 for the year ended 31 December 2006. In its profits tax
                 return for the year of assessment 2006-07 [which is to be filed
                 within the normal time limit], R Limited should report the
                 deemed assessable profits of $1.26M [for the period from 1
                 October to 31 December 2006].

                 Not later than 30 April 2008, R Limited should send a letter to
                 the Department to report the deemed assessable profits of
                 $1.48M [for the period from 1 January to 31 March 2007].
                 An additional assessment for the year of assessment 2006-07
                 with additional assessable profits of $1.48M will be raised on
                 R Limited.




                                        31
                 In its profits tax return for the year of assessment 2007-08
                 [which is to be filed within the normal time limit], R Limited
                 should report the deemed assessable profits of $3.01M [for
                 the period from 1 April to 30 September 2007].

69.       There may be cases where a resident person relies on the information
provided by an offshore fund in determining whether any deemed profits arose
or in reporting an incorrect amount of deemed profits to the Department.
Under the Ordinance, a taxpayer will only be imposed a penalty if he fails to
perform the legal obligations “without reasonable excuse”. The Department,
before imposing a penalty, would consider the whole facts and circumstances in
deciding whether a resident person’s reliance on incorrect information provided
by an offshore fund constitutes a reasonable excuse. Further, a resident
person has the right to appeal against the penalty imposed by the Department if
he does not agree with it.

Effective date

70.        The Deeming Provisions will apply from the year of assessment
commencing on 1 April 2006. A resident person is required to report his
deemed assessable profits for the year ended 31 March 2007 and subsequent
years in his tax returns. Alternatively, if he has not already been required to
furnish a return for any year of assessment in which he has deemed assessable
profits, he should inform the Commissioner in writing of his chargeability
within 4 months after the end of the basis period of the year of assessment
concerned. The deemed assessable profits should be ascertained and reported
by reference to the year ended 31 March of each year irrespective of the
accounting date adopted by the tax-exempt offshore fund or the resident
person.



TAX AVOIDANCE

71.        The Department will generally act in accordance with these Practice
Notes in providing profits tax exemption to offshore funds and administering
the related issues. However, in cases where tax avoidance is involved, the
Department will consider invoking the general anti-avoidance provisions under
sections 61 or 61A of the Ordinance as appropriate to counteract the avoidance.


                                      32
                                                            Appendix A

    REVENUE (PROFITSTAX EXEMPTIONFOR              Ord.No.4o12006     A363
       OFFSHOREFUNDS) ORDINANCE

            REVENUE(PROFITSTAX EXEMPTION FOR
              OFFSHOREFUNDS)ORDINANCE2006

                             CONTENTS
Section                                                            Paee

  1.   Short
           title........                                           ,4.365

                                    Ordinance
                       Inland Revenue

  2.          added
       Sections
          20AB. Interpretationof sections20AC,20AD and 20AE
                  and Schedule 15                           4.365
          20AC. Certain profits of non-residentpersons exempt
                 from tax ........                            4371
          20AD. Loss from transactions referred to in section
                  20AC(l) not available setoff .......
                                      for                  .. A.373
          20AE. Assessable                      persons
                          profits of non-resident      regarded
                                                persons
                              profits of resident
                  as assessable                                 4373
  3.   Sectionadded
          70AB. Revision of assessment to commencement
                                     due                  of
                 section2 of Revenue(ProfitsTax Exemptionfor
                 OffshoreFunds)Ordinance   2006              A38l
  4.          15
       Schedule added
                 15 Provisions for ascertaining amount of
          Schedule
                                                 personunder
                               profits of resident
                      assessable
                      section                                  A38l
                             20AE of this Ordinance................
  5.          16
       Schedule added
                 l6
          Schedule                        ..........
                               transactions
                       Specified                                   A385
      REVENUE (PROFITSTAX EXEMPTION FOR            Ord.No.4of 2006   A36s
         OFFSHOREFUNDS) ORDINANCE

         HONG KONG SPECIAL ADMINISTRATIVE REGION

                        ORpneNcENo. 4 oe 2006



                                                 Donald TSANG
                                                 Chief Executive
                                                  9 March 2006


An Ordinance to amend the Inland RevenueOrdinanceto give effect to the
   proposal to exempt offshore funds from profits tax in the Budget
   introduced by the Government for the 2003-2004financial vear and to
   rnakerelatedamendments.

                                                     [0 March 2006]

     Enactedby the LegislativeCouncil.

1.   Short title
    This Ordinancemay be cited as the Revenue(Prohts Tax Exemption for
OffshoreFunds)Ordinance2006.

                        Inland Revenue
                                     Ordinance

2.   Sectionsadded
     The Inland RevenueOrdinance(Cap. I 12) is amended adding-
                                                      by
     "20AB. Interpretationof sections20AC,20AD
            and 20AE and Schedule   15
          (1) This section applies to the interpretation of sections204C,
     20AD and 20AE,and Schedule       15.
          (2) In relationto any year of assessment,personis to be regarded
                                                  a
     as a residentpersonif--
              (a) wherethe personis a natural personwho is not a trusteeof
                   a trust estate,the person-
                    (i) ordinarily resides in Hong Kong in that year of
                        assessment: or
REVENUE (PROFITSTAX EXEMPTION FOR                  Ord. No. 4 o12006   4361
   OFFSHOREFUNDS) ORDINANCE

               (ii) stays in Hong Kong for a period or a number of
                    periodsamountingto more than 180 days during that
                    year of assessment for a period or a number of
                                         or
                    periods amounting to more than 300 days in 2
                    consecutive  years of assessment of which is that
                                                       one
                    year of assessment;
          (b) wherethe personis a corporationthat is not a trusteeof a
              trust estate, the central managementand control of the
              corporation is exercised Hong Kong in that year of
                                          in
              assessment;
          (c) wherethe personis a partnership      that is not a trusteeof a
              trust estate,the central management       and control of the
              partnership is exercisedin Hong Kong in that year of
              assessment;   or
          (d) where the personis a trusteeof a trust estate,the central
              management      and control of the trust estateis exercised   in
              Hong Kong in that year of assessment.
     (3) In relationto any year of assessment,personis a non-resident
                                                  a
personif he is not a resident  personin relationto that year of assessment.
     (4) A personis to be regardedas having a direct beneficialinterest
in anotherpersonif-
          (o) wherethe other personis a corporationthat is not a trustee
              of a trust estate,the personholds any of the issuedshare
              capital(however    described) the corporation;
                                            of
          (b) wherethe other    personis a partnership   that is not a trustee
              of a trust estate, person,as a partnerin the partnership,
                                 the
              is entitledto any of the profits of the partnership;  or
          (c) where the other person is a trusteeof a trust estate,the
              person-
                (i) benefits under the trust estate;or
               (ii) not being a trustee of the trust estateor, where the
                    trustee a corporation,a directorof the trustee, able
                           is                                           is
                    or might reasonably expected be able to control
                                          be           to
                    the activities the trust estate the applicationof its
                                  of                or
                    corpusor income,
              otherwise  than through anotherperson.
     (5) A person ("the first person") is to be regardedas having an
indirect beneficial interest in another person ("the secondperson") if-
REVENUE (PROFITS TAX EXEMPTION FOR                  Ord. No. 4 of 2006   A369
    OFFSHOREFUNDS) ORDINANCE

