The Hong Kong government has introduced tax incentives and established regimes for the re-domiciliation of foreign funds in Hong Kong. These changes make Hong Kong a more attractive location for fund creation and management.
In this article, we will discuss the main differences between the two investment fund structures in Hong Kong, namely the Open Ended Fund Company (“OFC”) and the Limited Partnership Fund (“LPF”).
Strengths of an OFC and an LPF
The choice between an OFC and an LPF depends on a variety of factors, including market practices, manager preference, investor background and familiarity with the structure, regulatory considerations, nature of the fund, scope of investment and tax incentives.
In general, an OFC can be established as an open-ended fund or a closed-end fund, a stand-alone fund or an umbrella structure with multiple sub-funds, and a public or private funds. Here are some of the main assets of an OFC:
➢ It is a corporate structure with separate legal personality and limited liability.
➢ OFC shares may be created or canceled in response to shareholder subscription and redemption requests. Such flexibility is not available to conventional companies incorporated in Hong Kong.
➢ The law recognizes that the assets/liabilities of each sub-fund can be separated from the assets/liabilities of the other sub-funds, thus allowing greater flexibility in investment strategies. ➢ Assets are entrusted to a custodian for safekeeping. ➢ Private CFOs are not subject to investment restrictions.
➢ Distribution of assets from share capital is permitted provided that legal solvency and disclosure requirements are met.
An LPF is a fund that is structured as a simple limited partnership and has no legal personality. The Founder/Promoter is a key operator, assumes the role of General Partner (“GP”) and has unlimited liability. Investors are limited partners (“LPs”) and are granted limited liability up to the amount of their agreed contributions. The structure is used for the purpose of managing assets for investors as LPs and is a popular form of private equity and venture capital funds. The strengths of an LFP include:
➢ It allows for flexibility in the limited partnership agreement between the GP and the LPs, subject to certain basic statutory requirements, eg the LPs cannot participate in the management of the LPF.
➢ LPFs are not subject to investment restrictions.
➢ Its creation does not require the approval of the Hong Kong Securities and Futures Commission (“SFC”).
➢ There is no minimum capital requirement for partners.
➢ No Hong Kong stamp duty is imposed on any contribution or withdrawal by a partner or on any transfer of partnership interest.
One of the main differences between the two structures is that the creation of an OFC requires the approval of the SFC. The SFC adopts a one-stop process for the approval of an OFC, i.e. the applicant only needs to submit an application to the SFC who will then liaise with the Registrar of Companies of Hong Kong.
Provided that the legal conditions are met, an LPF can be registered in the Commercial Register. SFC approval is not required to set up an LPF.
This different registration process is mainly due to the stricter legal requirements imposed on OFC operators, such as:
➢ An OFC must have at least two natural person directors aged at least 18 years. Most importantly, directors are subject to the approval of the SFC and must be of good character and have the necessary technical knowledge, capacity and expertise to carry out the business of the OFC.
The GP of an LPF may be an individual who is at least 18 years of age, a Hong Kong private company limited by shares, a non-Hong Kong registered company, a Hong Kong registered limited partnership, another LPF or a non-Hong Kong company. Kong limited partnership without legal personality. The law does not impose the knowledge and expertise requirements on GPs, as in the case of OFC administrators. Nevertheless, an LPF must have a responsible person to carry out anti-money laundering measures.
➢ The investment management function of an OFC must be delegated to an investment manager who must be authorized or registered with the SFC to carry out a type 9 regulated activity (asset management) and remain fit and competent, during OFC check-in and after.
The LPF is required to appoint the General Partner or another person as Investment Manager to perform the day-to-day investment management functions of the LPF. The investment manager may be a Hong Kong resident, a Hong Kong company or a company registered outside of Hong Kong. It is not necessary to be licensed or registered with the SFC unless it conducts regulated business in Hong Kong.
➢ It is mandatory for OFC to appoint a Custodian for safekeeping of the investment property. The depositary must meet the eligibility requirements under the SFC’s Mutual Funds and Mutual Funds Code, or must be authorized or registered with the SFC to engage in a type 1 regulated activity (dealing in securities).
There is no obligation for an LPF to have a custodian, but the GP must ensure the safekeeping of the assets of the LPF.