Asset Management Tax Highlights – Asia Pacific

In this edition’s asset management tax highlights for the Asia Pacific October to December 2014 region, we highlight industry developments from Australia ,, Kong, India, and Thailand, which may impact your asset management business. We hope you find these updates of interest, and will be pleased to discuss these developments and issues with you further.

Australia Australian Taxation Office provides guidance on equity over-ride rule

The Australian Taxation Office (ATO) has provided long-awaited guidance on the application of the equity over-ride rule in section 974-80 of the Income Tax Assessment Act 1997. The guidance represents initial efforts to deal with the ambiguity of the section 974-80 and gives taxpayers some comfort that it will respect basic inbound investment structures. While there is still China uncertainty associated with this CSRC issued the new administrative provision, the draft determinations regulations and subsidiary rules for issued on 11 November 2014 provide privately placed, exchange-traded, welcome certainty to many taxpayers and asset-backed securities in China that have employed basic inbound investment structures. The China Securities Regulatory Commission (CSRC) released the new For further details, please refer to Australian Taxation Office provides guidance on equity Provisions on Administration of the Asset over-ride rule Securitization Business of Securities Companies and Fund Management Subsidiaries (the Regulation) in November 2014. The new Regulation sets out the basic administrative rules, information disclosures and due diligence requirements for securities companies and subsidiaries of fund management companies to operate asset-backed securitisation businesses. Market players should prepare themselves for the challenges arising from the new Regulation to capture the opportunities presented. We summarise below the main changes and developments CSRC jointly released Caishui [2014] No.81 (Notice 81), from the new Regulation as compared with the old regulation on the China taxation rules relating to Stock Connect. for asset-backed securitisation below: Under the Notice 81, the taxation policies of corporate income tax (CIT), business tax (BT), as well as individual • There is now a clearer legal framework and regulatory income tax (IIT) were clarified as follows: system. The “Securities Law”, the “Securities Investment Fund Law”, and the “provisional measures 1. Taxation policies of China investors’ investments in on the administration and supervision of private eligible shares listed on the Stock equity funds” are the host laws of the Regulation. The Exchange through Stock Connect (southbound CSRC will be the supervisor, while the Securities trading link) Association of China (SAC) and the Asset Management Association of China (AMAC) will carry out industry a) Southbound trading link – China corporate investors self-discipline management. • Gains from the transfer • Subject to CIT • A change from advance approval to record filing. of eligible shares listed • Will be taxed or exempted in accordance in Hong Kong with the current BT regulations Securities companies and subsidiaries of fund management companies would now perform record • Dividend income • Generally subject to CIT; dividends from eligible shares from H shares held by the China filing with the AMAC within five working days upon listed in Hong Kong corporate investor for no less than 12 setting-up specialised projects. months will be exempted from CIT • Extending the qualified operating companies from • China corporate investors should make a self-declaration and settle the tax payable securities companies to include subsidiaries of fund management companies. b) Southbound trading link – China individual investors • Using a negative list to enlarge the scope of eligible • Gains from the • Temporarily exempt from IIT for the transfer of eligible period from 17 November 2014 until 16 underlying assets instead of limiting the scope. shares listed in Hong November 2017 • More securities exchange markets are allowed for Kong • Temporarily exempt from BT in quotation and transfers of asset-backed securitisation. accordance with the current regulation • Dividend income • Dividends will be subject to IIT at 20%. • A clear definition of “qualified investors” is provided. from eligible shares The H share company has to withhold listed in Hong Kong IIT relating to its dividend distribution / Observation the China Securities Depository and Clearing Corporation has to withhold IIT This new Regulation represents a big step for the on dividends from non-H shares regulatory authority towards strengthening the • Dividends paid to China securities administration of asset-backed securities in China. Not investment funds would follow the same only does the Regulation clarify the administration rules, IIT treatment as above the change to record filing rather than the original pre-approval system will reduce the regulatory risk and 2. Taxation policies of Hong Kong investors’ investments in transaction costs significantly. It may make asset-backed eligible A shares listed on the Shanghai Stock Exchange securitisation a more routine business operation. In the through Stock Connect (northbound trading link) meantime, the negative list and the inclusion of subsidiaries of fund management companies broadens the • Gains from the • Temporarily exempt from IIT/CIT scope and offers a more convenient financing channel for transfer of eligible • Temporarily exempt from BT companies with qualified underlying assets. A shares • Stamp duty payable by the seller

