The widely-anticipated Limited Partnership Fund (“LPF”) Ordinance (Cap. 637) (“Ordinance”), which depicts an investor-friendly framework for private funds, will eventually come into play on 31 August 2020. The Ordinance paves a way for the domiciliation of private funds in Hong Kong with its laxity on regulation and tax exemption (given certain conditions are satisfied). With the introduction of LPF regime, private fund vehicles in Hong Kong now has parity in terms of fund environment or even plays ahead of the pack compared with offshore fund vehicles in for example, Cayman Islands which has historical advantages under its tailored laws and regulations for funds.
Hong Kong’s role as a global hub and channel for managing renminbi asset portfolios will thereon be strengthened by the LPF regime. With all these pull factors in a basket, Hong Kong is more ready than ever to welcome private investment funds including private equity and venture capital funds, especially for start-ups in the innovation and technology field in the Greater Bay Area.
LPF at a Glance:
- How does an LPF operate in Hong Kong?
- Registered by the Registrar of Companies (“RoC”).
- Has no independent legal personality.
- Comprises of:
- one general partner, who has unlimited liability and ultimate responsibility for fund management and control;
- at least one unlimited partner, who has limited liability but has no day-to-day management rights and control, subject to “safe harbour” exemptions (Schedule 2 of the Ordinance); and
- Other key entities: an Investment Manager, an Auditor, a Responsible Person and/or an Authorized Representative.
- An LPF is governed by limited partnership agreement and enjoys the freedom of contract in areas such as subscription facilities, composition and duties of the partners.
- An LPF can be dissolved in accordance with the limited partnership agreement, even without a court order.
- Why should I opt for the LPF vehicle in Hong Kong?
Regarding LPF’s Registration:
- Need not obtain approval or authorization from Securities and Futures Commission (“SFC”).
- No minimum capital requirement or statutory restriction on investment.
- Streamlined mechanism for the migration of funds established under existing Limited Partnerships Ordinance (Cap. 37) to LPF.
Regarding LPF’s Confidentiality:
- The public only has access to the LPF Index and LPF Register kept by the RoC, which contains all documents filed or reported to RoC at and after the registration including particulars of the fund, current and former general partners, investment manager and authorized representative (if any).
- The identities and details of limited partners, anti-money laundering related records, audited financial statements and records on LPF’s transactions are restricted from pubic inspection. They are only available to the regulators and law enforcement agencies for inspection if necessary.
- The audited financial statements shall be made available for all partners.
Regarding Taxation on LPF:
- Profits Tax Exemption:
With the effect of Unified Funds Exemption Regime launched in 2019, an LPF can be exempted from profits tax, regardless of its tax residence, given certain basic requirements in sections 20AM and 20AN of Inland Revenue (Profit Tax Exemption for Funds) (Amendment) Ordinance 2019 are met.
- Favourable Stamp Duty Conditions
As long as the LPF’s capital contribution and distribution of assets are by way of cash, they will not be subject to stamp duty as they are not “stocks” defined in Stamp Duty Ordinance (Cap. 117). Neither are the transfers and withdrawals of partnership interest in an LPF subject to stamp duty. Only in-kind capital contribution and distribution of assets will be chargeable for stamp duty.
- Expected Tax Concession on Carried Interests:
The HKSAR government showed its unequivocal support to the LPF regime evidenced by the expected tax concession for carried interests forecasted in the Budget Speech earlier this year.
Offshore Fund Vehicles Losing Its Edges
- Under the Economic Substance Law 2019 which aims to combat tax avoidance, offshore funds in Cayman Islands are ultimately required to have physical presence of the maintenance (an office) or hire full-time employees.
- It is envisaged that private funds in Cayman Islands will face more stringent regulations by Cayman Islands Monetary Authority (“CIMA”) and European Union (“EU”), because:
- Under the Private Funds Law 2020, all closed-ended funds and some open-ended funds are subject to registration and ongoing regulation by CIMA.
- In February 2020, EU has included Cayman Islands on its list of non-cooperative jurisdictions for tax purpose.
Onshore LPF Outshining Offshore Fund Vehicles
- Incorporation fees for the general partner and LPF itself are expected to be substantially lower than those in Cayman Islands with the support of the HKSAR government. The ongoing maintenance fee is also expected to be nominal for LPF whereas it is presumably higher for the private funds in Cayman Islands provided the additional costs charged by CIMA.
- The LPF is less cumbersome procedure-wise because there is no filing and registration requirements with SFC while offshore private funds shall file a private placement memorandum, summary of terms or marketing materials containing prescribed information upon registration as required by CIMA.
- In which areas should I look for professional legal help?
- Registration of an LPF should be filed to the RoC by a Hong Kong law firm or solicitor on behalf of the general partner.
- The general partner must appoint a Responsible Person to perform stipulated measures on anti-money laundering and counter-terrorist financing. The Responsible Person must either be an authorized institution, an SFC-licensed corporation, an accounting professional or a legal professional.
In essence, the commencement of LPF regime marks an unprecedented milestone in private fund vehicles. With increased appetite for private funds, it is foreseeable that LPF in Hong Kong will develop on a sound and prosperous footing in the future. It is high time for investors to domicile their private funds here in Hong Kong.
