Hong Kong: Asia’s international Limited Partnership Fund center

On August 31^st, 2020, the Hong Kong Legislative Council’s Limited Partnership Fund Ordinance (LPFO) came into effect, establishing the region as a leading jurisdiction for Limited Partnership Funds.

 

Hong Kong’s new Limited Partnership Fund regulations match the features of previously popular jurisdictions, such as Bermuda and the Cayman islands, that have now fallen out of favor in light of EU blacklisting and increased pressure over the years from authorities, institutions and non-governmental organizations. Hong Kong, by contrast, has maintained a sterling reputation for transparency, compliance and integrity over the decades, providing a new, more stable foundation for international investment funds in 2020 and beyond.

 

The Limited Partnership Fund Ordinance follows 2019’s Profits Tax Exemption for Funds, which granted conditional tax relief to funds domiciled in the region. The LPFO further develops Hong Kong’s thriving family office sector and private equity environment as venture capital projects in the Greater Bay Area continue to gather momentum.

 

What is a Limited Partnership Fund?

 

Limited Partnership Funds are a way of structuring private funds with liability allocated between a limited partner that will not held responsible for debts or losses beyond an established threshold, and a general partner that assumes full liability. Under the new LPFO Hong Kong-based Limited Partnership Funds are now free to distribute profits, set equity contribution, amend terms and dissolve partnerships according to the individual needs of fund participants and beneficiaries.

 

Under the LPFO, the Hong Kong Registrar of Companies governs Limited Partnership Funds, requiring at least one General Partner and one Limited Partner in a Limited Partnership Agreement.  Furthermore, the LPF should involve an investment manager, an audit service provider, a Responsible Person and an Authorized Representative.

 

What are the benefits of a Limited Partnership Fund in Hong Kong?

 

• Flexibility: LPF partners can set up terms and operations according to their preferences, including investment details, duration of the fund, reporting schedules, and rules for inclusion and exclusion of partners etc. Previous regulations did not permit this degree of freedom when drawing up bespoke investment plans.

 

• Migration: Private equity funds in Hong Kong can easily be transitioned to Limited Partnership Fund status without incurring any complications.

 

• Tax: Hong Kong’s tax regime does not assess capital gains or bank interest income, and funds registered in Hong Kong benefit from the Unified Funds Exemption, while ensuring whitelist status with the OECD.

 

What is the registration process?

 

LPF applications must be filed with the Registry of Companies (RoC) through a registered law firm or solicitor on behalf of the partners in the fund. The application should include information including the name of the fund, details about its operations and the identity details of the General Partner, Investment Manager and Responsible Person.

 

What are the requirements for a Limited Partnership Fund in Hong Kong in 2020?

 

The LPF should satisfy the legal definition of a fund, which requires that the asset be managed by, or on behalf of the individuals operating the partnership, with contributions from participants. Participants should not have direct control over the assets, although they may be consulted during any stage of the decision-making process. The Fund should also maintain a registered office in Hong Kong.

 

The partnership asset should provide some form of income for its participants in order to be considered a fund, and may not be considered a fund if it is operated in any way other than in a business capacity, or if all participants in the partnership fund are employed by (or related to a person employed by) the fund operator. Franchise agreements are ineligible, as are funds governed under the Securities and Futures Commission.

 

• The General Partner (GP) must be a private company, registered in Hong Kong or overseas, an individual of legal age, or a limited partnership registered in Hong Kong or abroad. The General Partner bears full responsibility for all debts and liabilities, as well as administration of the fund. The General Partner is also responsible for nominating the Investment Manager, engaging an audit service provider and designating an Authorized Representative, while ensuring that assets are maintained by an appropriate party.

 

• The Limited Partner (LP) may be an individual, company or any other legal entity entitled to returns generated by the fund, with the ability to participate but no immediate control. The extent of Limited Partner’s responsibility for any obligation incurred by the fund will proportional to their contribution, unless the person or company has been directly involved with everyday asset management, which should be carried out by the Investment Manager.

 

• The Investment Manager (IM) Should nominated by the General Partner for daily administration purposes and may be an individual, company, or the General Partner themselves. The IM should ideally be licensed by the Securities and Future Commission (SFC) as the relevant activities will often be governed by SFC regulations.

 

• The General Partner is also responsible for engaging an auditor to provide annual audited statements of the partnership. The auditor should be unrelated to the partners, Investment Manager and Authorized Representative. The General Partner may also appoint a Responsible Person (RP) to certify that the fund has been subject to legal verification protocols, if necessary. The function of the RP is to execute requirements set by the Anti-Money Laundering and Counter Terrorist Financing Ordinance as a third party. The RP can be an accredited service provider or licensed professional such as CPA or Solicitor.

 

• If the General Partner of the LPF is another Limited Partnership Fund or overseas limited partnership that is not considered a person under Hong Kong law, they will be required to designate an Authorized Representative (AR), which may be a Hong Kong company, registered overseas company or individual of legal age with Hong Kong residence. The Authorized Representative is responsible for all duties and liabilities borne by the General Partner, and this requirement is applicable to funds structured without a person (legal or natural) as the General Partner.

 

We are excited about the growth potential and opportunities that the new Limited Partnership Fund legislation will bring to Hong Kong. Investors will be able to scale funds to new heights through via the competitive advantage of Asia’s leading financial services hub and the expanding horizons of the Greater Bay Area. Should you have any interest in exploring the exciting new investment possibilities for Limited Partnership Funds in Hong Kong, feel free to contact us via info@fungyucpa.com or +852 2541 6632 for a consultation anytime. 

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