Sidley Helps Hong Kong Frame Landmark Legislation for the Development of a Domestic Private Fund Industry

1. double taxation arrangements they utilize in relation to their downstream investments;
2. the taxation of their fee streams; and
3. the licensing and regulation of their management operations.
   
   

Who does this law affect?

Once enacted, the Limited Partnership Fund Ordinance will provide for the registration of funds established in the form of limited partnerships in Hong Kong. 

The Limited Partnership Fund Ordinance will directly affect segments of the market that traditionally use limited partnerships to structure privately offered investment funds. These include:

• venture capital, private equity and buyout funds;
• real estate funds;
• infrastructure and projects funds;
• special situations and hybrid funds;
• credit funds;
• hedge funds; and
• funds that invest in digital assets, such as cryptocurrency and virtual assets (collectively, “Private Funds”).

The Limited Partnership Fund Ordinance will not preclude investment funds that invest in public equity and other liquid assets, although the limited partnership structure is less commonly used by these segments of the market in Asia.

The new limited partnership fund regime will be of interest to fund managers that would like to:

• establish limited partnership funds in Hong Kong;
• migrate limited partnership funds registered under the LPO to the Limited Partnership Fund Ordinance; or 
• explore the possibility of re-domiciling limited partnership funds established overseas to Hong Kong; or
• take advantage of the tax concessions that are to be introduced in respect of carried interest fee streams, as recently announced in the government’s budget proposal,

in each case, in order to align with their business activities in Asia and facilitate greater regulatory and taxation certainty. 

Set forth below is a high-level summary of the key aspects of the new regime.

1. Eligibility requirements

1.1 Funds that qualify for the new limited partnership fund regime are:

(a) funds that admit external and proprietary capital: funds that meet the definition of a “fund” in the Limited Partnership Fund Ordinance, which is largely the same as the definition of a “collective investment scheme” under Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571); and

(b) funds that admit proprietary capital only: funds that meet the definition of a “fund” in the Limited Partnership Fund Ordinance and have a general partner and limited partners (“Partners”) that are each wholly owned corporations within the same group of companies at the date of initial registration.

1.2 A fund is eligible to be registered as a limited partnership fund if:

(a) it has one general partner (“GP”) and at least one limited partner (“LP”);

(b) it is constituted by a limited partnership agreement, and the arrangements in the agreement do not contravene the Limited Partnership Fund Ordinance or any other applicable law;

(c) it is not established for an unlawful purpose;

(d) it complies with the naming conventions prescribed in the Limited Partnership Fund Ordinance; and

(e) it has a registered office in Hong Kong for receipt of communications and notices.

1.3 The General Partner

1.3.1 The GP must be at least one of the following:

(i) a natural person over 18 years old; 

(ii) a Hong Kong company;

(iii) a non-Hong Kong company registered in Hong Kong;

(iv) a limited partnership fund;

(v) a limited partnership registered under the LPO; or

(vi) a non-Hong Kong Limited Partnership (with or without legal personality).

1.3.2 If the GP takes the form of another limited partnership fund or a non-Hong Kong limited partnership without a legal personality, the GP must appoint an authorized representative of the fund to be responsible for the management and control of the fund.

The authorized representative must be:

(i) a Hong Kong resident who is at least 18 years old;

(ii) a Hong Kong company; or

(iii) a non-Hong Kong company registered in Hong Kong.

The authorized representative will generally be liable for the obligations imposed on the GP, and references to the GP in the Limited Partnership Fund Ordinance will largely refer to the authorized representative while acting in this capacity as prescribed in the Limited Partnership Fund Ordinance. 

1.4 The Limited Partners

Each LP may be one of the following:

(a) a natural person;

(b) a corporation;

(c) a partnership;

(d) an unincorporated body; or

(e) any other entity.