         (") where the secondperson is a corporation that is not a
              trusteeof a trust estate, first personis interested any
                                         the                          in
              of the issued share capital (however described)of the
              corporation;
         (b) where the secondperson is a partnershipthat is not a
              trusteeof a trust estate, first personis entitledto any of
                                         the
              the prolits of the partnership;   or
         (c) where the secondpersonis a trusteeof a trust estate,the
              first person-
                (i) benefitsunder the trust estate;or
               (ii) not being a trusteeof the trust estateor, where the
                            is                                        is
                    trustee a corporation,a directorof the trustee, able
                                            be          to
                    or might reasonably expected be able to control
                    the activities the trust estate the applicationof its
                                  of                 or
                    corpusor income,
through another    person("interposed   person")or through a series 2 or
                                                                      of
more interposed   persons  who is or are relatedto the first personand the
second  personin the mannerdescribed subsections and (7).
                                           in             (6)
     (6) Wherethereis one interposed       person-
         (a) the first person has a direct beneficial interest in the
              interposed   person;and
         (b) the interposedperson has a direct beneficialinterest in the
              second    person.
     (7) Wherethereis a series 2 or more interposed
                                   of                       persons-
         (o) the first person has a direct beneficialinterest in the first
              interposed   personin the series;
         (b) each interposedperson (other than the last interposed
              person) in the serieshas a direct beneficial interest in the
              next interposed    personin the series;and
         (c) the last interposed   personin the series a directbeneficial
                                                       has
              interestin the second    person.
     (8) A reference an entitlement the profits of a partnership in
                        to                to                             is,
the casewherethe partnersin a partnership not entitledto its profits
                                                 are
but are only entitledto a distributionof its assets  upon its dissolution,   to
be construedas a reference an entitlementto a distribution of the assets
                              to
of the partnership  upon its dissolution.
     (9) A reference the issued
                        to            sharecapitalof a corporationdoesnot
                     to
includea reference the shares                  in
                                   comprised the issued     sharecapitalthat
do not entitle their holdersto receivedividends,whether in cash or in
kind, and a distribution of the corporation'sassets      upon its dissolution
other than a return of capital.
REVENUE (PROFITS TAX EXEMPTION FOR                   Ord. No. 4 of 2OO6   1^371
    OFFSHOREFUNDS) ORDINANCE

                                    persons
20AC. Certain profits of non-resident
      exemptfrom tax
                                       (3)
     (l) Subject to subsections and (4), a non-residentperson rs
exemptfrom tax chargeable          under this Part in respectof his assessable
profits, for any year of assessment     commencing or after I April 1996,
                                                      on
from-
          (a) transactions                                 (2);
                               falling within subsection and
          (b) transactions incidental to the carrying out of the
               transactions    referredto in paragraph(a).
     (2) A transactionfalls within this subsection it-   if
          (a) is a transaction                            l6;
                                            in Schedule and
                                   specified.
          (b) has been carried out through or arrangedby a specified
               person.
     (3) Subsection doesnot apply to a non-resident
                        (l)                                       personin a year
of assessment at any time in that year of assessment, personcarries
               if,                                              the
on any trade, profession or businessin Hong Kong involving any
transaction  other than a transaction     referredto in that subsection.
     (4) Subsection      (lXb) doesnot apply to a non-resident        personin a
year of assessment in that year of assessment, trading receipts
                      if,                              his                   from
the incidentaltransactions      referredto in that subsection    exceed5% of the
total trading receipts    from the transactions  referred in subsection
                                                           to               (1)(a)
and  (6).
     (5) The Commissionermay by notice published in the Gazette
amendSchedule      16.
     (6) In subsection a "specified
                            (2),             person"(fFEE,l\t) means-
          (a) in relation to a transaction carried out before I April
               2003-
                 (i) a bank within the meaning of section 2(l) of the
                     BankingOrdinance(Cap. 155);
                (ii) a personregistered a dealeror commodity trading
                                            as
                     adviser under Part IV of the CommoditiesTrading
                     Ordinance     (Cap.250)repealed   under section   406 of the
                     Securities FuturesOrdinance
                                  and                       (Cap. 571);
               (iii) a personregistered a dealeror an investment
                                           as                             adviser
                     under    Part VI, or as a securitiesmargin financierunder
                     Part XA, of the SecuritiesOrdinance (Cap. 333)
                     repealed under section 406 of the Securitiesand
                     FuturesOrdinance      (Cap. 571);or
REVENUE (PROFITS TAX EXEMPTION FOR                Ord. No. 4 o12006   4373
    OFFSHOREFUNDS) ORDINANCE

             (iv) a person licensed as a leveraged foreign exchange
                  trader under Part IV of the Leveraged Foreign
                  Exchange Trading Ordinance (Cap. 451) repealed
                  under section 406 of the Securities and Futures
                  Ordinance  (Cap.571);or
         (b) in relation to a transactioncarriedout on or after I April
             2003,a corporation licensedunder Part V of the Securities
             and Futures Ordinance (Cap. 571) to carry otr, or an
             authorizedfinancial institution registeredunder that Part
             for carryingon, a business any regulatedactivity within
                                        in
                                               5
             the meaninsof Part 1 of Schedule to that Ordinance.