However, the number of asset-backed securities holders is • Dividend income • Dividend will be subject to 10% still limited to 200. This limit may lead to a liquidity from eligible withholding tax and the listed company shortage of the product, and is expected to be removed as shares listed in distributing the dividends has the Hong Kong withholding obligation the market gradually matures. • If the recipient is entitled to a lower treaty rate, it can apply to the in-charge tax Launch of the Shanghai-Hong Kong Stock bureau of the payer for a refund Connect Scheme

The CSRC and the Securities and Futures Commission Observations (SFC) jointly announced the launch of stock trading under the Shanghai-Hong Kong Stock Connect Scheme The launch of Stock Connect is considered a securities (Stock Connect) on 17 November 2014. trading milestone to those in the China and Hong Kong capital markets alike. Notable reasons include: In conjunction with this, the Ministry of Finance (MOF), the State Administration of Taxation (SAT) and the

2 Asset Management Tax Highlights – Asia Pacific • Launch of the Shenzhen-Hong Kong stock connect scheme As another important stock exchange in the China capital market, the Shenzhen stock exchange primarily serves the stock trading of entrepreneurial enterprises, which to some extent, represents the growth trend of the China economy. The launch of the Shenzhen-Hong Kong stock connect scheme will be warmly welcomed considering the trend of capital markets internationalisation, and closer relationships between the China and Hong Kong financial centres.

The long awaited withholding tax policies for QFII/RQFIIs capital gains

Together with the Stock Connect launch and the issuance of Notice 81, the authorities also released Caishui [2014] No. 79 (Notice 79), which provides a long-awaited clarification on the withholding tax (WHT) policy for capital gains in relation to QFIIs/RQFIIs schemes. Notice 79 stipulated that QFIIs/RQFIIs without an establishment or place (E&P) in China, or QFIIs/RQFIIs with E&P in China but the income so derived in China is not effectively connected with their E&P, are temporarily exempt from WHT on gains derived from the trading of equity investment assets (including shares) effective from 17 • Promotes RMB internationalisation November 2014. The massive volume of foreign currency exchange under the north trading link stimulates the demand for Observations RMB in Hong Kong’s offshore market and enhances Hong Kong’s status as an offshore RMB centre. At the Notice 79 offered a temporary exemption on capital same time, Stock Connect allows foreign investors to gains for QFIIs/RQFIIs so that they can start on a level directly invest in RMB denominated A shares and also playing field with Stock Connect from its launch. This expands the scope and volume of investment in A blanket tax exemption is consistent with international shares. Stock Connect will undoubtedly enhance the practices and reinforces the promotion of China’s A long-term strength of the RMB and promote future share market and the internationalisation of RMB. RMB internationalisation. However, it is imperative to note that the exemption is • Attracting foreign investment only a temporary measure. It is unclear how long the Following the launch of Stock Connect, some structured exemption will be in place and what should be the products held by overseas listed A share tracking funds grandfathering protection if the exemption is can now be converted to substantive A shares, and the eventually removed. value of blue stocks in the China capital market will increase. In view of this, investment in China may now On the other hand, Notice 79 clearly stipulates that QFIIs/ be more attractive to foreign investors. RQFIIs would be subject to WHT in respect of the capital gains derived pre-17 November 2014. It answered a very • Enhancing market vitality important question that many QFIIs/RQFIIs (and their Given these developments, foreign investors’ demand investors) have been asking over the years. However, there for overseas listed China companies will reduce are still many key tax issues which have yet to be clarified by gradually. However, Stock Connect gives foreign tax authorities such as clarification on the tax payment investors more opportunities to invest in China and location, how taxable income is calculated, how treaty allows them enter into new industries. Since existing benefits can be applied, etc. QFII investors may purchase A shares through Stock Connect, it will attract more overseas funds, which would develop the Shanghai stock market further and enhance its vitality. In addition, Stock Connect also makes it more convenient for China investors to invest in overseas capital markets and diversify their assets.

