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The new LPF regime will provide an option for private funds to be established onshore in Hong Kong and structured in limited partnership form.
The Limited Partnership Fund (LPF) Ordinance, which introduces a tailor-made limited partnership regime for attracting investment funds to establish and operate in Hong Kong, will come into effect on 31 August 2020.
Historically a fund could be established onshore in Hong Kong in the form of a unit trust or an open-ended fund company. While these fund structures are popular for public offer or hedge funds, it is more common for private funds such as private equity funds to be established in the form of a limited partnership.
The new LPF regime in Hong Kong will provide an option for private funds to be established onshore in Hong Kong and structured in limited partnership form. The LPF regime is aimed at attracting fund managers to establish and operate investment funds onshore in Hong Kong and is a crucial piece of the puzzle in developing Hong Kong into a full-fledged fund service centre.
What is LPF? An arrangement meeting the definition of “fund” that is structured in a limited partnership form registered in Hong Kong
Who can use it? Largely, but not exclusively:
- Venture capital, private equity and buy-out funds
- Real estate funds
- Infrastructure and projects funds
- Special situations / hybrid funds
- Funds that invest in digital assets, such as cryptocurrency and virtual assets
What are the key features of the LPF regime?
- Simple structure
- Not a legal person
- Registration scheme
- Appointment of investment manager, auditor and responsible person
- Proper custody of assets
What are the benefits of the LPF regime?
- Features on par with overseas fund domiciliation centres
- Alignment of fund structure with place of management
- Investor protection
- Nominal set up fee
- Tax and stamp duty treatment
- Migration of funds registered under the LPO
EY teams warmly welcome the Government’s initiative to establish the LPF regime in Hong Kong which will be beneficial to Hong Kong’s development as a premier international asset and wealth management centre in the region. The Government has also announced in the 2020/21 Budget that a concessional tax arrangement regarding taxation of carried interest will be introduced starting from this year of assessment. A consultation paper on the proposed new rules, including eligibility conditions and compliance procedures was released earlier this month with comments due by 4 September 2020. Once finalized, the carry concession will further increase the attractiveness of Hong Kong as a place for private equity funds to set up and operate.
To allow broader usage of the LPF regime, the Government should consider providing other financial grants or subsidies to attract the use of LPF. The Government should also consider subsequently introducing provisions to permit the migration of existing offshore limited partnerships to Hong Kong.
Summary
The new LPF regime in Hong Kong will provide an option for private funds to be established onshore in Hong Kong and structured in limited partnership form, further increasing its attractiveness as a place for private equity funds to set up and operate.