20AD. Loss from transactionsreferredto in section
                           for
      20AC(1) not available set off
     Notwithstandinganythingin this Part, any loss sustained a non-
                                                              by
residentpersonfrom a transaction   referredto in section20AC(l) in a year
of assessment which he has not at any time carried on any trade,
               in
profession business Hong Kong involvingany transaction
           or         in                                      other than
a transaction                                           for
              referredto in that sectionis not available set off against
any of his assessableprofits for any subsequent year of assessment.

                profits of non-resident
204'8. Assessable                       persons
       regarded assessable
               as           profits of resident
       persons
     (1) Where, in the year of assessment        following the year of
assessment which the Revenue(Profits Tax Exemption for Offshore
           in
Funds) Ordinance2006(4 of 2006)commences in any subsequent
                                               or                     year
of assessment-
         (a) a resident person has, during any period of time, a
              beneficialinterest,whether direct or indirect or both, in a
              non-resident  personto the extentset out in subsection   (2);
              and
         (b) the non-resident   person is exemptfrom tax under section
              20AC,
the assessable profits of the non-resident personfor that period of time
that would have been chargeableto tax under this Part but for that
sectionare to be regardedas the assessable   profits arising in or derived
from Hong Kong of the resident   personfor that year of assessment   from
a trade,profession business
                   or          carriedon by the residentpersonin Hong
Kong.
 REVENUE (PROFITS TAX EXEMPTION FOR                   Ord. No. 4 o12006    4'375
     OFFSHOREFUNDS) ORDINANCE

     (2) The extent of a residentperson'sbeneficialinterestin a non-
                                              (1)
residentperson referredto in subsection is that the residentperson,
eitheraloneor jointly with any of his associates    (whethera resident    person
or not)-
          (a) wherethe non-resident       personis a corporationthat is not a
                                                                     in
                trusteeof a trust estate,holds or is interested not less
                than 30ohof the issuedsharecapital (howeverdescribed)          of
                the corporation;
          (b) wherethe non-resident       personis a partnership   that is not a
                trusteeof a trust estate,is entitledto not lessthan 30"/o      of
                the profits of the partnership;  or
          (c) wherethe non-resident       personis a trusteeof a trust estate,
                is interested not lessthan 30%in value of the trust estate.
                              in
     (3) Where, in the year of assessment             following the year of
assessment which the Revenue
             in                        (Profits Tax Exemption for Offshore
Funds)Ordinance2006(4 of 2006)commences in any subsequent
                                                    or                       year
of assessment-
          (") a resident person has, during any period of time, a
                beneficialinterest,whetherdirect or indirect or both, in a
                non-resident   personwho is exemptfrom tax under section
                20AC; and
          (b) the non-residentperson is an associateof the resident
                person,
the assessable   profits of the non-resident  personfor that period of time
that would have been chargeable tax under this Part but for that
                                        to
sectionare to be regardedas the assessable        profits arising in or derived
from Hong Kong of the resident       personfor that year of assessment      from
a trade,profession business
                      or           carriedon by the resident   personin Hong
Kong.
     (4) Subsections and (3) apply in relation to a residentperson
                         (1)
irrespective whetherthe personhas received, will receive,
             of                                     or                directlyor
indirectly,from the non-resident     personconcerned      any money or other
property representing     the profits of the non-residentperson for the
relevantyear of assessment.
     (5) A resident    personwho has a direct or indirectbeneficial      interest
in a trusteeof a trust estateby reasonof the fact that he is able or might
reasonablybe expected be able to control the activitiesof the trust
                            to
estate the applicationof its corpusor incomeis, for the purposes this
       or                                                                 of
section,to be regardedas being interested 100%in value of the trust
                                                in
estate.
     (6) The extent of a residentperson'sbeneficialinterestin a non-
residentpersonis to be determined accordance
                                         in             with the provisionsin
Part 2 of Schedule    15.
REVENUE GROFITS TAX EXEMPTION FOR                      Ord. No. 4 of 2006   1'377
    OFFSHOREFUNDS) ORDINANCE
     (7) The amount regardedas the assessable              profits of a resident
person for a year of assessment         under subsection      (l) or (3) is to be
              in
ascertained accordance         with the provisions Schedule
                                                    in             15.
     (8) Subsection or (3) does not apply in relation to a resident
                          (1)
personwho has a direct or indirect beneficialinterestin a non-resident
                                 is
personif the Commissioner satisfied          that beneficial interests the non-
                                                                       in
residentpersonare bona fide widely held.
     (9) Where a residentpersonis liable to tax under subsection or          (l)
(3) in respectof the profits of a non-resident         person by reasonof his
having an indirect beneficialinterest in the non-residentperson through
an interposed    personor through a series 2 or more interposed
                                               of                          persons,
if the interposed     person or any of the interposedpersonsis a resident
                                                                 in
personwho is also liable to tax under that subsection respectof the
sameprofits, the first-mentioned       residentpersonis discharged        from his
liability to tax under that subsection respect thoseprofits.
                                          in         of
     (10) In this section-
"associate"(|HWE} in relation to a person,means-
           (a) wherethe personis a natural person-
                   (i) a relativeof the person;
                  (ii) a partnerof the personand any relativeof that partner;
                 (iii) a partnership which the personis a partner;
                                     in
                 (iv) any corporationcontrolledby the person,by a partner
                       of the personor by a partnership which the personis
                                                           in
                       a partner;
                  (v) any director or principal officer of a corporation
                       referredto in subparagraph    (iv);
           (b) wherethe personis a corporation-
                   (i) any associated corporation;
                  (ii) any person who controls the corporation and any
                       partner of suchperson,and, whereeither such person
                       is a natural person,atry relativeof suchperson;
                 (iii) any director or principal officer of the corporation or
                       of any associated  corporationand any relativeof any
                       suchdirector or officer:
                 (iv) any partnerof the corporationand, wheresuchpartner
                       is a natural person,dfly relativeof suchpartner;
           (c) wherethe personis a partnership-
                   (i) any partner of the partnershipand where such partner
                       is a partnershipany partner of that partnership,any
                       partner with the partnershipin any other partnership
                       and wheresuchpartneris a partnership         any partner of
                       that partnershipand where any      partner of, or with, or
                       in any of the partnerships mentioned in this
REVENUE (PROFITS TAX EXEMPTION FOR                  Ord. No. 4 of 2006   A3l9
    OFFSHOREFUNDS) ORDINANCE

