A NEW STEP FORWARD
The Hong Kong government has increased its efforts to improve Hong Kong’s competitive edge in relation to asset and wealth management by attracting on-shore fund formations. Currently, a fund may be established as a unit trust or an open-ended fund company in Hong Kong which are the preferred fund structures for public funds or hedge funds. However, private funds, such as private equity funds, are commonly established in the form of a limited partnership. According to the Asian Venture Capital Journal, 560 private equity and venture capital firms in Hong Kong currently manage assets worth US$160 billion (Year 2019), which renders Hong Kong the second-largest private equity hub in Asia
In order to live up to the growing needs of the industry, Hong Kong started a new initiative to further diversify its fund regime.1
On 20 March 2020, the Hong Kong government gazetted the Limited Partnership Fund Bill (“LPF Bill”) in order to provide for the registration of funds as limited partnerships.2
The LPF Bill is scheduled to be enacted as the Limited Partnership Fund Ordinance (“LPFO”) and shall take effect on 31 August 2020. However, on 12 and 19 June 2020 the Hong Kong legislative council considered it necessary to form a Bills Committee in order to study the LPF Bill in greater detail (results are pending).3
CAYMAN AND ITS REGULATORY STRUGGLE
Traditionally, private funds are being established in off-shore jurisdictions such as the Cayman Islands and BVI. However, in the last few years, these jurisdictions had implemented legislative reforms in response to the global demand for combating cross-border tax avoidance, money-laundering and terrorist financing.
Economic Substance Requirements
In 2018, the Cayman Islands implemented the International Tax Co-operation (Economic Substance) Law
(“ESL”). The ESL introduces certain reporting and economic substance requirements for ‘relevant’ entities
conducting ‘relevant activities’. In particular, private funds may fall within the scope of this definition and
may now be required to report to the Cayman Tax Information Authority on an annual basis in respect of
Registration with CIMA and additional requirements
In 2020, the Cayman Private Funds Law (“CPFL”) came into force. The CPFL seeks to ensure that there is transparency and proper documentation in relation to a private fund’s core operations and processes. The CPFL achieves this through the following requirements (non-exhaustive list):
• A private fund must submit an application for registration to the Cayman Islands Monetary Authority (“CIMA”);
• The financial statements of a private fund must be audited and signed-off by a Cayman Islands auditor, and be submitted to CIMA;
• Valuations of the assets of a private fund must be carried out at a frequency that is appropriate to the assets held by the private fund;
• A custodian must be appointed to custody the custodial assets of a private fund and to verify title to and maintain a record of other fund assets;
• A private fund must appoint a person to monitor the cash flows of the private fund; and
• A private fund that regularly trades securities or holds securities on a consistent basis must maintain a record of the relevant identification codes and shall make this record available to CIMA upon request.
As exemplified by the introduction of the ESL and CPFL, the off-shore fund formation environment poses uncertainties as private funds are increasingly subjected to more stringent regulatory oversight. Conversely, together with the enactment of the LPFO in Hong Kong, the cumulative effect of the regulatory changes in Hong Kong and off-shore jurisdictions provide a new opportunity for Hong Kong to become an alternative jurisdiction for the setting up of private funds.
HONG KONG’S NEW OPPORTUNITY
To date, Hong Kong plays a pivotal role in the private equity industry as a major financial centre in the Greater Bay Area. Together with its top IPO market in the region, it provides the perfect platform for private equity funds who are seeking to raise, for instance, funds from Mainland Chinese investors or to invest in China and eventually exit their investments by way of an IPO. In addition, Hong Kong’s role as a major actor in the renminbi internationalization renders it the preferred destination for funds that manage renminbi assets portfolios.
