Oversight August 2019 - Proposed Hong Kong Limited Partnership Regime for Funds


By dint of its entrepreneurial culture and free markets as well as its proximity to the Mainland, Hong Kong has a strong PE industry. The Asian Venture Capital Journal estimated that at the end of 2018, the total capital under management of some 520 PE firms operating in Hong Kong exceeded HK$1.21 trillion.

In December 2015 the Hong Kong Financial Services Development Council (FSDC) issued “A Paper on Limited Partnerships for Private Equity Funds” - FSDC Paper No. 17 (FSDC Paper). The FSDC Paper highlighted Hong Kong’s lack of suitable vehicles domiciled in jurisdiction for use as private equity (PE) funds. It followed the FSDC’s initiative of November 2013 to encourage the creation of Hong Kong incorporated mutual funds which has ultimately resulted in the establishment of the open-ended fund company (OFC) regime. The OFC regime finally came into effect in July 2018 (see Oversight of August 2018) although as at the date of this publication none has yet been incorporated.

The FSDC Paper identified a number of benefits for Hong Kong if a suitable limited partnership regime were to be created: (i) the substantial community of PE firms already based in Hong Kong which will otherwise be motivated to establish onshore entities in other jurisdictions (such as the Cayman Islands or those with a good double tax agreement (DTA) network) will be able to use Hong Kong DTAs, (ii) foreign PE firms that wish to benefit from Asian investment returns will be motivated to set up in Hong Kong, (iii) the number of Mainland PE investors (encompassing State Owned Enterprises, pension and insurance funds and domestic PE funds) using Hong Kong that are expanding their outbound investment activities may be increased, and (iv) the Hong Kong based advisory firms which provide services to PE firms in fund administration, accounting, legal and tax advice will benefit from more business.

Hong Kong has long had in place the Limited Partnership Ordinance of 1912 (LPO) which is based on the United Kingdom’s Limited Partnership Act of 1907 - although unlike the latter, the LPO has not been materially modified or updated during the over a century of its existence. The difficulty of utilising a limited partnership established under the LPO to date has been for a variety of reasons:

  • the LPO does not cover issues relating to the distribution of capital
  • the general partner (GP) of a Hong Kong limited partnership would possibly be subject to licensing requirements under the Securities and Futures Ordinance (SFO), and
  • a Hong Kong limited partnership and its general partner would likely be subject to Hong Kong profits tax.

In the 2019-20 budget speech at the end of February 2019, the Hong Kong Financial Secretary stated that the Government had been studying the establishment of a limited partnership regime for PE funds. The Government has now set out further its proposals (Proposal) after discussions with the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), the Hong Kong Treasury and the Hong Kong Inland Revenue Department (IRD). This Oversight summarises and comments on the Proposals as well as the related issues identified previously by the FSDC of (i) taxation, and (ii) SFC licensing.

Read this edition of Oversight in full.

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