                      subparagraph a natural person,any relativeof such
                                     is
                      partner;
                 (ii) any corporation controlled by the partnershipor by
                      any partnerof the partnership wheresucha partner
                                                      or,
                      is a natural person,&tryrelativeof suchpartner;
                (iii) any corporation of which any partner of the
                      partnershipis a director or principal officer;
                (iv) any director or principal officer of a corporation
                      referredto in subparagraph   (ii);
"associated  corporation" (fHffi*XH),in relationto a person,means-
          (o) a corporationover which the personhas control;
          (b) a corporationwhich has'control      over sucha person,beinga
                corporation;or
          (c) a corporation which is under the control of the same
                person,beinga corporation;
"control" (EfttJ), relationto a corporation,
                    in                           means powerof a person
                                                         the
     to secure-
          (a) by means of the holding of sharesor the possession           of
                voting power in or in relation to that or any other
                corporation;or
          (b) by virtue of any powers conferred by the articles of
                association other documentregulatingthat or any other
                             or
                corporation,
     that the affairs of the first-mentionedcorporation are conductedin
     accordance    with the wishes that person;
                                    of
"principal officer" (t4$fi8), in relationto a corporation,means-
          (q) a personemployedby the corporationwho, eitheraloneor
               jointly with one or more other persons, responsible
                                                           is           under
                the immediateauthority of the directorsfor the conduct of
                the business the corporation;or
                              of
          (b) a personso employedwho, under the immediateauthority
                of a director of the corporation or a person to whom
                paragraph (a) applies, exercises     managerialfunctions in
                respect the corporation;
                         of
"relative" (tfltr),-in relationto a person,meansthe spouse,      parent,child,
     brother or sisterof the person,and, in deducingsucha relationship,
     an adopted child is to be regardedas a child both of the natural
     parentsand the adoptingparentand a stepchild as the child of both
     the natural parentsand of any stepparent.".
            (PROFITS EXEMPTION
      REVENUE      TAX         FOR                      No.
                                                     Ord. 4of 2006      A38l
                FUNDS)
         OFFSHORE      ORDINANCE
     Sectionadded
      The following is added-
     "70A8. Revisionof assessment to commencement
                               due
                                 (Profits Tax
            of section2 of Revenue
            Exemptionfor OffshoreFunds)
            Ordinance2006
          (1) Notwithstanding any other provisions of this Ordinance, if,
     upon applicationby a person in respectof a year of assessment       ("the
     relevant year") that expiresbeforethe date of commencement section2
                                                                    of
     of the Revenue(Profits Tax Exemption for Offshore Funds) Ordinance
     2006(4 of 2006)madewithin l2 months after that date, or within 6 years
                                 year,whichever the later,it is established
     after the end of the relevant                 is                       to
     the satisfaction of an assessor that the tax chargedfor the relevantyear
     exceeds  the amount that the person would have had to pay had that
     section been in force, the assessor                               for
                                            shall revise the assessment the
     relevant year.
          (2) Where an assessor                                  in
                                  refuses revisean assessment accordance
                                          to
     with an applicationmade under this section,he shall give notice of the
     refusalin writing to the personwho made the application and the person
     thereuponhas the samerights of objectionand appealunder this Part as
     if the noticeof refusalwerea noticeof assessment.".

4.          15
     Schedule added
     The following is added-

                               ..SCHEDULE 5
                                         I               [ss.20AB & 20AE]

                                                     PNOT'NSOT'
       PnovISIONS FOR ASCNNTEININGAIT,IOUNT ASSESSABLE
                                          OF
          ResroeNr PnRsoN    SscrtoN 20AE oF THISORoINaNcs
                         UNDER

                                    PART I
     l. The amount regardedas the assessable    profits of a residentperson
     for a year of assessment the total sum arrived at by adding up the
                                is
     assessable profits of the non-residentperson that would have been
     chargeable tax under Part IV of this Ordinancebut for section20AC of
                to
     this Ordinance("exemptprofits") for eachday in the period in that year
     of assessment  during which the residentpersonhas a direct or indirect
     beneficial                          person.
               interestin the non-resident
REVENUE (PROFITSTAX EXEMPTION FOR                 Ord. No. 4 o12006   A3B3
   OFFSHOREFUNDS) ORDINANCE

2. For the purposesof sectionl, the exemptprofits of a non-resident
                                                                   in
personfor a particular day in a year of assessment to be ascertained
                                                are
accordance with the following formula-
                                     BxC
                              A _
                                      D

where: A meansthe exempt profits of the non-resident    person for a
         particularday in a yearof assessment;
       B meansthe extentof the resident person's          interestin
                                                 beneficial
         the non-resident personon the particularday, expressed a as
         percentage            in
                     determined accordance   with Paft 2;
       C meansthe exemptprofits of the non-resident   personfor the
         accountingperiod of the non-resident   person in which the
         particular day falls;
       D meansthe total number of days in the accountingperiod of
         the non-resident personin which the particularday falls.

                                PART 2

L Where a residentperson has a direct beneficialinterestin a non-
resident person,the extentof the beneficial interestof the resident person
in the non-residentpersonis-
          (a) wherethe non-resident  personis a corporationthat is not a
              trusteeof a trust estate,the percentage the issuedshare
                                                       of
              capital (howeverdescribed)of the corporation held by the
              resident person;
          (b) wherethe non-resident  personis a partnership   that is not a
              trusteeof a trust estate, percentage the profits of the
                                       the            of
              partnership which the resident
                          to                    personis entitled;or
          (r) wherethe non-resident   personis a trusteeof a trust estate,
              the percentagein value of the trust estate in which the
              resident personis interested.
2. Where a residentpersonhas an indirect beneficial      interestin a non-
residentperson,the extentof the beneficial  interestof the residentperson
in the non-residentpersonis-
          (a) wherethereis one interposed  person,the percentage    arrived
              at by multiplying the percentagerepresentingthe extent
              of the beneficial interest of the resident person in the
              interposed personby the percentage   representing extent
                                                                the
              of the beneficialinterest of the interposedperson in the
              non-resident person;or
     REVENUE (PROFITSTAX EXEMPTION FOR                Ord. No.4of 2006   A385
        OFFSHOREFUNDS) ORDINANCE

              (b) where there is a seriesof 2 or more interposedpersons,
                  the percentagearrived at by multiplying the percentage
                  representing   the extent of the beneficial interest of the
                  residentpersonin the first interposed    person in the series
                  by-
                    (i) the percentage  representing extentof the beneficial
                                                    the
                        interestof eachinterposed   person(other than the last
                        interposed                      in
                                    person)in the series the next interposed
                        personin the series;  and
                   (ii) the percentage              the
                                        representing extentof the beneficial
                                                     personin the series the
                        interestof the last interposed                  in
                        non-resident person.
     3.   For the purposes section2-
                             of
              (a) section I appliesin determiningthe extent of the beneficial
                   interestof a residentpersonin an interposedpersonas if
                   references a non-residentperson in that section were
                                 to
                   references an interposed
                                to               person;
              (b) section I appliesin determiningthe extent of the beneficial
                   interestof an interposed                          personas
                                               personin a non-resident
                   if referencesto a resident person in that section were
                   references an interposed
                                to               person;
              (c) section I appliesin determiningthe extent of the beneficial
                   interestof an interposed    person(first-mentioned
                                                                    interposed
                   person) in another interposedperson (second-mentioned
                   interposed    person)as if-
                     (i) references a residentperson in that section were
                                     to
                         references the first-mentionedinterposedperson;
                                     to
                         and
                    (ii) references a non-residentperson in that section
                                     to
                         were references the second-mentioned
                                           to                       interposed
                         person.".