In light of the growing regulatory oversight in off-shore jurisdictions as set out above, the LPFO may allow for the reduction of a fund’s regulatory exposure and unify its operation and management in one single jurisdiction, which in return may save costs and expenses. This offers a practical alternative for the domiciliation of private equity funds in Hong Kong and provides fund managers/fund promoters with more flexibility to meet the market demand in Asia. In other words, with the LPFO coming into place, a new opportunity arises for private funds to benefit from Hong Kong’s position as a financial hub.
DETAILS OF THE LPF BILL
The LPF Bill provides an opt-in registration scheme by which the Registrar of Companies (“Registrar”) registers the fund as a limited partnership fund in Hong Kong (“LPF”).
Similar to a Cayman Islands limited partnership fund, a LPF to be registered by the Registrar shall comprise of one general partner (“GP”) and at least one limited partner (“LP”) with the (amended and restated) limited partnership agreement (“LPA”) being the major constitutional document of the LPF.
Set out below are the key features and requirements for a LPF:
Limited Partnership Fund
• is not itself a legal person and, therefore, must have one GP and at
least one LP and be constituted by the ‘initial’ LPA;
• has 2 years to accept external investors as LPs to the fund;
• must satisfy the definition of “fund”;
• has contractual freedom;
• has no minimum capital requirement or statutory investment
• must have a registered office in Hong Kong and a business
A registration fee of HK$3,034 has to be paid to the Registrar.
• a natural person who is at least 18 years old;
• a private company limited by shares incorporated in Hong Kong;
• a registered non-Hong Kong company;
• a limited partnership registered in Hong Kong or in a foreign jurisdiction with or without legal personality; or
• an LPF.
• has unlimited liability for all debts and obligations of the LPF;
• bears the ultimate responsibility for the management and control
of the LPF;
• has the duty to appoint an investment manager, an auditor, and an
authorized representative if the GP is an LPF or a non-Hong Kong limited partnership with no legal personality; and
• has the duty to ensure proper custody of assets.
• a natural person (whether in the person’s capacity as trustee, or in the person’s own or any representative capacity);
• a corporation;
• a partnership,
• an unincorporated body; or
• any other entity (whether in its capacity as trustee, or in its own or any representative capacity).
• has the right to participate in the income and profits of the LPF and is not liable for the debts and obligations of the LPF beyond the amount of its agreed contribution, unless the LP takes part in the management of the LPF, subject to the non-exhaustive exemptions granted under the “safe harbour” provisions which would not be regarded as management of the LPF (for more details, see below).
• a Hong Kong resident who is at least 18 years old;
• a Hong Kong company; or
• a registered non-Hong Kong company.
The Investment Manager:
• must be appointed by the GP to carry out day-to-day investment management functions of the LPF; and
• can be the GP itself
• an authorised institution;
• a licensed corporation as per the meaning stipulated in the
Securities and Futures Ordinance;
• an accounting professional; or
• a legal professional.
The Responsible Person:
• must be appointed by the GP to carry out the anti-money
laundering and counter-terrorist financing measures as stipulated in Schedule 2 to the Anti-Money Laundering and CounterTerrorist Financing Ordinance.
• a Hong Kong resident who is at least 18 years old;
• a Hong Kong company; or
• a registered non-Hong Kong company.
The Authorised Representative:
• must be appointed by the GP to be responsible for the management and control of the LPF if the GP is an LPF or a non-Hong Kong limited partnership with no legal personality;
• is jointly and severally liable for all debts and obligations of the LPF with the GP; and
• shares the ultimate responsibility for the management and control of the LPF with the GP.
• must be appointed by the GP to carry out annual audits of the financial statements of the LPF; and
• must be independent of the GP, the Investment Manager and also the Authorised Representative (if applicable) of the LPF.
