This is a translated version from the Chinese article that Ms. Wong writes for Master-insight.com.
Hong Kong occupies the position as the financial centre of the Greater Bay Area of Guangdong, Hong Kong and Macao. The introduction of a limited partnership system to attract private investment funds to set up and register in Hong Kong is conducive to bringing capital to companies in the real sector.
The Limited Partnership Fund Ordinance(“LPFO”)has just come into effect onAugust31,2020.The Bill passed its Second and Third Readings at the Legislative Council one month earlier on 9 July. After the implementation of the new Ordinance, fund managers may choose to set up limited partnership funds in Hong Kong. The new legislation will bring great potential for the development of private investment funds in Hong Kong. It is a great piece of good news and a new milestone for Hong Kong’s asset management industry and will enable Hong Kong to play a more dynamic role in the financial sector.
This is the first time that Hong Kong has adopted a new structure to accommodate private equity/venture capital funds. This initiative, coupled with the recently enacted unified fund tax exemption policy, is a timely proposal to achieve better results.
Singapore has implementedaLPFO-like regime since 2009, putting it at the forefront of competition with Hong Kong in the areas of private equity, infrastructure, real estate, and credit fund management companies. Previously, Hong Kong had an old system with only two types of fund structures: unit trusts and open-ended fund companies. Private equity funds, usually in the form of limited partnerships, could not be registered in Hong Kong.
Over the past decade, as the number of private equity/venture capital investors in China has increased, the pools of funds (including SOE funds, pension and social security funds, domestic private equity funds, etc.) have grown geometrically and have expanded their domestic and international investment business. In addition to raising RMB funds to invest in mainland China, they also raise foreign currency (USD-based) funds to seek investment targets outside of China. There are also institutional investors who raise foreign currency funds and stay abroad (mainly in Hong Kong) to go through the complicated procedures of converting the funds into RMB for investment in China.
The majority of these funds, which are private placements of Chinese companies, have in the past chosen to set up their offshore funds in the Cayman Islands. This dramatic growth has been driven by both internal and external factors. Internal factors include the lack of free circulation of the Chinese Renminbi (RMB), the lack of financial liberalization and restrictions on access to capital, and external factors such as the liberal policy environment, convenient registration process, and favorable tax policies.
Figures for the Cayman Islands Fund
The cayman islands have the largest number of funds registered and managed in all offshore jurisdictions, with over10,000, but there has been a downward trend in recent years. The following chart shows the trend of changes in the number of funds and managers registered in the Cayman Islands in recent years.
The reason for this is the implementation of the common reporting Standard(CRS), which is the international tax cooperation Economic Substance Law of 2018. As a result, the Cayman Islands enacted the International Tax Co-operation (Economic Substance) Law in 2018 in response to the need for a more comprehensive approach to international tax cooperation for businesses with high geographical mobility. OECD Tax Base Erosion and Profit Shifting Standards, fully implemented by the end of August 2020.
Meanwhile, on 18 February 2020, the EU finance ministers updated the EU Black List, adding four more jurisdictions to the list. The cayman islands are included in this blacklist. In the future, offshore private equity funds will need to find convenient and more tax-efficient places to domicile. This is where Hong Kong’s new limited partnership fund policy could fill the gap.
Simple Diagram of a Limited Partnership Fund
Detailed guidance on this new piece of legislation can be obtained from the legal profession. I will only mention a few key points here.
A limited partnership fund (LPF) requires a general partner(GP) and at least one limited partner(LP) in Hong Kong, they will have unlimited and ultimate responsibility for the management and control of the fund. The Fund can be registered directly with the Companies Registry in Hong Kong. Application procedures must be submitted by a Hong Kong law firm or a Hong Kong solicitor. The appointment of an investment manager licensed by the SFC is not required unless the regulated activity is carried out in Hong Kong, such as offering funds to the public.
Funds have also relaxed the eligibility requirements for an administrator. A general partner may also act as an administrator or appoint a separate Responsible Person to ensure the implementation of anti-money laundering measures and investor confidentiality (AML / CFTmeasures). Any one of the following four types of persons can be appointed as a Responsible Person: an authorized institution, an SFC licensed legal entity, an accounting professional, or a legal professional. In addition, the Ordinance expressly provides for profits tax exemption for qualified asset transactions (and strip transactions) of limited partnership funds.
After the implementation of the new policy, the relevant application fees in Hong Kong are cheaper than those in the Cayman Islands, as follows.
- Registration Fee: HK$2555
- Application fee: HK$479 (non-refundable, except for legal services fees)
As professionals in the asset
management industry in Hong Kong, we welcome the enactment of this new
legislation by the Hong Kong SAR Government.
The Way Forward for Hong Kong Finance
Hong Kong occupies a prime position as the financial centre of the Greater Bay Area of Guangdong, Hong Kong and Macao. The introduction of limited partnerships will attract private investment funds (including private equity funds and venture capital funds) to set up and register in Hong Kong, which will be conducive to bringing capital into real companies, including start-ups in the innovation and technology sectors in the Greater Bay Area. Under a limited partnership system, there will be a proliferation of investment funds established in Hong Kong, which will drive the development of related fund services businesses such as lawyers, accountants and fund trustees, replacing the relevant foreign institutions in the Cayman Islands.
In recent years, Mainland and Hong Kong have been improving mechanisms such as the “Shanghai-Hong Kong Stock Connect”, “Shenzhen-Hong Kong Stock Connect”, “Bond Connect” and mutual recognition of funds. At the same time, the recently disclosed framework agreement on the development of pilot cross-border financial services in the Greater Bay Area of Guangdong, Hong Kong, and Macao is also under discussion.
Through such cross-border financial cooperation,
it is believed
that Hong Kong will be able to play a more effective role in the implementation of cross-border and inclusive financial services for enterprises and individuals in China, serve as a channel for financing and wealth management for private enterprises in the Greater Bay Area, and reinforce Hong Kong’s position as an international asset and wealth management centre.
Moreover, Hong Kong is an important component of the internationalization of RMB. As Hong Kong continues to tie in with the expansion of offshore RMB activities, Hong Kong should broaden and deepen its corresponding financial policies and make use of its excellent international financial environment to provide a channel for RMB circulation, which is the most promising business for Hong Kong’s capital market.
Leveraging on these advantages, Hong Kong will be able to establish itself as the financial leader in the Greater Bay Area, facilitate the internationalization of RMB, and build up a cross- border and multi-layered capital market. Naturally, Hong Kong will be able to maintain its strong competitive edge in the international market.