To enhance Hong Kong as a premier private equity investment and wealth management jurisdiction, the limited partnership fund (“LPF”) regime was introduced to attract private investment funds to set up and register onshore in Hong Kong. The new LPF regime aims to compete with other traditional offshore jurisdictions like the Cayman Islands for funds which have become more regulated and costly to maintain due to the introduction of the economic substance and other compliance requirements.
Outline of the LPFO
The Limited Partnership Fund Ordinance (Cap. 637) (“LPFO”) which replaces the Limited Partnership Ordinance (Cap. 37) (“LPO”) enables private funds to be registered in the form of limited partnerships in Hong Kong. More than 300 LPFs have been registered in less than one year since the LPFO came into operation on 31 August 2020.
LPF is a new entity type that is structured in the form of a limited partnership for the purpose of managing investments for the benefit of investors. It is not a legal person. A fund set up in the form of a limited partnership registered under the LPO may be registered as an LPF if it meets the eligibility requirements under the LPFO.
Key Features of LPFO
A fund for registration under the LPF regime must satisfy the eligibility requirements under Section 7 of the LPFO as follows :-
1. The LPF is constituted by a written limited partnership agreement and the arrangements in the agreement do not contravene the LPFO or any other applicable law :-
The agreement normally consists of the following terms :-
(a) admission and withdrawal of partners;
(b) transfer of interests by LPs;
(c) governance and decision-making procedures of the fund;
(d) investment scope and strategy of the LPF;
(e) powers, rights and obligations of the partners;
(f) scope of the GP’s fiduciary duties and the remedies for breach or default thereof;
(g) capital contributions, withdrawals of capital contributions, distribution of proceeds and clawback obligations; and
(h) voluntary dissolution procedures of the LPF (as a convenient alternative to the right of any partner or creditor to petition the Court to dissolve the fund on just and equitable grounds, or to wind up the fund as an unregistered company pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)).
2. The LPF must have one general partner and at least one limited partner :-
General Partner (“GP”)
The GP is responsible for the management and control of the fund, and will assume unlimited liability for the debts and obligations of the fund. The GP can be a natural person of at least 18 years old, a private company, a registered non-Hong Kong company, a limited partnership, a LPF, or a non-Hong Kong limited partnership with or without a legal personality. The GP can also simultaneously act as an investment manager (“IM”) and assume the responsibility for carrying out the day-to-day management of the fund. Otherwise, the GP must appoint a separate person or company to act as the IM (see Section 20(1)). If the IM is not engaged in regulated activity or function in Hong Kong (or hold itself out as such), it is not required to hold the appropriate licence from the Securities and Futures Commission of Hong Kong.
Limited Partner (“LP”)
LPs have no day-to-day management rights or control over the assets of the fund, but they have the right to share in the income and profits arising from the fund. The liability of LPs for the debts and obligations of the fund is limited to the extent of their agreed contributions. However, if a LP engages in an activity that amounts to managing the fund, both the LP and the GP may be jointly and severally liable for debts and obligations incurred whilst the LP takes part in such activities.
3. The LPF’s name complies with the requirements relating to an LPF’s name under the LPFO;
4. Registration of the fund by its name will not contravene the restrictions on LPF’s name under the LPFO;
5. The fund is not set up for an unlawful purpose; and
6. Not all the partners in the LPF are corporations in the same group of companies.
See Section 16(2) of LPFO.
Other requirements in the LPFO are as follows :-
(a) To end the name of the fund with “Limited Partnership Fund”, “LPF” and/or “有限合夥基金” (Sections 8(2) and (3));
(b) To maintain a registered office in Hong Kong (Section 18(1));
(c) GP to ensure proper custody of the fund’s assets (whether through the appointment of a custodian or otherwise) (Section 22);
(d) GP to appoint an independent auditor for the purpose of auditing the financial statements of the fund annually (Section 21);
(e) GP to appoint either an authorized institution, licensed corporation, legal or accounting professional to conduct required anti-money laundering measures (Sections 33(1) and (2)); and
(f) It is necessary to have a Hong Kong law firm or solicitor submit the application to register the fund to the Registrar of Companies (Section 11(2)(d)).
Pursuant to Section 25(1), all funds must continuously update the Registrar with basic information that will be made publicly available for a prescribed fee. Such information includes the name of the fund, its registered office address and principal place of business, its investment scope and the name and contact details of the GP, investment manager and/or authorized representative of the fund.
LPFs enjoy favourable tax arrangements. They may be exempt from profits tax if they meet the funds profits tax exemption under section 20AN of the Inland Revenue Ordinance (Cap 112). LPFs also have the benefit of not being charged any capital duty and/or stamp duty imposed on proceeds arising from the distribution of profits, as well as on the contribution, transfer or withdrawal of a partnership interest to and from a fund.
The new LPFO regime is cost effective and business user friendly. However, for such new regime to become a popular choice over conventional fund jurisdictions for fund managers will definitely take time.
If you have any questions on the above eNews or require advice on fund registration or securities compliance matters, experienced lawyers in our Securities, Corporate and Commercial team will be happy to assist you.