2. Registration Procedure

2.1 The application for registration of a fund as a limited partnership fund must be submitted to the Registrar of Companies (“Registrar”) on behalf of the GP by a Hong Kong registered law firm or solicitor. 

2.2 The application will consist of information that includes:

(a) the name, registered office address in Hong Kong, recordkeeping address in Hong Kong and investment scope of the fund;

(b) the name, address in Hong Kong, identity and signature of the GP;

(c) the name and identity of the investment manager (if different from the GP);

(d) the name and identity of the responsible person appointed to perform anti-money-laundering and counterterrorist financing functions and obligations for the fund;

(e) a declaration and undertaking from the GP that the fund is intended to be established as a limited partnership fund and meets all the eligibility requirements in paragraph 1 above; 

(f) a statement on whether all Partners of the fund are wholly owned corporations within the same group of companies and, if so, an acknowledgement by the GP that the fund may be deregistered if there is no external limited partner following the second anniversary of registration;

(g) an acknowledgement by the GP that it is an offense to make a statement in the application that is false, misleading or deceptive in a material respect.

2.3 The application fee is HK$479, and the registration fee is HK$2,555.

2.4 Upon satisfaction of the registration requirements, the Registrar will issue a certificate of registration. 

3. Publicly Available Information

3.1 The Registrar must establish and maintain a register in relation to each limited partnership fund that records information contained in:

(a) every document that is delivered to, and the Registrar decides to register, under the Limited Partnership Fund Ordinance; and

(b) every certificate that is issued by the Registrar under the Limited Partnership Fund Ordinance.

3.2 The Registrar must establish and maintain an index of the names of every limited partnership fund. 

3.3 The register in paragraph 3.1 above shall be available for public inspection on payment of a prescribed fee to allow members of the public to ascertain:

(a) the identity of the GP, the authorized representative of the limited partnership fund (if any) or the investment manager of the limited partnership fund; and

(b) the particulars of

(i) the limited partnership fund;

(ii) the current/former GP;

(iii) the current/former authorized representative of the limited partnership fund (if any); or 

(iv) the current/former investment manager of the limited partnership fund. 

The Limited Partnership Fund Bill does not specify whether “particulars” are confined only to the information provided in the application under paragraph 2.2 above.

3.4 The index of names in paragraph 3.2 above shall be freely available for public inspection by the Registrar.

4. Operations

4.1 The Duties and Responsibilities of the GP

4.1.1 The GP has ultimate responsibility for the management and control of the limited partnership fund and therefore assumes unlimited liability for all the debts and obligations of the limited partnership fund.

4.1.2 The GP must appoint a person (either the GP itself or another person) as investment manager to carry out the day-to-day investment management functions of the limited partnership fund. The investment manager must be:

(i) a Hong Kong resident who is at least 18 years old;

(ii) a Hong Kong company; or

(iii) a non-Hong Kong company registered in Hong Kong.

If the GP or the investment manager carries out regulated activities in Hong Kong, it will need be licensed by the Securities and Futures Commission of Hong Kong. 

For further guidance relating to the licensing requirements applicable to private equity firms, please refer to our newsletter:

https://www.sidley.com/en/insights/newsupdates/2019/12/sfc-licensing-requirements-for-private-equity-and-venture-capital-firms-in-hong-kong.

4.1.3 The GP must appoint a responsible person (who may be the GP or another person) to carry out the prescribed measures under Schedule 2 to the Anti-Money Laundering and Counter-Financing of Terrorists Ordinance (Cap. 615) (“AMLO”). The responsible person must be an authorized institution, a licensed corporation or an accounting or legal professional that is registered in Hong Kong.

4.1.4 The GP must appoint an auditor that is independent of the GP, the authorized representative of the limited partnership fund (if any) and the investment manager of the limited partnership fund (if any) to audit the financial statements of the limited partnership fund on an annual basis.

4.1.5 The GP must ensure that there are proper custody arrangements for the assets of the limited partnership fund in accordance with the limited partnership agreement of the fund. 