5.          16
     Schedule added
     The following is added-

                               ..SCHEDULE16                         [s. 20AC]
                                    TnRNsacrIoNS
                            Specrpreo
     l.                in
          a transaction securities.
     2.                in
          a transaction futurescontracts.
 REVENUE (PROFITS TAX EXEMPTION FOR                  Ord. No. 4 of 2006   A387
     OFFSHOREFUNDS) ORDINANCE
a
J.                in
     a transaction foreignexchange    contracts.
4.   a transaction           in
                  consisting the making of a depositother than by way
     of a money-lending  business.
5.   a transactionin foreign currencies.
6.                in
     a transaction exchange-traded   commodities.
     In this Schedule-
"collective investmentscheme" (+ffi&HHtglJ) means arrangements               in
     respect any property-
             of
          (a) under which the participatingpersonsdo not have day-to-
              day control over the management the property, whether
                                                      of
               or not they have the right to be consulted or to give
              directions respect the management;
                           in          of
          (b) under which-
                 (i) the property is managed a whole by or on behalf of
                                                as
                     the personoperatingthe arrangements;
                (ii) the contributionsof the participatingpersonsand the
                     profits or income from which payments are made to
                     them are pooled;or
               (iii) the property is managed a whole by or on behalf of
                                                as
                     the person operating the arrangements,and the
                     contributions of the participating persons and the
                     profits or income from which payments are made to
                     them are pooled;and
          (c) the purpose or effect, or pretendedpurpose or effect, of
              which is to enable the participatingpersons,whether by
               acquiringany right, interest,   title or benefitin the property
               or any part of the propertyor otherwise, participate or
                                                           to             in
              receive-
                                                                    to
                 (i) profits, incomeor other returnsrepresented ariseor
                     to be likely to arise from the acquisition, holding,
                     management disposal the property or any part of
                                    or          of
                     the property, or sumsrepresented be paid or to be
                                                          to
                     likely to be paid out of any such profits, income or
                     other returns:or
                (ii) a payment or other returns arising from the
                     acquisition,                                       of
                                   holding or disposalof, the exercise any
                     right in, the redemptionof, or the expiry of, any right,
                     interest,title or benefitin the property or any part of
                     the property;
REVENUE (PROFITS TAX EXEMPTION FOR                  Ord. No. 4 of 2006   A389
    OFFSHOREFUNDS) ORDINANCE
"contract for differences"(EIHAAI) meansan agreement purpose or  the
     effect of which is to obtain a profit or avoid a loss by reference      to
     fluctuationsin the valueor price of propertyof any description in    or
     an   index or other factor designated for that purpose in the
     agreement;
"debenture" (Gffi-gl includes debenture stocks, bonds, and other
     securitiesof a corporation, whether constituting a charge on the
     assets the corporationor not;
             of
"deposit"(ft+ means loan of money-
                           a
                  )
           (a) at interest;  or
           (b) repayable a premiumor repayable
                            at                           with any consideration
                in moneyor money'sworth;
"exchange-traded      commodity" (ft\-hEfHFH'1ffiffi) meansgold or silver
     traded on a commodity exchangein Hong Kong to which the
     Commodity Exchanges          (Prohibition)Ordinance(Cap. 82) does not
     apply by virtue of section3(d) of that Ordinance;
"foreign exchange     contract" (rlEX-h#,4!) meansa contractother than a
     futures contract and an options contract, wherebythe parties to the
     contract agreeto exchange       different currencies a future time;
                                                           at
"futures contract" (ffiH.#A|) means-
           (a) a contractor an option on a contractthat is listedor traded
                on the Hong Kong FuturesExchange           Limited; or
           (b) any other contract for differences-
                  (i) that is listed on a specified                    or
                                                     stock exchange, traded
                      on a specifiedfutures exchange,     within the meaningof
                                                         I
                      section1 of Part I of Schedule to the Securities     and
                      FuturesOrdinance     (Cap. 571);
                 (ii) that an authorizedinstitution within the meaning of
                      the Banking Ordinance (Cap. 155) may enter into
                      under that Ordinance;or
                (iii) the transactionin respectof which is regulatedby or
                      under, or is carried out in compliance with, the
                      Securities FuturesOrdinance
                                 and                        (Cap. 571);
"options contract" (tr{EA*t) meansa contractthat givesthe holderof the
     contractthe option or right, exercisable or beforea time specified
                                                   at
     in the contract to-
           (o) buy or sell-
                  (i) at an agreed consideration an agreed quantity of a
                      specifiedfutures contract, share or other property; or
                 (ii) an agreedvalue of a specified   futurescontract, shareor
                      other property;or
REVENUE (PROFITS TAX EXEMPTION FOR                 Ord. No. 4 o12006   A39l
    OFFSHOREFUNDS) ORDINANCE

         (b) be paid an amount of money calculatedby reference the     to
               value of suchfuturescontract, shareor other property or by
               reference the level of an index, as may be specifiedin the
                         to
               contract;
"property" (FdE) includes-
         (:a) money,goods,choses action and land, whetherin Hong
                                        in
               Kong or elsewhere;    and
         (b) obligations, easements        and every description of estate,
               interestand   profit, presentor future, vestedor contingent,
               arising out of or incident to property as defined in
               paragraph(o);
"securities"('##) means-
         (o) shares,stocks, debentures,        loan stocks, funds, bonds or
               notes of, or issuedby, a body, whether incorporatedor
               unincorporated, a government municipalgovernment
                                 or                 or
               authority;
         (b) rights, options or interests(whetherdescribed units or
                                                                  as
               otherwise) in, or in respect of, such shares, stocks,
               debentures,  loan stocks,funds,bondsor notes;
         (c) certificatesof interest or participation in, temporary or
               interim certificates for, receiptsfor, or warrantsto subscribe
               for or purchase, such shares, stocks, debentures,loan
               stocks,funds,bondsor notes;
         (d) interests any collective
                        in                  investment scheme;
         (e) interests,rights or property, whether in the form of an
               instrumentor otherwise,     commonlyknown as securities,
                                                     of,
    but does not include sharesor debentures or rights, options or
    interests (whetherdescribed units or otherwise) or in respect
                                   as                      in,            of,
    shares debentures a companythat is a
           or               of,                       privatecompanywithin
    the meaningof section29 of the Companies          Ordinance (Cap. 32);
"share" (Etfrr)meansany sharein the sharecapital of a corporation, and,
    exceptwhere a distinction betweenstock and sharesis expressor
    implied,includesstock.".
                                                                                                         Appendix B
                              The central management and control test
                          Residence of different forms of investment vehicles

            Investor           Investment       Management of          Fund           Taxable Entity    Residence of
                                 Vehicle      Investment Vehicle     Management                        Taxable Entity
                                                    (Note1)

1.                        Funds remitted             N.A.                              Individual A
                          directly to HK                                                  (Note2)
                          Fund Manager
         Individual A
                                                                   Licensed Hong
2.       not ordinarily Trust set up in      Trustee B resides                          Trustee B
                                                                   Kong Fund
         or temporarily Cayman Islands       in Cayman Islands                                          Non-resident
                                                                   Manager with
         resides in
                                                                   full discretion
         Hong Kong
3.                      Mutual Fund          Board of directors                      Mutual Fund
                        Corporation C        in Cayman Islands                       Corporation C
                        set up in
                        Cayman Islands