Asset Management Tax Highlights – Asia Pacific 3 State Council issued the notice regarding cleaning up and standardising preferential policies

The State Council issued a circular (GuoFa [2014] No.45) on the decision to conduct an in-depth reform on the budget administrative mechanism, and notified the issues concerning the clean-up and standardisation of preferential policies on tax and other non-tax aspects. The notice addressed all municipal governments, and requires them to report the results of the clean-up of the preferential policies to the State Council by the end of March 2015. The State Council has set out the following major tasks: • Regions (Province, Autonomous Regions, and Municipalities) are not allowed to formulate respective preferential tax policy, unless it is based on special tax law and regulation or the tax administration regulated be conducted – the procedures will still need to be in Law of the People’s Republic of China Regional defined. Local governments would still be motivated and National Autonomy. be pressured into attracting investments, so preferential • Ministries and commissions of the State Council are not policies in other forms (e.g. paper documents) may be allowed to formulate specific preferential tax policy in presented. As such, a risk assessment should be their drafts of laws, regulations, development plans and undertaken to ensure that any preferential policies can regional policies, unless pre-approved by the State still be enjoyed. Council. From a more positive angle, this clean-up and • Regions are not allowed to exempt, reduce or delay standardisation process may clarify and unify the various charging administrative fees, government fund, and regulations throughout China. According to various social insurance fund from the enterprises. reports, the CSRS and the National Development and • Regions are not allowed to provide financial incentives Reform Commission are making progress to standardise to enterprises unless approved by the State Council. regulations to promote the development of private equity. Financial incentives related to tax revenue or non-tax revenue of fiscal expenditure shall be cancelled. Other kinds of preferential policies shall be progressively Hong Kong standardised, such as bearing the social insurance payment for the enterprises, reduction on electronic or The latest Inland Revenue Department (IRD)’s view water prices and attracting investment by providing on important profits tax and tax treaty issues fiscal incentives or subsidies etc. In the 2014 annual meeting between the IRD and the Observation Hong Kong Institute of Certified Public Accountants, the IRD expressed its views on a number of tax issues that Private equity and venture capital has always been a hot are of interest to taxpayers. While the meeting minutes topic in driving local economic development. In recent are not law and taxpayers can hold a different view from years, local governments and authorities have published those expressed by the IRD in the meeting, the minutes various preferential tax policies and financial incentives, serve as a good reference to the IRD’s stance on various such as individual income tax, value added tax, financial tax issues. Companies with business operations in Hong subsidies, etc. to attract investments. As a result, many Kong or doing business with Hong Kong should take into private equity ventures put in place complex strictures account the views expressed by the IRD in the meeting and set up companies in these local areas to save large minutes to effectively manage their tax matters. Salient amounts of tax. As the State Council begins its clean up points relevant to the asset management industry are and regulation of local incentive policies, company summarised below. structures may now lose their tax efficiencies. Market players should be prepared and be ready to adjust their Source rule for dividends / distributions structures. The IRD clarified that the source of dividends derived from In saying that, although there is a set date for local the mere holding of an investment will generally be governments to report the clean-up result (end of March determined by the place of business operations of the 2015), it is uncertain as to what extent the clean-up will investee company or the place where the investee company

4 Asset Management Tax Highlights – Asia Pacific derived the profits out of which the dividends were paid based on case law1 . As such, dividends received from the India mere holding of an entity which operates its business or generates its profits outside Hong Kong would be offshore Regulatory updates sourced and not taxable in Hong Kong. • On 21 October 2014 the Government notified the However, for an asset management business carried on in Depository Receipts scheme, 2014 which will replace the Hong Kong, the management fees or performance fees existing scheme governing the issuance Depository received (which may be payable in the form of dividends or Receipts (DR). The 2014 DR Scheme became effective distributions) are sourced in Hong Kong since they are from 15 December 2015 and is expected to give impetus derived from asset management services rendered in Hong to Indian entities seeking capital from overseas markets Kong. Such dividends / distributions will be taxed under and allowing overseas investors to participate in the the normal charging section (i.e. section 14) of the Inland Indian markets. No specific approval is required except Revenue Ordinance if the tax exemption in section 262 . when it is in connection with the transfer of securities to a non-resident. The definition of permissible securities Taxation of Hong Kong investment managers / advisers has also been considerably widened.