4.1.6 The GP must file an annual return with the Registrar within 42 days following each anniversary of the date on which the certificate of registration was originally issued to the limited partnership fund. 

4.1.7 Records that must be kept

4.1.7.1  The specified person (the GP or the investment manager for this purpose) must keep the following records at the recordkeeping address in Hong Kong:

(A) the audited financial statements of the limited partnership fund;

(B) a register of the GP and LPs that includes the following information:

(1) the names, identities, address and contact details of the GP, LPs or authorized representative (if applicable);

(2) the date of admission and cessation as partner or authorized representative (if applicable); and

(3) the amount and date of capital commitments and capital contributions and withdrawals;

(C) in relation to a customer of the limited partnership fund, the documents, records and files prescribed in section 20(1)(b) of Schedule 2 to the AMLO;

(D) the supporting documents and records of each transaction carried out by the limited partnership fund; and

(E) the controller of each of the GP and LPs in the limited partnership fund.

A controller means a natural person (whether in his/her own capacity or in the capacity of a settlor, trustee, protector, enforcer or a beneficiary) who exercises control over the partner by (i) directly or indirectly owning or controlling more than 25 percent of the issued share capital, capital or profits, or vested interest, (ii) directly or indirectly being entitled to exercise or control the exercise of more than 25 percent of the voting rights or (iii) exercising ultimate control over the management of an entity.

4.1.7.2 The records mentioned in paragraph 4.1.7.1 above must be kept for at least six years following the date of dissolution of the limited partnership fund.

4.1.7.3 The specified person is not required to make the above records available for public inspection but must make them available for inspection by a regulator, a department or agency of the government or a statutory body prescribed in the Limited Partnership Fund Ordinance on request. 

4.1.7.4 Only the audited financial statements of the limited partnership fund are required to be made available for inspection by the GP and all the LPs in the limited partnership fund.

4.2 Custody and Administration Arrangements

4.2.1 The Limited Partnership Fund Bill does not specify the meaning of “proper custody arrangements.” 

4.2.2 However, if the GP, the authorized representative (if applicable) or the investment manager carries out regulated activities in Hong Kong, it will need to be licensed by the SFC. A corporation that is licensed for Type 9 (Asset Management) regulated activity will need to comply with the custody requirements applicable under the SFC Fund Manager Code of Conduct (“FMCC”). 

4.2.3 Licensed fund managers are typically subject to license conditions that effectively mandate the appointment of an independent custodian. 

4.2.4 In engaging a custodian, a licensed corporation licensed for Type 9 (Asset Management) regulated activity should ensure that the custodian is one of the following: 

(a) a registered trust company;

(b) an authorized financial institution (including a licensed bank, deposit-taking company or restricted-license bank) or the subsidiary of a licensed bank;

(c) a banking institution or trust company outside Hong Kong that is subject to prudential supervision;

(d) any other appropriately qualified institution.

Additional custody requirements also apply to licensed fund managers under the FMCC.

4.2.5 There is no mandatory requirement under the Limited Partnership Fund Bill to appoint an administrator. An independent administrator may be engaged at the option of the GP or the investment manager. 

4.2.6 A licensed investment manager must also comply with the regulatory guidelines applicable under the SFC’s administrative codes of conduct concerning the appointment of counterparties. 

4.3 Rights and Protections of the LPs

4.3.1 An LP has the right to participate in the income and profits arising from the management of the assets and transactions of the limited partnership fund by the GP and investment manager of the limited partnership fund. 

4.3.2 An LP does not owe any fiduciary duty to the GP or another LP of the limited partnership fund and does not have day-to-day management rights or control over the assets of the limited partnership fund.