To register a LPF, an application for registration must be submitted by a registered Hong Kong law firm or a Hong Kong solicitor on behalf of the LPF. The application must contain the prescribed information set out in the LPF Bill inclusive of the registration fee. Such information shall include the proposed name of the LPF, the name and identification number of the GP, the Investment Manager and the Responsible Person
Upon satisfactory application to the Registrar, the Registrar will register the LPF and issue a certificate of
The identity of LPs will not be available for public inspection. The register of partners will be kept by the
LPF itself at its registered office or any other place Hong Kong made known to the Registrar. The Registrar
will only maintain an index of the identity and particulars of the LPF, current and former GP(s), Authorised
Representative(s) (if applicable) and Investment Manager(s).
As mentioned in the above table, LPs may risk losing their limited liability if they take part in the management of the LPF. Nonetheless, as it is market practice for LPs to have a certain degree of management or decision-making power in the LPF, a non-exhaustive list of “safe harbour” activities has been introduced in the LPF Bill in order to offer guidance as to the kind of activities which would not be regarded as management of the LPF.4
Examples of such “safe harbour” activities include:
• acting as or appointing someone to act as an agent, member contractor, officer or employee of the LPF;
• acting as or appointing someone to act as an agent, director, shareholder, member, contractor, officer oremployee of the GP;
• serving on or appointing someone to serve on a board or committee of the LPF or the GP;
• serving on or appointing someone to serve on a board or committee of portfolio companies;
• approving the GP or the Investment Manager to carry out certain actions relating to the business, prospects or transactions of the LPF; and
• taking part in certain decisions of the LPF including extension of fund term, change in investment scope or creation, extension, variation or discharge of any other obligation owed by the LPF
In relation to the LPF5
The LPF will be treated as a separate entity from partners for tax purposes. Under the tax regime in Hong Kong, the profits of a LPF arising in Hong Kong will be chargeable to profits tax. However, it is expected that the LPF will enjoy profits tax exemption as long as it meets the definition of “fund” under section 20AM of the Inland Revenue Ordinance (“IRO”), subject to certain exemption conditions under the profits tax exemption regime that currently applies to qualifying corporate funds in Hong Kong. A qualifying LPF may enjoy profits tax exemption on transactions in qualifying assets as set out in Schedule 16C to the IRO and incidental transactions for any year of tax assessment.
Although the IRO makes no distinction between residents and non-residents for the purpose of profits tax, a LPF may still have to analyse as to whether the jurisdiction(s) in which it holds investments will treat the LPF as a tax resident in Hong Kong. In general, as limited partnerships do not qualify as tax residents in Hong Kong, the LPF may not be able to enjoy the benefits of Hong Kong’s favourable tax treaties (i.e. reduced withholding taxes on dividends or interest and avoidance of local capital gains tax when the LPF disposes of its investments). This could however be circumvented by structuring the investment to flow through a Hong Kong holding company/special purpose vehicle that qualifies as a tax resident in Hong Kong. The most suitable structure of a LPF depends on the actual circumstances of the investment requirements and professional legal advice should be sought in relation to the structuring of a LPF in Hong Kong.
The GP (or Authorised Representative, if applicable) is responsible for lodging profits tax returns on behalf of the LPF. The GP (or Authorised Representative, if applicable) as well as the Investment Manager will be responsible for ensuring that the LPF complies with the requirements of the IRO.