4.                        Funds remitted             N.A.                              Company D
                          directly to HK
                          Fund Manager
         Company D
         carrying on
                                                                   Licensed Hong
5.       other business Trust set up in      Trustee E resides                          Trustee E
                                                                   Kong Fund
         in London;      Cayman Islands      in Cayman Islands                                          Non-resident
                                                                   Manager with
         managed by a
                                                                   full discretion
         board of
6.       directors there Mutual Fund         Board of directors                      Mutual Fund
                         Corporation F       in Cayman Islands                       Corporation F
                         set up in
                         Cayman Islands




     1
         The relevant board of directors can remove the fund manager, monitors and evaluates the
          fund manager’s performance, and may direct the funds to be invested in other countries. In
          the case of a trust, the relevant trustee is legally in charge of the trust estate and ultimately
          responsible to the beneficiaries (i.e. unit holders). He supervises the operation of the trust
          to ensure compliance with the trust’s constitutive documents, ensures that the fund manager
          complies with the investment strategy, reviews the fund manager’s performance and has the
          power to remove the fund manager in accordance with the relevant provisions in the trust
          deed. The mere fact that the majority of the directors of the management board of a
          company (if that is the highest level of control of the business of the fund) are resident in
          Hong Kong would not adversely affect the residence status of the company (see paragraph
          15). Neither will the mere outsourcing of back office administrative work to a service
          provider in Hong Kong affect the taxable entity’s residence.
     2
         The residence of an individual is based on the “ordinary or temporary residence” test and not
          the “central management and control” test. This example is added for the sake of
          completeness.
        Investor          Investment        Management of          Fund           Taxable Entity    Residence of
                            Vehicle       Investment Vehicle     Management                        Taxable Entity
                                                (Note1)

7.   Offshore         Private             Board of directors    2 licensed      Company G          Resident
     investors        Company G           comprising only 2     Hong Kong                          (centrally
                      incorporated in     HK fund managers      Fund Managers                      managed and
                      BVI                 in HK                 (the directors)                    controlled in
                                                                with full                          HK)
                                                                discretion

8.   Offshore         Private             Board of directors    Licensed Hong      Company H
     investors        Company H           comprising HK         Kong Fund                          Non-resident
                      incorporated in     fund managers and     Managers (the
                      BVI                 other non-resident    directors) with
                                          persons, holding      full discretion
                                          majority of board
                                          meetings (through
                                          which central
                                          management and
                                          control is
                                          exercised –footnote
                                          1) outside HK

9.   Offshore         Limited           Non-resident            Licensed Hong Limited              Non-Resident
     investors        partnership J set general partners        Kong Fund       partnership J      (centrally
                      up in BVI         only; limited           Managers with                      managed and
                                        partners [may           full discretion                    controlled
                                        include resident                                           outside HK)
                                        persons] have no
                                        management rights

10. Company K         Branch set up in Company K itself         Licensed Hong Company K            Non-resident,
    incorporated      Hong Kong –      in Japan                 Kong Fund                          but no
    in Japan and      sells home                                Manager with                       exemption
    managed by a      appliances and                            full discretion                    since selling
    board of          deals in HK                                                                  of home
    directors         securities                                                                   appliances is a
    there; deals in                                                                                separate
    home                                                                                           business
    appliances

11. Global fund       A portion of the           N.A.           Licensed Hong Institution L        Non-resident
    Institution L     global funds                              Kong Fund
    incorporated      remitted directly                         Manager with
    and managed       to HK Fund                                full discretion
    by a board of     Manager; no
    directors         investment
    outside HK;       vehicle is set up
    invests in the
    global
    securities
    markets




                                                   2
                                                                                  Appendix C

             Profits tax exemption for offshore funds - specified transactions

                  Transaction in                   Covered by specified transactions?

 1     Foreign exchange/currencies

1(a)   Foreign exchange forwards              Yes – “transaction in foreign exchange
                                              contract”. Both leveraged and non-leveraged
                                              transactions are covered.

1(b)   Foreign exchange options               Yes – “transaction in securities”– paragraph (e).
                                              Both leveraged and non-leveraged transactions
                                              are covered.

1(c)   Currency swaps                         Yes – “transaction in foreign exchange
                                              contract”. Both leveraged and non-leveraged
                                              transactions are covered.

1(d)   Spot foreign exchange transactions     Yes – “transaction in foreign currencies”.
                                              Transactions of foreign currencies exchanged
                                              from/to Hong Kong dollars are covered.

1(e)   Deposits                               Yes – “transaction consisting in the making of a
                                              deposit other than by way of a money-lending
                                              business”.

1(f)   Certificates of deposit, bills of      Yes – “transaction in securities”– paragraph (e).
       exchange and promissory notes

1(g)   Borrowing/lending money (in any        No, if the activities amount to the carrying on
       currency, and whether on a secured     of a money-lending business similar to a
       or unsecured basis) (including         financial institution or a licensed money-lender.
       participating as a lender in           The absence of a banking or money-lending
       syndicated       loans,      selling   licence is not conclusive as to whether or not
       sub-participations in loans to third   such a business is being carried on. The
       parties, etc.)                         normal course of the business of an offshore
                                              fund should not include carrying on a money
                                              lending business, which is a question of fact.
                                              If the placing of funds is by way of investment,
                                              it is covered by “transaction consisting in the
                                              making of a deposit other than by way of a
                                              money-lending business”.

1(h)   Non-performing loans                   Yes – “transaction in securities”– paragraph (e).
                  Transaction in                       Covered by specified transactions?

 2     Equities

2(a)   Listed equities (whether in Hong           Yes – “transaction in securities”– paragraph (a).
       Kong or elsewhere)

2(b)   Unlisted equities issued by ‘public’       Yes – “transaction in securities”– paragraph (a).
       companies (whether incorporated
       in Hong Kong or elsewhere)

2(c)   Equities in private companies              No, not covered by the specified transactions.
                                                  A person may in effect trade in any types of
                                                  assets [e.g. landed property] through transfer of
                                                  shares in private companies purposely set up
                                                  for holding such assets.

