With the view to revitalising the legal framework for setting up and operating private equity funds in Hong Kong, the Hong Kong Government has established a new regime under the Limited Partnership Fund Bill (“LPFB“) for eligible funds to be registered as limited partnerships.
Need for catering to Private Fund Markets
Existing limited partnerships registered under the incumbent Limited Partnership Ordinance (“LPO”) is generally perceived as outdated, inadequate and not flexible enough for today’s private fund market and asset management practitioners. While the LPO cuts across a wide spectrum of businesses (e.g. professional services, restaurants and game centres), it does not address the specific needs of private equity funds. The gazetting of the LPFB on 20 March 2020 paved the way to provide a new registration regime enabling funds to be constituted in the form of limited partnerships in Hong Kong.
Set to come into force on 31 August 2020, the LPFB aims to attract investment funds (including Private Equity (“PE”) and Venture Capital (“VC”) funds) to set up and operate in Hong Kong. The LPFB is designed to cater for the operational needs of funds, while ensuring investor protection. In addition, the new tax incentives in favour of private equity funds operating in the city and further cements Hong Kong's position as an international asset and wealth management hub.
Change in Fund Management Landscape and Increased Investment Diversification
The Hong Kong Government is keen to increase competitive edge of the city in the field of asset and wealth management and has brought in different policies to support the industry in the recent years. The Chief Executive of Hong Kong has setup a taskforce led by the Financial Services Branch and comprising of members from the Hong Kong Monetary Authority, the Securities and Futures Commission, the Treasury Branch and the Inland Revenue Department. This taskforce has come up with a policy recommendations to not only upgrade the antiquated LPO regime, but to also enable tailormade limited partnership structures which will attract investment funds to establish and operate in Hong Kong.
This policy is particularly framed to allow PE & VC firms to setup onshore funds in Hong Kong, considering these private funds are usually established in the form of a limited partnership. Investors have been actively looking to diversify their portfolios via PE & VC vehicles. In addition, there is a push for Economic Substance and The Organisation for Economic Co-operation and Development taxation rules requiring taxation to happen where asset management activities take place. The trend for public disclosure of beneficial ownership and onerous compliance requirements being imposed on offshore PE funds, is leading to fund managers to revisit fund structures and consider moving funds and business activities back onshore. With Hong Kong’s reputed international regulatory landscape and strong rules for investor protection, the LPFB enables Hong Kong to capitalize on the trend and empowers the city to become a full-fledged fund service center.
How Does LPFB Benefit Private Funds to establish in Hong Kong?
As mentioned above, the existing regimes related to private fund management are outdated and are not fit for purpose for private funds. The LPO was enacted over a century ago and is more suitable for governing and establishing professional practices, rather than the fund industry. It lacks flexibility in capital contributions and distribution of profits and also lacks contractual freedom among partners regarding operation of the partnership. On the other hand, the Open-ended Fund Companies (“OFC”) ordinance introduced through the Securities and Futures (Amendment) Ordinance in July 2018 is more commonly applied to public funds and hedge funds. However, the OFC was not flexible enough to meet operational needs of private funds, such as ad hoc subscription and redemption requests. In addition, overseas fund managers may not be familiar with Hong Kong's trust law or the open-ended fund regime.
Key features of the LPFB are as follows:
- Partnership Formation: Requires at least one General Partner (“GP”) and one Limited Partner (“LP”). A GP is defined as an individual/a Hong Kong private limited company/a non-Hong Kong company registered with the Companies Registry (“CR”)/ a limited partnership (whether domestic or foreign). A LP is defined as an individual/a corporation/a partnership/trustee/unincorporated body/any other entity or body. The partnership must be constituted by a written agreement (i.e. a limited partnership agreement).
- Legal Liability: The GP is considered an operating person with unlimited liability in respect of the debts and liabilities of the fund, as well as ultimate responsibility for the management and control of the LPF. While the LP is considered as investors with limited liability having freedom of contract in respect of the operation of the partnership, having no day-to-day management rights or control over the underlying assets.
- Statutory Appointments: The LPF is mandated to appoint an Investment Manager, an Auditor and a Responsible Person. The Investment Manager should be appointed by the GP for day-to-day management functions. He or she must be a Hong Kong resident aged over 18 or a Hong Kong company/non-Hong Kong company registered with the CR. The Auditor must be a local Auditor appointed by GP for annual audits on the financial statements. Lastly, the Responsible Person must be appointed by GP for the LPF to carry out anti-money laundering/counter-terrorist financing functions. The Responsible Person must be an authorized institution, a licensed corporation, an accounting professional or a legal professional.
- Registration and Obligations: Application must be submitted to the CR by a registered Hong Kong law firm or a solicitor admitted to practice Law in Hong Kong. The LPF must maintain a registered office in Hong Kong. It should maintain records of documents obtained in the course of operation of the LPF. It is also obligated to file annual return and any change in particulars provided upon registration.
- Migration of Funds: A streamlined channel will be provided to existing funds registered under the LPO to migrate onto the LPF regime. However, this does not generate profits tax or stamp duty implications in the course of migration.
- Tax and Stamp Duty: Subject to certain exemption conditions set out in the Inland Revenue Ordinance, tax exemption is allowed. Interest in LPF is not a "stock" and is not chargeable with stamp duty when the interest is contributed, transferred or withdrawn. In-kind capital contributions in relation to transfer of dutiable assets will be subject to stamp duty. As limited partnerships generally do not, under Hong Kong’s tax treaties, qualify as a tax resident of Hong Kong, the LPF generally would not enjoy the benefits of Hong Kong’s favourable tax treaties.
Hong Kong as a Favoured Hub for Private Equity and Venture Capital
Hong Kong is emerging as a hub for Asian and locally based asset managers and family offices, as well as for fund managers eager to invest in Mainland China. While offshore alternatives are still attractive for certain structures, they are also becoming expensive with increasing regulatory compliance requirements. Tricor believes that when compared with other offshore and overseas jurisdictions and funds, the new regime is bound to attract more private funds and family offices to Hong Kong, fueling the development of its asset management industry. In addition, Hong Kong has a large number of high-quality law firms at the disposal of fund managers when they need legal advice. This new legislation is a major step towards cementing Hong Kong’s position as the private equity hub in Asia, and a favoured domicile and location for fund managers.
Tricor has a proven track record in setting up and structuring funds in Asia, the Caribbean and Europe over the last two decades. Our experienced team of professionals is well versed in legal and regulatory frameworks for fund management, both locally in Hong Kong and overseas. We offer tailor-made solutions to meet our client’s specific requirements for a variety of fund administration services and look forward to supporting our clients and advisors in their preferred jurisdiction.