In relation to LPs
Although profits tax is chargeable to the distribution of profits of a LPF to its LPs, the distribution of assets by a LPF to its LPs, as well as the redemption and transfer of LP interests, are proposed to be exempted from stamp duty as an interest in an LPF does not fall within the definition of “stock” under section 2 of the Stamp Duty Ordinance.6
Where the relevant LP concerned is not a tax resident in Hong Kong, specific attention has to be paid for the tax obligations for both Hong Kong and the resident jurisdiction of the LP. Nonetheless, favourable tax treatments may be available to certain non-resident LPs in relation to such double tax obligations due to tax treaties between Hong Kong and certain jurisdictions. For example, where the relevant LP of the LPF is a mainland Chinese investor, in relation to the distribution of the profits from the LPF to the LP, income tax will be chargeable in mainland China to the profits of the LP and profit tax will be chargeable in Hong Kong to such profits. However, under the double tax agreement between Hong Kong and mainland China, the LP may enjoy significant profit tax concessions in Hong Kong.7
In relation to Investment Managers and other advisors
Hong Kong based Investment Managers or advisors arranging or conducting the specified transactions for the LPF are chargeable. However, tax treatment of carried interest is subject to further clarification. The IRD seems to endorse the view that Investment Managers and advisors should be adequately compensated for their services or remunerated on an arm’s length basis, To that end, it raises the issue that management and performance fees to the Investment Managers and advisors based on a cost-plus formula are not likely to have been determined on the arm’s length basis, particularly when the Investment Managers or advisors performed significant functions and bore considerable risks to generate profits.8
Nonetheless, it seems that the Hong Kong Government will provide tax concessions for carried interest and, thus, addresses the IRD’s view that carried interest is typically a fee for services or a type of disguised management fee.9
MIGRATION AND RE-DOMICILIATION OF EXISTING FUNDS
The LPF Bill provides a streamlined channel for existing funds that are established under the current Limited Partnership Ordinance to migrate to the LPF regime, provided that they satisfy the eligibility requirements of an LPF. No profits or stamp duty implications should arise from such migration.
However, there has yet to be a mechanism in the LPF Bill to allow offshore funds to re-domicile and become an LPF in Hong Kong.
HONG KONG – THE NEW ALTERNATIVE
With the new LPF regime in place, Hong Kong may become the new alternative jurisdiction in Asia for establishing funds. In particular, service providers such as Investment Managers and fund promoters may be drawn to bringing their future funds onshore when raising capital from investors in China or for investing in China. Together with the recently-enacted unified funds tax exemptions, as well as the broad network of double tax treaties of Hong Kong (as compared with other off-shore jurisdictions), the new LPF regime in Hong Kong may be favourable for setting up a private fund as well as for investors investing in the same, giving rise to an opportunity for Hong Kong to capitalise on the global offshore-onshore shift in light of the increasing regulatory burdens and uncertainties in several tax havens.
This legal update is provided for information purposes only and does not constitute legal advice. Specific
advice should be sought in relation to any particular situation. This legal update has been prepared based
on the laws and regulations in force at the date of this legal update which may be subsequently amended,
modified, re-enacted, restated or replaced.
TITUS modern and independent law firm in Hong Kong. We help global fund managers as well as start-upmanagers on investment fund legal services, in particular on:
➢ Fund establishments in Hong Kong and offshore – across all the main asset classes, including retail and alternative investment fund structures;
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➢ Fund-related M&A and corporate transactions and corporate finance work, including joint ventures, fund restructuring, secondary transactions and joint co-investment arrangements.
1. For further details, see the legislative council brief by the Financial Services and the Treasury Bureau dated 18 March 2020,
accessible at https://www.legco.gov.hk/yr19-20/english/bills/brief/b202003201_brf.pdf.
2. For further details, see the LPF Bill, accessible at: https://www.legco.gov.hk/yr19-20/english/bills/b202003201.pdf.
3. For further details, see the minutes of the meetings by the legislative council dated 12 and 19 June 2020, accessible at:
4. See also Section 27 and Schedule 2 of the LPF Bill.
5. See also paragraph 25 of Proposals to Establish a Limited Partnership Regime for Funds of the Legislative Council Panel on
Financial Affairs (LC Paper No. CB(1)175/19-20(06)).
6. See also footnote 12 to paragraph 26 of Proposals to Establish a Limited Partnership Regime for Funds of the Legislative
Council Panel on Financial Affairs (LC Paper No. CB(1)175/19-20(06)).
7. The Arrangements between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, accessible at:
8. See also paragraph 72 of the IRD Departmental Interpretation and Practice Notes No.51, accessible at:
9. Financial Secretary Paul Chan Mo-po said in his budget speech in February 2020.