2(d)   Stock borrowing and lending and            Yes – “transaction in securities”– paragraph (a).
       repurchase and reverse-repurchase
       transactions in equities

2(e)   Hedging    activities   involving          Yes – “transaction in securities”– paragraph (a).
       buying and selling equities as a
       hedge to some derivative or other
       position

2(f)   Short selling equities (whether on         Yes – “transaction in securities”– paragraph (a).
       market or off market)

 3     Equity derivatives

3(a)   Exchange-traded futures contracts          Yes – “transaction in futures contracts”.
       over equities (including equity
       index products)

3(b)   Exchange-traded options on futures         Yes – “transaction in futures contracts”.
       contracts over equities (including
       equity index products)

3(c)   Exchange-traded stock option               Yes – “transaction in futures contracts”.
       contracts over equities (including
       equity index products)

3(d)   Over-the-counter (“OTC”) equity            Yes – “transaction in futures contracts” –
       contracts for differences (whether         paragraph (b).
       over one or more equities)




                                              2
                Transaction in                       Covered by specified transactions?

3(e)   OTC call/put options over equities       Yes – “transaction in securities”– paragraph (b).
       (physical delivery) (whether over
       one or more equities)

3(f)   OTC call/put options over equities       Yes – “transaction in futures contracts”.
       (cash settlement) (whether over
       one or more equities)

3(g)   OTC forwards over equities               Yes – “transaction in securities”– paragraph (b).
       (physical delivery) (whether over
       one or more equities)

3(h)   OTC forwards over equities (cash         Yes – “transaction in futures contracts” –
       settlement) (whether over one or         paragraph (b).
       more equities)

3(i)   OTC equity asset swaps, total            Yes – “transaction in securities”– paragraph (b).
       return swaps, swaptions (whether
       over one or more equities)

3(j)   Warrants (whether exchange traded        Yes – “transaction in securities”– paragraph (b).
       or OTC)

3(k)   OTC swaps of dividend on equities        Yes – “transaction in securities”– paragraph (e).
       against some other income stream
       (whether over one or more
       equities)

 4     Funds

4(a)   Funds (whether exchange traded or        Yes – “transaction in securities”– paragraph (a).
       not)

4(b)   Funds of funds                           Yes – “transaction in securities”– paragraph (a).

4(c)   Hedge funds                              Yes – “transaction in securities”– paragraph (a).

4(d)   OTC call/put options over funds          Yes – “transaction in securities”– paragraph (b).
       (physical delivery) (whether over
       one or more funds)

4(e)   OTC call/put options over funds          Yes – “transaction in futures contracts”.
       (cash settlement) (whether over
       one or more funds)




                                            3
                Transaction in                        Covered by specified transactions?

4(f)   OTC forwards over funds (physical         Yes – “transaction in securities”– paragraph (b).
       delivery) (whether over one or
       more funds)

4(g)   OTC forwards over funds (cash             Yes – “transaction in futures contracts” –
       settlement) (whether over one or          paragraph (b).
       more funds)

 5     Fixed income

5(a)   Any listed bonds, debentures or           Yes – “transaction in securities”– paragraph (a).
       notes (whether in Hong Kong or
       elsewhere)    (including     ‘plain
       vanilla’ bonds,     bonds     with
       warrants,   convertible     bonds,
       exchangeable bonds, structured
       notes, asset-backed securities,
       mortgage-backed securities)

5(b)   Any unlisted bonds, debentures or         Yes – “transaction in securities”– paragraph (a).
       notes issued by ‘public’ companies
       (whether incorporated in Hong
       Kong or elsewhere) (including
       ‘plain vanilla’ bonds, bonds with
       warrants,     convertible   bonds,
       exchangeable bonds, structured
       notes)

5(c)   Unlisted bonds, debentures or notes       No, not covered by the specified transactions.
       issued by private companies               The intended result of buying/selling shares in
       (including ‘plain vanilla’ bonds,         private companies may be achieved through
       bonds with warrants, convertible          arrangements involving bonds/debentures/notes
       bonds,     exchangeable     bonds,        convertible into shares. See item 2(c) above.
       structured notes)

5(d)   Stock borrowing and lending and           Yes – “transaction in securities”– paragraph (a).
       repurchase and reverse-repurchase
       transactions   in   any    bonds,
       debentures or notes

5(e)   Hedging     activities    involving       Yes – “transaction in securities”– paragraph (a).
       buying and selling any bonds,
       debentures or notes as a hedge to
       some derivative or other position




                                             4
                Transaction in                        Covered by specified transactions?

5(f)   Short selling any bonds, debentures       Yes – “transaction in securities”– paragraph (a).
       or notes (whether on market or off
       market)

 6     Fixed income derivatives

6(a)   OTC call/put options over bonds,          Yes – “transaction in securities”– paragraph (b).
       debentures or notes (physical
       delivery) (whether over one or
       more bonds, debentures or notes)

6(b)   OTC call/put options over bonds,          Yes – “transaction in futures contracts”.
       debentures    or    notes    (cash
       settlement) (whether over one or
       more bonds, debentures or notes)

6(c)   OTC forwards over bonds,                  Yes – “transaction in securities”– paragraph (b).
       debentures or notes (physical
       delivery) (whether over one or
       more bonds, debentures or notes)

6(d)   OTC forwards over bonds,                  Yes – “transaction in futures contracts” –
       debentures    or    notes    (cash        paragraph (b).
       settlement) (whether over one or
       more bonds, debentures or notes)

6(e)   OTC bond, debenture or note asset         Yes – “transaction in securities”– paragraph (b).
       swaps,   total   return     swaps,
       swaptions (whether over one or
       more bonds, debentures or notes)

6(f)   OTC swaps of interest paid on             Yes – “transaction in securities”– paragraph (e).
       bonds, debentures or notes against
       some    other     income   stream
       (whether over one or more bonds,
       debentures or notes)

6(g)   OTC credit default swaps (physical        Yes – “transaction in securities”– paragraph (e).
       delivery    of    the  underlying
       reference obligations)

6(h)   OTC credit default swaps (cash            Yes – “transaction in securities”– paragraph (e).
       settled)

6(i)   Credit-linked notes (whether listed       Yes – “transaction in securities”– paragraph (a).
       or unlisted)


                                             5
                 Transaction in                          Covered by specified transactions?

6(j)   Collateralised debt obligations              Yes – “transaction in securities”– paragraph (a).

 7     Interest rate derivatives

7(a)   OTC interest rate swaps (whether             Yes – “transaction in securities”– paragraph (e).
       fixed rate v fixed rate, fixed rate v
       floating rate, or floating rate v
       floating rate)

7(b)   OTC     interest    rate     options,        Yes – “transaction in futures contract” –
       swaptions, caps, collars, floors, etc.       paragraph (b).

 8     Commodities

8(a)   Commodities (physical delivery)              Yes – “transaction in exchange-traded
                                                    commodities” [buying/selling gold and silver
                                                    through the Hong Kong Gold and Silver
                                                    Exchange Society]. Overseas transactions in
                                                    exchange-traded    commodities      (physical
                                                    delivery) would only give rise to non-taxable
                                                    offshore profits.

