Hong Kong is seen as a strong global financial centre and act as a financial gateway between China and the rest of the world.
Cross-border initiatives between Hong Kong and China include the Mutual Recognition of Funds (MRF) scheme, which enables qualifying Hong Kong-domiciled funds to be sold in China and vice-versa.
Hong Kong has entered into numerous MRF operating memoranda with European nations as well, including Luxembourg, France, Switzerland, the Netherlands and the United Kingdom.
Hong Kong also authorised a new type of fund structure in 2018 called the Open-ended Fund Company (OFC), enabling funds to be established in a corporate form in addition to the traditional unit trust structure. Over 60 percent of funds currently sold in Hong Kong are UCITS, but the various MRF arrangements and the new OFC regime are increasing the attractiveness of Hong Kong as a fund domicile location.
Explore Fund Structures: Open-ended Fund Company | Hong Kong Limited Partner Fund (HKLPF)
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Open-ended Fund Company
Fund vehicle description
An open-ended fund company (OFC) is a new investment structure introduced in 2018. This structure is modelled after the Cayman Islands’ SPC.
The OFC is a separate legal entity that has its own board of directors and is able to contract and hold assets in its own name. The OFC is regulated by the Securities and Futures Commission and governed by the SFC Rules, OFC Code, OFC Fees Regulation, SFC Projects Handbook for public OFCs and the Inland Revenue Ordinance.
Key considerations
The primary advantage to setting up an open-ended fund company in Hong Kong is:
• Low setup costs. While OFCs are modelled after the Cayman Islands’ SPC, the setup costs are relatively lower.
Tax implications
When establishing an open-ended fund company in Hong Kong, it’s important to understand the tax implications.
• OFCs are regulated by the SFC, and as such are required to pay a 16-17 percent tax to the SFC annually.
• In some cases, OFCs may be approved as an “eligible carried interest,” in which case they are not subject to tax
• An OFC grant scheme is available from May 10, 2021 to May 9, 2024. Under the scheme, hedge fund managers who have successfully incorporated a Hong Kong OFC or who have successfully re-domiciled an overseas fund into Hong Kong as an OFC will be eligible for a grant of 70 percent of eligible expenses up to a cap of HK $1 million per OFC.
Hong Kong Limited Partner Fund (HKLPF)
Fund vehicle description
The Hong Kong Limited Partner Fund (HKLPF) is regulated by Hong Kong Company Secretary, with activities around the HKLPF potentially in scope of SFC (Securities and Futures Commission) governance. The set-up of HKLPF requires a GP (general partner), does not necessarily require an IM (Investment Manager), a licensed AML responsible person.
Key considerations
The HKLPF can be easily set up within 4 business days, subject to a complete form filed with the CR by a registered lawyer/law firm, with appropriate GP and AML Responsible Person identified, fund strategy and UBO (Ultimate Beneficial Owner) filed.
- Re-domiciliation regime is also available for funds with other jurisdictions such as Cayman who’d like to redomicile to HK.
- The HKLPF structure is intended and should be attractive to asset managers/investors of the Greater Bay area.
- The downside is that although HKLPF is regulated by CR, the fund’s activities can easily fall in scope of SFC regulation, hence may require a licensed entity within the structure which can also serve as the AML responsible person
Tax implications
- The concessionary tax rate (0%) will have retrospective effect, meaning that eligible carried interest received by or accrued to qualifying carried interest recipients on or after April 1, 2020 will, in essence, be exempt from Hong Kong profits tax.
- The HKMA will administer a certification scheme and funds will have to go through a certification process before concessionary tax treatment will apply to their eligible carried interest distributions. To apply for certification, a fund or the local authorised representative of a non-resident fund must submit an application to the HKMA (Hong Kong Monetary Authority), together with relevant documents and information as required by the HKMA.
