Limited Partnership Fund ("LPF")
A new type of modernized, mid-shore fund structure registered in Hong Kong, the LPF is a limited partnership used for managing investments for its investors.
Business Users Friendly
As one of the versatile investment vehicles in the region, LPF is attracting the attention of numerous investors who consider flexibility as a key in their investments. An LPF does not have a legal personality. To be eligible for registration as an LPF under the Limited Partnership Fund Ordinance (Cap. 37) (“LPFO”), a fund must consist of one general partner and at least one limited partner. Under the LPFO, as the investment targets can be flexibly decided by a limited partnership agreement, this creates more contractual freedom for the investors.
An LPF can be easily formed given its streamlined governance. There is no minimum capital requirement or regulatory restriction on the investment scope, strategy and number of investors. Such flexibility has diversified LPF’s usage, such as utilizing a liquid investment strategy, feeder structure or a holding structure for assets. The LPFO provides for an opt-in registration scheme for LPFs and does not preclude other funds from operating in Hong Kong in the form of a limited partnership in parallel to a registered LPF.
As offshore funds are facing The Organization for Economic Cooperation and Development driven challenges, attributed to stricter regulatory rules in transfer pricing and economic substance, it is becoming a viable option, and a relatively commercially friendly alternative for the investors to consider and adopt mid-shore entities to set up their funds like LPFs in Hong Kong.
Preferential Tax Regime
Arising from Hong Kong’s position as one of the most tax-friendly jurisdictions and its tax compatibility up to the international standards, LPF is a real option for many. Investors can enjoy taxation benefits derived from the following three financial returns in connection with the LPF:
(i) LPF’s profit;
An LPF satisfying the definition of “fund” in section 20AM of the Inland Revenue Ordinance (Cap. 112) (“IRO”) and meeting the exemption conditions specified in section 20AN of the IRO, would be eligible for profits tax exemption in respect of its qualifying transactions covering a wide range of specified classes of assets.
The exemption covers profits derived from the LPF’s incidental transactions not exceeding 5% of the total of the fund’s trading receipts from both qualifying transactions and incidental transactions, and in such cases, the LPF would be exempt from profits tax in respect of the incidental transactions.
(ii) Management fee
If the investment manager carries on a trade or business in Hong Kong, such management fees will generally be taxable. However, given the territorial source principle of taxation in Hong Kong, it may appeal to transnational investment managers as management fees sourced outside Hong Kong may be exempt from taxation in Hong Kong.
(iii) Carried interest
The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 was enacted to offer concessions for carried interest. Carried interest earned by or accrued to qualifying persons including licensed corporation registered by the Securities and Futures Commission in Hong Kong and their employees (i.e. qualifying employees) who provide investment management services in Hong Kong to funds certified by the Hong Kong Monetary Authority, will be taxed at 0% in Hong Kong.
Investors also benefit from stamp duty exemption. Interests in LPFs do not fall into the definition of “Hong Kong stock” under the Stamp Duty Ordinance (Cap. 117) so transfer or assignment of interests in LPFs is not chargeable to Hong Kong stamp duty. The same also applies to capital contributions and distributions of LPF assets by way of cash.
In addition to bringing Hong Kong on an equal footing with the tax advantage enjoyed by traditional offshore vehicles, the LPF regime also stands out as benefiting from an extensive double taxation treaty network whilst at the same time offering a unique avenue to different market opportunities in a cost-effective and efficient manner.
Fostering Investment Opportunities in the Greater Bay Area
With the fluidity and channeling of capital between Hong Kong and the Mainland, the LPF provides the growing concentration of high-net-worth individuals in the Greater Bay Area (“GBA”) with a wealth of investment opportunities, as reinforced and benefited by the mutual market accessibility under the Cross-boundary Wealth Management Connect Pilot Scheme permitting capital flow. At the same time, the GBA Green Finance Alliance creates a level playing field for LPFs to align with the global mainstream strategy of ESG investment by leveraging the green investment demand and green finance capacities in the GBA.
The GBA is highly targeted given its huge market potential and comprehensive industrial value chain. With the preferential treatment offered to Hong Kong investors under the Mainland and Hong Kong Closer Economic Partnership Arrangement, the LPF has greater leverage to capture onshore investment opportunities in Mainland China than offshore funds. The LPF is a preferable collective investment platform and favorable channel to complement all types of businesses investing in the GBA.
Investors of the LPF may also benefit from the China-appointed attesting officer regime in Hong Kong, which is generally considered to be more certain and less time-consuming than the conventional notarization system when offshore jurisdictions are involved.
Currently, the increasing financial sway of wealthy individuals and families in Hong Kong and elsewhere also present new investment opportunities for the LPF. Family offices, as opposed to traditional asset owners like pension funds, are keen to invest in PEs and may adopt the LPF as one of their family-owned investment holding vehicles for such purposes. As the appetite for cross-boundary investment in the high potential Mainland China ramps up, related investment measures appeal to investors. In September 2022, the “Linked Development of Shenzhen and Hong Kong Venture Capital Investments in Qianhai” (“Qianhai Initiative”) was proposed. Targeting two key complementary GBA cities, Hong Kong and Shenzhen, the Qianhai Initiative consists of a series of measures offering subsidies and talent retention, supporting Qianhai venture capitals (“VCs”) to collaborate with Hong Kong LPFs to develop overseas business. With the exchange of capital, expertise, networks and leverage of resources that accompany such gateway for cross-boundary investments, the LPF is likely to attract start-up ventures and scale up high growth companies. Likewise, the Qianhai Initiative may also incentivize more PE and VC institutions to set up LPFs in Hong Kong, and to use Hong Kong as a springboard for investing in the Mainland.
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