EU regulation drives hedge funds to Asia
On May 11, 2010, in Banking & Finance, Economy, General News, Tax Law, by salim.ali
The EU’s proposal to impose stricter hedge fund regulations is leading to an exodus of hedge fund managers to Asian financial centers such as Hong Kong and Singapore.
Traditionally, the European Union has been the heart of the burgeoning hedge fund industry. However, the aftermath of the global financial crisis has brought the hedge fund industry under the spotlight of lawmakers, especially the EU. As a result Europe is proposing to tighten the regulatory regime of its hedge fund industry by a) limiting hedge funds’ borrowing, b) imposing a registration requirement for funds with more than US$134million under management, and c) imposing limits on pay, among other regulations. While France and Germany are in favor of the proposed legislation, Britain (currently home to 80% of Europe’s hedge funds) claims that the proposal could be a major blow to its financial services industry.
Uncertainty over the EU draft legislation is justifiable considering that some of the industry’s major players such as Fortress, Algebris Investments, GLG, and Soros Fund Management are already contemplating a move to Hong Kong or Singapore. According to Christopher Fawcett – a senior partner of Fauchier Partners, a fund-of-hedge-funds firm,
“Hong Kong and Singapore have attractive tax rates and have avoided excessive regulation. To the extent that their investment strategy allows it, the attractions of Hong Kong and Singapore have grown.”
Singapore and Hong Kong’s low tax rates and light regulatory regime is drawing the attention of hedge funds world-wide. For instance, Hong Kong’s tax rates are the lowest in Asia and one of the lowest in the world. The corporate income tax rate is a flat 16.5% on assessable profits. Moreover, Hong Kong’s territorial system of taxation does not tax foreign sourced income or profits. Hedge fund investors stand to benefit as there is no dividend tax, no capital gains tax, no withholding tax on dividends or interest in Hong Kong. After Hong Kong, Singapore’s hedge fund industry is the second largest in Asia, predominantly due to its light regulatory regime including licensing exemptions and tax incentives for certain fund managers. For instance, hedge fund managers with less than US$183million and with less than 30 qualified investors are exempt from holding a Capital Markets Services License, which is otherwise required in order to conduct fund management and financial related activities in Singapore. Singapore’s tax system and industry-specific tax incentives are additional attractions for hedge fund managers.
A low tax and light regulatory environment coupled with the ease of Hong Kong company setup and Singapore company formation, makes Asia an attractive destination for the relocation of hedge funds.
Here is a Bloomberg news report on the EU’s hedge fund clampdown.