Hong Kong’s newest investment fund vehicle: cost-effective alternative to Cayman Fund

On 9 July 2020, the Hong Kong Government passed the Limited Partnership Fund Bill (“Proposed Bill”), and is going to enact the Proposed Bill on 31 August 2020 as the Limited Partnership Fund Ordinance (Cap. 637) (“LPFO”).

The LPFO will enable asset managers to raise capital through a domestic limited partnership fund (“LPF”) instead of through other common alternatives like the Cayman Islands Exempted Limited Partnership (“ELP”). The government aims to develop Hong Kong’s position as an international asset and wealth management centre by facilitating the channelling of capital into corporates (especially to start-ups in the innovation and technology field in the Greater Bay Area). The main benefits of a LPF includes pro t tax and stamp duty exemptions.

The introduction of LPFs in Hong Kong will be an addition to the existing business vehicles, i.e. sole proprietorships, partnerships and limited companies for potential investors and businesses to raise capital.

Key Features of a Limited Partnership Fund

For a fund to be eligible to be registered as a LPF, it must first be constituted by a written limited partnership agreement, where the arrangements of the agreement do not conflict with the Proposed Bill and any other applicable law. The fund must have one general partner (“GP”) and at least one limited partner (“LP”). The GP and LP must meet certain eligibility requirements as described in the Proposed Bill, i.e. the GP in the fund must be one of the following: a natural person of at least 18 years of age; a private company incorporated in Hong Kong; a registered non-Hong Kong Company; a limited partnership; a limited partnership fund; or a non-Hong Kong limited partnership fund with or without a legal personality. The Proposed Bill also consists of other requirements, including that the fund must have a registered of ce in Hong Kong; is not to be set up for an unlawful purpose; and not all partners in the fund are corporations in the same group of companies within two years of registration.

As the Proposed Bill suggests, a LPF will not have a separate legal personality, while the partners in the limited partnership will have freedom of contract in respect of the fund. The GP will have unlimited liability for all the debts and obligations of the fund and has the sole responsibility for the management and control of the fund.

LPF vs. other business entities in Hong Kong

Apart from its cost-effectiveness, LPFs can be viewed as an alternative to Private Limited Companies (“PLC”) as they operate in a similar fashion. For instance, LPAs has the same function to a LPF as the articles of association to a PLC, while the partners in an LPF act as shareholders of a PLC. An Authorized Person must be appointed by the LPF to manage and control the fund, like a director who manages the company for a PLC. Both LPFs and PLCs are required to carry out Anti-Money Laundering and Counter-Terrorist Financing functions under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), with the former being managed by the Responsible Person and the latter managed by the Company Secretary. Both businesses must complete audits. The LPF regime is a registration scheme administered by the Companies’ Registry, like how PLCs are also registered there.

The regime provided by the LPFO differs from the regimes provided by the outdated Limited Partnership Ordinance (Cap. 37) (“LPO”) and Partnership Ordinance (Cap. 38) (“PO”). The new LPFO regime addresses the concerns and gaps that were left open by the LPO and PO.

Profit tax and stamp duty exemptions in LPFs

LPFs are an attractive alternative to the other existing business vehicles because of the pro t tax and stamp duty exemptions provided under the Proposed Bill.

Profit tax exemptions may apply where a LPF meets the definition of “fund” under S20AM (and are qualifying assets within Schedule 16C) of the Inland Revenue Ordinance (Cap. 112). Furthermore, LPFs are treated as separate taxable entities from its partners for tax purposes. As well, interest in a LPF is not chargeable under the Stamp Duty Ordinance (Cap. 117) because it does not fall within the definition of “stock”. Apart from this, capital contributions and distributions of LPF assets by way of cash are also not subject to stamp duty in Hong Kong. Such stamp duty exemptions, however, do not apply to in-kind capital contribution and transfer of dutiable assets (ie. Hong Kong stock or immovable property) to and from the LPF and the partners.

Way Forward

Since Hong Kong’s new LPFO regime provides attractive tax bene ts, investment fund managers who are based in Hong Kong ought to consider LPFs as a cost-effective alternative to offshore limited partnerships such as the Cayman Island’s ELP. This new business investment vehicle will be a big development in the asset management industry and is what investors, potential businesses and overseas fund managers should look out for when considering the establishment of a new business or investment entity in Hong Kong.

Please contact us if you have any questions regarding the upcoming LPFO regime commencing 31 August 2020. Our solicitors are more than happy to advise and assist on any queries relating to this new regime.

The above does not constitute legal advice nor does it consider a complete list of issues to consider in the context of the new LPFO regime. Should you have any queries, please do not hesitate to contact the authors of this article or your usual contact at Ince & Co.

1200 675 Eric Lui
Start Typing
Privacy Preferences

When you visit our website, it may store information through your browser from specific services, usually in the form of cookies. Here you can change your Privacy preferences. It is worth noting that blocking some types of cookies may impact your experience on our website and the services we are able to offer. Read our Privacy Policy

For performance and security reasons we use Cloudflare
Our website uses cookies, mainly from 3rd party services. Define your Privacy Preferences and/or agree to our use of cookies.