The IRD disclosed in the meeting that it has examined the • On 29 October 2014, the Union Cabinet chaired by taxation affairs of a few Hong Kong investment managers or Hon’ble Prime Minister, Narendra Modi approved advisers who offered professional services in Hong Kong to liberalised Foreign Direct Investment (FDI) norms in offshore hedge funds or private equity funds and found that Construction Development Sector permitting 100% the management and performance fees paid to them (which investment under the Automatic Route. In particular, were computed on a cost-plus basis) are far below the arm’s the policy relaxation is in the following aspects: length rate, taking into account the significant functions minimum area requirement, minimum FDI and exit performed and risks borne by them in generating the profits route for foreign investors before completion of of the funds. projects. This policy is expected to boost Government’s agenda of housing for all and investment in tier-2 and The IRD reiterated it expects that the investment managers tier-3 cities. or advisers in Hong Kong should be adequately • On 24 November 2014, Securities and Exchange Board of remunerated after taking into account the functions, assets India (SEBI) issued a circular to align the eligibility and and risks attributed to the Hong Kong operation and the investment norms between Foreign Portfolio Investor management / performance fees should be based on an (FPI) regime and subscription through the Offshore arm’s length rate. However, the IRD agreed that the place Derivative Instruments (ODI) route. The Circular intends where the investment managers or advisers render their to address the concerns over possible misuse of structures services should be considered in deciding the extent to for round-tripping and money laundering. Earlier, the FPI which the arm’s length management / performance fees regulations required the subscriber of ODI to be regulated should be chargeable to profits tax. or supervised by the securities market regulator or the banking regulator of the concerned foreign jurisdiction. Proposed stamp duty wavier for exchange traded funds (ETFs) SEBI has now restricted investment via ODI only from The Stamp Duty (Amendment) Bill 2014 was gazetted countries who are Financial Action Task Force (FATF) on 5 December 2014. The Bill seeks to waive stamp duty compliant and are members of the International payable on the transfer of units or shares of all Hong Organization of Securities Commissions (IOSCO). Opaque Kong listed exchange ETFs as proposed in the 2014/15 structures have been specifically barred from subscribing Budget. The Bill has yet to be enacted into law, pending to ODIs. the scrutiny and approval of the Legislative Council. • SEBI (Research Analysts) Regulations, 2014 were Extension of the stamp duty waiver to all Hong Kong notified on 1 September 2014 and came into effect from listed ETFs provides a level playing field for all Hong 1 December 2014. Taking a step further, on 28 November Kong listed ETFs and puts Hong Kong on par with other 2014 SEBI issued a press release stating that these major financial markets. This should help strengthen Regulations shall come into effect from 1 December, Hong Kong’s role as an international financial and asset 2014 and also separately issued instructions to be management centre. followed in applying as a Research Analyst. Further, on 9 December, 2014, SEBI issued FAQs to address the queries

1. The Australian tax case cited by the IRD in the meeting is Nathan v FCT 25 of various market participants on the applicability and CLR 183. interpretation of these Regulations. 2. Under section 26 of the IRO, dividends from a corporation which is chargeable to profits tax or distributions from an unincorporated business which is chargeable to profits tax are exempt from profits tax to avoid double taxation.

