Associate, International Business Advisory and Development | APAC
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Hong Kong remains a sophisticated financial centre despite current challenges, thanks to the city’s strategic location and continuous enhancements to tax laws and policies. A recent report by Boston Consulting Group indicates that Hong Kong will surpass Switzerland as the domicile managing the largest amount of private cross-border wealth in 2023[1]. This will likely lead to greater opportunities within the asset and wealth management sector. The Hong Kong SAR government recognized the importance of this industry by introducing further enactments to bolster the regulatory ecosystem in Hong Kong. This blog article will outline three key initiatives aimed at strengthening Hong Kong’s position as a leading asset management hub.
Introduction of the Limited Partnership Fund
With the introduction of the Limited Partnership Fund (LPF) Ordinance on 31 August 2020, fund managers were offered a viable alternative to domicile investment funds in Hong Kong compared to traditional offshore structures. In recent years, onshore funds have received more attention due to the increase in regulation and cost associated with traditional offshore structures, such as the enactment of the Private Funds Law 2020 and Mutual Funds (Amendment) Law 2020 in the Cayman Islands.[2]
The LPF is aimed primarily at private funds and offers a suitable framework for establishing a limited partnership as an investment vehicle. A Hong Kong LPF structure offers no restriction on investment scope, provides flexibility in capital contribution and profit distribution, and does not require stamp duty on transfers or redemption of an interest in an LPF.
The popularity of LPFs is apparent since over 400 were registered under the ordinance by the end of 2021[3].
Tax concessions for carried interest
The treatment of carried interest is of particular concern to fund managers and investment professionals. Thus, the government recently clarified the taxation of carried interest and confirmed a rate of 0% on eligible carried interest distribution by certified investment funds. In addition to local substance requirements, the concession applies to carried interest received from private investments only.
For detailed clarification on fund certification, the Hong Kong Monetary Authority (HKMA) issued guidelines in July 2021[4]. Once the fund meets requirements and receives certification, the carried interest tax concession can be applied retrospectively to a financial year commencing on or after April 2020.
The competitive tax treatment of carried interest is a crucial factor to choose Hong Kong as a fund domicile.
Ability for re-domiciliation of foreign investment funds
Most funds managed in Hong Kong have been typically established in foreign jurisdictions, while no practical mechanism was in place to re-domicile these funds to Hong Kong. The government addressed this concern and introduced a bill in 2021 to provide the option of a statutory re-domiciliation of foreign investment funds to Hong Kong[5]. If the fund meets certain eligibility requirements, it can be re-domiciled and registered in Hong Kong, as either an Open Fund Company (OFC) or Limited Partnership Fund (LPF). After the migration is complete, the fund remains the same legal entity with no impact on existing contracts, properties liabilities, or obligations. Furthermore, a re-domiciliation has no exposure to stamp duty as the beneficial ownership status remains the same, adding to its commercial viability.
The introduction of the bill enhances the scope of the LPF and OFC regime and provides a practical, cost-efficient solution for foreign funds to re-domicile to Hong Kong.
Conclusion
Overall, these initiatives are likely to continue to position Hong Kong as a premier asset management hub. Asset managers have alternative structures to set up funds in Hong Kong, an attractive tax concession on carried interest, and a statutory mechanism for re-domiciliation of existing foreign funds. It is expected that the Hong Kong SAR government will continue to work closely with the industry to respond to pressing demands and strengthen the regulatory environment to attract interest of market players.
How CSC can help
Whether an asset manager is launching a new fund, considering outsourcing for the first time, or contemplating an alternative to their current service provider, CSC helps some of the most complex fund managers across the globe meet their regulatory and investor requirements. We provide best-in-class solutions to clients of every size across fund types, jurisdictions, and corporate and partnership structures. Our experienced teams go above and beyond to support our clients’ needs, enabling them to focus on key tasks such as fundraising and capital investing.
We provide a wide range of services, including:
- Pre-launch support services
- NAV preparation, SPV administration, and financial reporting services
- Waterfall and performance fee calculations
- Investor services, including investor reports and a secure, online portal
- Tax reporting assistance, including K1, Hong Kong Domestic Statutory Filings
- CRS and FATCA services
- Partnership representative services
- Regulatory reporting
Our bespoke solutions are available in the United States, Europe, and Asia-Pacific.
[1] Boston Consulting Group, https://web-assets.bcg.com/24/f5/f3776eb4427fa57471dddc921211/bcg-global-wealth-standing-still-is-not-an-option-jun-2022-r-4.pdf
[2] Deloitte, https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/financial-services/deloitte-cn-fsi-the-private-funds-law-2020-and-mutual-funds-amendment-law-2020-en.pdf
[3] Companies Registry releases statistics for 2021, https://www.info.gov.hk/gia/general/202201/14/P2022011300446p.htm#:~:text=The%20total%20number%20of%20LPFs,by%20the%20end%20of%202021.
[4] Hong Kong Monetary Authority, https://www.hkma.gov.hk/eng/news-and-media/press-releases/2021/07/20210716-3/
[5] PWC, https://www.pwccn.com/en/industries/financial-services/asset-and-wealth-management/publications/hk-proposed-re-domiciliation-mechanism-feb2021.html