8(b)   Exchange-traded futures contracts            Yes – “transaction in futures contracts”.
       over   commodities     (including
       commodity index products)

8(c)   Exchange-traded options on futures           Yes – “transaction in futures contracts”.
       contracts   over     commodities
       (including   commodity      index
       products)

8(d)   OTC commodity contracts for                  Yes – “transaction in futures contracts” –
       differences (whether over one or             paragraph (b).
       more commodities)

8(e)   OTC     call/put options   over              Yes – “transaction in securities”– paragraph (e).
       commodities (physical delivery)
       (whether over one or more
       commodities)


8(f)   OTC     call/put options over                Yes – “transaction in futures contracts”.
       commodities (cash settlement)
       (whether over one or more
       commodities)



                                                6
                  Transaction in                      Covered by specified transactions?

 8(g)   OTC forwards over commodities            Yes – “transaction in securities”– paragraph (e).
        (physical delivery) (whether over
        one or more commodities)

 8(h)   OTC forwards over commodities            Yes – “transaction in futures contracts” –
        (cash settlement) (whether over          paragraph (b).
        one or more commodities)

 8(i)   OTC commodity asset swaps, total         Yes – “transaction in securities”– paragraph (e).
        return swaps, swaptions (whether
        over one or more commodities)

  9     Other derivatives

 9(a)   Insurance policies                       No, not covered by the specified transactions.
                                                 An insurance policy is presently not an
                                                 investment “commonly known as securities”.

 9(b)   OTC energy derivatives (e.g. over        Yes - “transaction in securities” – paragraph (e),
        electricity supply/capacity)             if there is physical delivery of the electricity
                                                 supply. Otherwise covered by “transaction in
                                                 futures contracts” – paragraph (b).

 9(c)   OTC weather derivatives                  Yes – “transaction in futures contracts” –
                                                 paragraph (b).

 9(d)   OTC freight derivatives                  Yes – “transaction in futures contracts” –
                                                 paragraph (b).      May also be covered by
                                                 “transaction in securities” – paragraph (e), if
                                                 there is physical delivery.

 9(e)   OTC derivatives over insurance           No, not covered by the specified transactions.
        policies                                 See item 9(a) above.

 9(f)   OTC derivatives over inflation           Yes – “transaction in futures contracts” –
        rates and economic statistics            paragraph (b).

 9(g)   Derivatives on derivatives               Yes – “transaction in securities”– paragraph (e).



Notes : Unless otherwise stated, all shares, stocks, bonds, debentures, notes or other
        equities are not those in, or in respect of, private companies.

        Paragraphs mentioned in the right-hand column refer to the paragraphs of the
        definitions of the relevant specified transactions stipulated in Schedule 16.



                                             7
                                                                          Appendix D

The following are the specified stock exchanges and specified futures exchanges within
the meaning of section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance
(Cap. 571) [as at September 2006].


                        SPECIFIED FUTURES EXCHANGES


1.       Australian Stock Exchange
2.       Bourse de Montreal Inc.
3.       Chicago Board of Trade
4.       Chicago Board Options Exchange
5.       Chicago Mercantile Exchange Inc.
6.       Commodity Exchange, Inc.(New York)
7.       Eurex
8.       Euronext Amsterdam
9.       Hong Kong Futures Exchange Limited
10.      Korea Stock Exchange
11.      London International Financial Futures and Options Exchange
12.      London Metal Exchange
13.      Marche a Terme International de France
14.      Marche des Options Negociables de Paris
15.      New York Cotton Exchange, Inc.
16.      New York Futures Exchange
17.      New York Mercantile Exchange
18.      New Zealand Futures and Options Exchange
19.      Osaka Securities Exchange
20.      Pacific Exchange
21.      Philadelphia Stock Exchange
22.      Singapore Exchange Derivatives Trading Limited
23.      Stockholmsborsen
24.      Sydney Futures Exchange, Ltd.
25.      Tokyo Grain Exchange
26.      Tokyo International Financial Futures Exchange
27.      Tokyo Stock Exchange
28.      Winnipeg Commodities Exchange Inc.
                     SPECIFIED STOCK EXCHANGES


1.    American Stock Exchange
2.    Australian Stock Exchange
3.    Bolsa de Madrid
4.    Borsa Italiana S.p.A.
5.    Bourse de Montreal Inc.
6.    Copenhagen Stock Exchange
7.    Deutsche Borse AG
8.    Euronext Amsterdam
9.    Euronext Brussels
10.   Euronext Paris
11.   Helsinki Exchanges
12.   Japanese Association of Securities Dealers Automated Quotations
13.   Korea Stock Exchange
14.   Kuala Lumpur Stock Exchange
15.   London Stock Exchange
16.   Luxembourg Stock Exchange
17.   Nagoya Stock Exchange
18.   National Association of Securities Dealers Automated Quotations
19.   New York Stock Exchange
20.   New Zealand Stock Exchange
21.   Osaka Securities Exchange
22.   Oslo Bors
23.   Philippine Stock Exchange Inc.
24.   Singapore Exchange Securities Trading Limited
25.   The Stock Exchange of Hong Kong Limited
26.   Stock Exchange of Thailand
27.   Stockholmsborsen
28.   SWX Swiss Exchange
29.   Tokyo Stock Exchange
30.   Toronto Stock Exchange
31.   Wiener Borse AG




                                       2
                                                                                   Appendix E

Resident person holding indirect beneficial interest in a tax-exempt offshore fund
                  Ascertainment of deemed assessable profits


 Resident                                             Non-resident




                100%                        90%                      80%
 Resident                Corporation                 Partnership              Trust Estate




                                                                                       70%
                          indirect beneficial
                          interest – 50.4%

                                                                              Tax-exempt
                                                                              offshore fund


Note:                     means direct beneficial interest
                          means indirect beneficial interest

During the accounting year ended 31 March 2007, the tax-exempt offshore fund made
profits of $50 million from securities trading transactions in Hong Kong, which are
exempt profits under the Exemption Provisions. The resident person held indirect
beneficial interest of 50.4% (100% x 90% x 80% x 70%) in the offshore fund through
interposed non-resident persons from 1 to 31 March 2007. The amount of the resident
person’s deemed assessable profits for the year of assessment 2006/07 ascertained in
accordance with the formula in Schedule 15 is -

   Amount of deemed assessable profits for a particular day in the year of assessment
   2006/07 -

                        BxC                50.4%     x        $50M
            A     =                =                                     =   $0.069M
                          D                        365 days

   Amount of the resident person’s deemed assessable profits for the year of
   assessment 2006/07 (from 1 to 31 March 2007) -

            =    A     x 31 days       =    $0.069M x          31 days

            =    $2.139M

				
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