Asset Management Tax Highlights – Asia Pacific 5 • On 14 October 2014, the Ministry of Corporate Affairs • Introduction of inheritance tax in Thailand (MCA) issued a general circular stating that a trustee (being a body corporate) of Real Estate Investment Trusts On 18 November 2014, the cabinet of Thailand (REITs), Infrastructure Investment Trust (InvITs), or any approved the draft Inheritance Tax Act proposed by other trust set up under the regulations prescribed under the Ministry of Finance to impose inheritance tax in the SEBI shall not be barred from becoming a partner in Thailand and the draft Revenue Code Amendment a limited liability partnership (LLP). Act to include gift tax in the provisions of the Revenue Code. Tax updates The following persons will be liable for Thai inheritance • On 17 October 2014, the Bangalore Bench of the tax at a flat rate of 10% on estates valued at over Baht 50 Hon’ble Income-tax Appellate Tribunal (the Tribunal) million (approximately USD 1.6 million) that are located in the case of India Advantage Fund-VII [ITA No. 178/ either in or outside of Thailand: Bang/2012] (the fund or the trust) held that in the case of a revocable trust, income had to be taxed in the i. a person of Thai nationality, hands of the beneficiaries of the trust and not in the ii. a person of Thai nationality who has had a hands of the trustee in the capacity of a representative domicile or headquarters situated in Thailand for taxpayer. This decision is very relevant and useful to three consecutive years on the date they are the domestic alternative asset management industry. entitled to inherit the estate. • On 17 October 2014 the Central Board of Direct Taxes Foreign nationals who inherit an estate situated in (CBDT) conveyed approval of Government for issue of Thailand will also be liable for inheritance tax. long-term bonds, including long-term infrastructure bonds, by Indian companies (subject to certain The proposed gift tax will be imposed as a conditions) to be eligible for concessional rate of tax on supplementary tax to the inheritance tax. According to income thereon under section 194LC of the Act with the current draft Revenue Code Amendment Act, 5% effect from 1 October, 2014. Such long term bond issue tax will be imposed on the transfer of immovable carrying interest rate within the all-in-cost ceilings property valued at over Baht 10 million (approximately specified by the Reserve Bank of India (RBI) under USD o.3 million) to a legitimate child without External Commercial Borrowings (ECBs) Regulations remuneration. It’s likely that the transfer of movable and having a maturity of more than 3 years shall be property valued at over Baht 10 million will also be eligible for deduction of tax under section 194LC. subject to the 5% gift tax. • The Finance Minister (FM) in his maiden Budget At present (as at January 2015), the draft Inheritance Speech for financial year 2014-15 had indicated setting Tax Act and the draft Revenue Code Amendment Act up a High Level Committee (HLC) for resolving have been introduced into the National Legislative industry’s tax issues. On 3 December 2014, the FM set Assembly for debate and approval. Further details up a 3 member HLC under chairmanship of former and changes are expected when the final acts are Chief Economic Advisor to Government, Mr. Ashok announced. Lahiri; HLC to interact with Trade and Industry bodies, consult experts and tax professionals, to ascertain areas • Tax incentives for setting up international that require clarity in tax laws; CBDT to issue requisite/ headquarters and international trading centres in circulars/notifications/clarifications within 2 months of Thailand receiving recommendations from HLC; HLC to have A month after introducing inheritance tax, the cabinet term of 1 year, to submit half-yearly reports to FM. of Thailand signalled some positive changes in Thai tax policy on 23 December 2014 by approving the Ministry of Finance’s proposal to provide tax incentives for Thailand setting up international headquarters (IHQ) and international trading centres (ITC) in Thailand. • Reduced corporate income tax rate extension IHQ On 10 November 2014, Thailand officially passed a law extending the 20% corporate income tax rate for An IHQ is a company incorporated under the laws of another year (for accounting periods beginning Thailand for the purpose of providing financial between 1 January 2015 and 31 December 2015). management, managerial services and technical or This will be the third consecutive year of the reduced supporting services to its associated enterprises or corporate income tax rate. The normal corporate branches. There are certain conditions that an IHQ must income tax rate in Thailand is 30%. meet to enjoy tax privileges under this proposal, including the following key conditions:

6 Asset Management Tax Highlights – Asia Pacific i. It must have paid-up capital of at least Baht 10 million (approximately USD 300,000). ii. The IHQ’s operating expenses in Thailand must not be less than Baht 15 million (approximately USD 490,000) each accounting period. iii. Its services must be provided to associated enterprises established under foreign law or to foreign branches of associated enterprises in at least one country. iv. An application must be submitted and approved by the Director General of the Revenue Department. The qualified IHQ will be granted tax privileges ranging from corporate income tax exemption to specific business tax exemption for 15 accounting periods. The key tax privileges offered are as follows:

Tax Tax privileges CIT Business CIT exemption (out-out transactions) 10% reduced CIT (in-in and in-out transactions)

Regional operating headquarters • Service income and royalties • Service income and royalties

Treasury • Treasury management fee • Treasury management fee • Interest on loans • Interest on loans Trading • Income from buying and selling goods • Income from buying raw materials or parts in abroad without importing such goods Thailand and selling such items to affiliated into Thailand enterprises located abroad for the purpose of • Income from international trade services manufacturing by such affiliated enterprises abroad

Holding • Dividends • N/A • Capital gains • (Capital loss is non-deductible) Foreign branches • Income of foreign branches (expenses of • N/A foreign branches are non-deductible) WHT Tax exemption for foreign companies not carrying on business in Thailand for the following income received from the IHQ:

• Interest on loans borrowed by the IHQ for re-lending to onshore/offshore associated enterprises for treasury management purposes • Dividends paid out of profit from income exempt from CIT

PIT 15% tax on the assessable income of an expatriate employee of the IHQ

SBT SBT exemption on interest on loans to onshore/offshore associated enterprises for treasury management purposes

Asset Management Tax Highlights – Asia Pacific 7 The qualified ITC will be granted tax privileges for 15 accounting periods. The key tax privileges offered are as follows:

Tax Tax privileges CIT CIT exemption 10% reduced CIT (out-out transactions) (in-in and in-out transactions)

• Income from buying and • Income from buying raw selling goods abroad materials or parts in without importing such Thailand and selling such goods into Thailand items to affiliated enterprises • Income from providing located abroad for the international trade purpose of manufacturing services to foreign abroad by such affiliated ITC juristic persons received enterprises from or in a foreign An ITC is a company established under the laws of country Thailand engaging in the business of buying and selling WHT Tax exemption for foreign companies not carrying on goods, raw materials and parts to affiliate enterprises, business in Thailand for dividends received from the ITC including providing services relating to international that are paid out of profits from CIT-exempt income trade to foreign juristic persons. To enjoy the tax privileges under this proposal, an ITC must meet the PIT 15% tax on the assessable income of an expatriate following key conditions: employee of the ITC i. It must have paid-up capital of at least Baht 10 million (approximately USD 300,000). This policy will encourage foreign investors to pilot ii. It must have associated enterprises or foreign investment in Thailand and use Thailand as their hub for branches situated in at least one country. regional management and treasury management. iii. An application must be submitted and approved by the Director General of the Revenue Department.

For more information, please contact the following territory tax partners:

Country Partner Telephone Email address Australia Ken Woo +61 (2) 8266 2948 [email protected] China Oliver Kang +86 (10) 6533 3012 [email protected] Hong Kong Florence Yip* +852 2289 1833 [email protected] India Gautam Mehra +91 (22) 6689 1155 [email protected] Indonesia Margie Margaret +62 (21) 5289 0862 [email protected] Japan Akemi Kitou +813 5251 2461 [email protected] Stuart Porter +813 5251 2944 [email protected] Korea Kwang-Soo Kim +82 (0) 10 3370 9319 [email protected] Malaysia Jennifer Chang +60 (3) 2173 1828 [email protected] New Zealand Mark Russell +64 (9) 355 8316 [email protected] Philippines Malou Lim +63 (2) 845 2728 [email protected] Singapore Anuj Kagalwala +65 6236 3822 [email protected] Taiwan Richard Watanabe +886 (0) 2 27296666 26704 [email protected] Thailand Prapasiri Kositthanakorn +66 (2) 344 1228 [email protected] Vietnam Van Dinh Thi Quynh +84 (4) 3946 2231 [email protected] * Asia Pacific Asset Management Tax Leader

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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