Hong Kong passes Limited Partnership Fund Ordinance and proposes carried interest concession
The Limited Partnership Fund Ordinance (LPFO), which provides for registration of eligible funds as limited partnership funds (LPFs) in Hong Kong, came into operation on 31 August 2020. The move is part the Hong Kong government’s stated aim to enhance the competitiveness of Hong Kong to encourage asset managers of private funds to locate their activities in Hong Kong and to use a Hong Kong domiciled fund vehicle.
Under Hong Kong’s previous legal framework, funds could be established in the form of a unit trust or an open-ended fund company. However, the preferred structure for private equity (PE) funds is the limited partnership, and Hong Kong’s previous Limited Partnership Ordinance did not provide an attractive framework.
The LPFO brings Hong Kong into line with limited partnership structures in other competing jurisdictions. The LPFO contains provisions that:
- Allow flexibility in capital contributions and distribution of profits;
- Enable the parties in a LPF to freely contract according to their commercial intentions;
- Offer a simple registration process with the Registrar of Companies; and
- Provide a straightforward and cost-efficient dissolution mechanism.
The introduction of the LPFO follows last year’s expansion of existing tax exemptions to create the ‘Unified Funds Exemption Regime’, which created a level playing field making tax exemptions at the fund level available, subject to meeting certain conditions, to both offshore and onshore funds on the same basis.
The final piece in the jigsaw is the proposal, published for consultation on 7 August, to introduce a tax concession on carried interest distributed by private equity funds in view of Singapore’s 10% special rate on fund managers’ performance fees.
The use of an LPF operating in Hong Kong will render each of the fund, the general partner and the investment manager subject to onshore tax reporting. In the context of the OECD’s Base Erosion and Profit Shifting initiative, this will mean that taxation of a fund’s activities and those of its manager should occur in the place or places where in substance those activities are being carried on.
An industry consultation in relation to the details is underway, which says: “A tax concession should be provided for carried interest arising from eligible transactions of a fund subject to meeting specified conditions.” The proposal does not specify the tax concession rate, but notes it will be “highly competitive.” If approved, the relief will have retrospective effect from 1 April 2020.
When added together, this package of measures should represent a dramatic change in the landscape for private funds in Hong Kong, and especially for private equity funds.