4.3.3 An LP will enjoy limited liability protection within a range of prescribed safe harbor activities. An LP will not be liable for the limited partnership fund’s debts and obligations beyond the amount it has agreed to contribute, unless the LP participates in the management of the limited partnership fund in a manner that falls outside the scope of the prescribed safe harbor activities. In this event, the LP and GP will be jointly and severally liable for all the debts and obligations of the limited partnership fund incurred while the LP takes part in such management activities in contravention of the safe harbor requirements.

4.3.4 The prescribed safe harbor activities set out in the Limited Partnership Fund Ordinance are very broad and nonexhaustive. Among these are the following key provisions:

• acting, or authorizing a person to act, as an agent, member, contractor, officer or employee of the limited partnership fund or the GP;
• serving, or appointing a person to serve, on a board or committee of the limited partnership fund or the GP or any corporation in which the limited partnership fund has an interest or business relationship;
• advising the GP, another LP or the investment manager, or authorizing their actions, in relation to the limited partnership fund’s business, prospects, affairs or transactions;
• voting on any of the limited partnership fund’s proposed transactions; and
• taking part in a decision of the limited partnership fund relating to but not limited to one or more of the following:

- the admission or cessation of partners;

- an extension of the limited partnership fund’s term;

- changes in persons responsible for the limited partnership fund’s day-to-day management;

- a change in the limited partnership fund’s investment scope;

- participation by an LP in a particular investment by the limited partnership fund;

- entering into contracts with other parties in relation to the limited partnership fund’s business; or 

- the creation, extension, variation or discharge of obligations owed by the limited partnership fund.

4.4 Extensive Contractual Freedom

The partners will enjoy extensive freedom of contract in respect of the operations of the limited partnership fund. There must be a written limited partnership agreement between the GP and the LPs. 

5. Striking Off and Deregistration of Limited Partnership Funds

5.1 The Registrar may, after issuing an inquiry letter and publishing a notice in the Gazette, strike an limited partnership fund’s name off the register of limited partnership funds (“LPF Register”) under the following circumstances:

(a) the limited partnership fund no longer meets the eligibility requirements for registration;

(b) the limited partnership fund does not have an investment manager, a responsible person or an authorized representative (if applicable);

(c) the limited partnership fund is not in operation or is not carrying on business as a fund following the second anniversary of the date on which its certificate of registration is issued; or

(d) all the partners in the limited partnership fund are wholly owned corporations in the same group of companies following the second anniversary of the date on which its certificate of registration is issued.

5.2 The GP of the limited partnership fund may apply to the Registrar for the deregistration of the limited partnership fund in the following circumstances:

(a) all the partners of the limited partnership fund agree to the deregistration;

(b) the limited partnership fund has no outstanding liabilities;

(c) the GP is not a party to any legal proceedings in respect of the affairs of the limited partnership fund; and

(d) the limited partnership fund’s assets do not consist of any immovable property (as defined in Section 3 of the Interpretation and General Clauses Ordinance (Cap. 1)) situated in Hong Kong.

5.3 Once a limited partnership fund’s name has been removed from the LPF Register or upon deregistration, the fund ceases to be a limited partnership fund.

6. Dissolution and Winding Up of Limited Partnership Funds

6.1 Dissolution 

6.1.1 A limited partnership fund may be dissolved

(i) voluntarily in accordance with the limited partnership agreement of the limited partnership fund; or

(ii) if the GP or the authorized representative (if applicable) can no longer act in such capacity under prescribed circumstances and is not replaced with a new GP or authorized representative (if applicable) within 30 days.  

6.1.2 A partner or creditor of a limited partnership fund may also apply to the court for a dissolution of the limited partnership fund. The Court may order a dissolution of the limited partnership fund if:

(i) the Court is of the opinion that a partner has undertaken any act or made any omission calculated to prejudicially affect the carrying on of the business of the limited partnership fund;

(ii) a partner willfully or persistently commits a breach of the limited partnership agreement or otherwise engages in conduct in respect of the business of the limited partnership fund such that it is not reasonably practicable for the other partners to carry on the business of the limited partnership fund with that partner;

(iii) the business of the limited partnership fund can only be carried on at a loss;

(iv) the Court is of the opinion that it is just and equitable that the limited partnership fund be dissolved;

(v) the GP is mentally incapacitated as defined under the Mental Health Ordinance (Cap. 136)); or

(vi) the GP becomes, in any other way, permanently incapable of performing its obligations in accordance with the limited partnership agreement.

6.1.3 Upon dissolution of the limited partnership fund under paragraphs 6.1 or 6.2 above, a notification of dissolution or a copy of the Court order must be filed by the applicant within 15 days after the limited partnership fund is dissolved or a Court order is made. 

6.2 Winding Up

6.2.1 A limited partnership fund may largely be wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) as if it were an unregistered company within the meaning of Part X of that ordinance.

6.2.2 A limited partnership fund may also be wound up by the Court, on the application of the Registrar by petition:

(i) if the limited partnership fund is being used for an unlawful purpose; or

(ii)  if  the limited partnership fund  fund is being used for any purpose that is lawful but cannot be validly carried out by the limited partnership fund in accordance with the Limited Partnership Ordinance; or

(iii) the obligations under the Limited Partnership Fund Ordinance have been persistently breached in relation to the limited partnership fund.

7. Migration of limited partnership funds registered under the LPO to the Limited Partnership Fund Ordinance 

7.1 The GP of a limited partnership that is registered under the LPO (“Specified Fund”) may apply to the Registrar for the registration of the Specified Fund as a limited partnership fund  if it meets the eligibility requirements under paragraph 1 above.

7.2 No new legal entity of the partnership is created upon registration of the Specified Fund under the Limited Partnership Fund Ordinance. The rights and liabilities of the Specified Fund before its re-registration remain unaffected. The registration of the Specified Fund under the Limited Partnership Fund Ordinance will not be regarded as a transfer of its assets or constitute a legal change in beneficial ownership of its assets for Hong Kong tax purposes.

7.3 Upon satisfaction of the eligibility and registration requirements, the Registrar will issue a certificate of registration and provide notice in the Gazette of the registration. The GP must apply for, or apply for changes to be made to, the business registration certificate of the limited partnership fund within one month of registration.

8. Redomiciliation of non-Hong Kong limited partnerships to the Limited Partnership Fund Ordinance 

The Limited Partnership Fund Bill does not presently include a provision that permits the re-domiciliation of a non-Hong Kong limited partnership fund to a limited partnership fund. The current version of the Limited Partnership Fund Bill does not preclude the possibility that such a provision may be included in the final version that is enacted as law. 

If a re-domiciliation mechanism is ultimately included in the Limited Partnership Fund Ordinance, the GP of a non-Hong Kong limited partnership should similarly be able to apply to the Registrar for the registration of the partnership as a limited partnership fund if it meets the eligibility requirements outlined under paragraph 1 above. 

This provision will allow re-domiciliation to occur for a significant proportion of the existing private fund industry that currently remains domiciled outside Hong Kong.

For further details on the Limited Partnership Fund Bill, please see

https://www.gld.gov.hk/egazette/pdf/20202412/es3202024125.pdf.

How Sidley can assist

We are well positioned to advise you as to:

• the requirements of the new Limited Partnership Fund regime;
• the fund structuring opportunities and benefits that exist;
• the documentation required to structure and register your private fund under the new limited partnership fund regime;
• the opportunities and benefits that exist for service providers to the private fund industry including custodians, administrators and placement agents;
• the taxation benefits that will apply following the government’s recent budget announcement that competitive tax concessions will be extended on carried interest fee arrangements;
• the best manner in which to structure carried interest and other fee streams under the new limited partnership fund regime;
• the benefits of the new limited partnership fund regime in respect of double tax arrangements ;
• the AML and licensing requirements that will apply in respect of private funds that seek to use the Limited Partnership Fund Ordinance.