Limited Partnership Fund Ordinance

Background

The Limited Partnership Fund bill will take effect on 31 August 2020, thereby becoming the Limited Partnership Fund Ordinance (“the Ordinance”).

The objective of the Ordinance is to sharpen Hong Kong’s competitive edge on asset and wealth management and to diversify Hong Kong’s fund structures to encourage fund formation in Hong Kong to meet the fund industry’s changing needs. In recent years, PE funds (including venture capital (“VC”) funds) are gaining popularity amongst investors and have become a key impetus to the growth of asset and wealth management business. The PE industry would continue to play a pivotal role in channelling capital into corporates, especially start-ups in the innovation and technology field in the Greater Bay Area.

Currently, a fund may be established in Hong Kong in the form of a unit trust or an open-ended fund company. These fund structures are, however, more popular among public funds or hedge funds. Meanwhile, it is more common for private funds such as PE funds to be established in the form of a limited partnership.

In Hong Kong, our Limited Partnerships Ordinance (Cap. 37) (“LPO”) was enacted about a century ago. It is not tailored to and cannot quite meet the needs of investment funds which are a relatively modern invention. For example, the LPO does not have provisions which allow flexibility in capital contributions and distribution of profits or allow a fund to have the necessary contractual flexibility or provide a straightforward dissolution mechanism. The absence of these features under the LPO discourages fund managers from using Hong Kong as the base for PE fund registration.

The Ordinance

The limited partnership fund (“LPF”) regime will be a registration scheme. A fund qualifying for registration under the LPF regime must be constituted by at least two partners (one general and one limited) under a written agreement. The general partner of an LPF has unlimited liability in respect of the debts and obligations of the fund and ultimate responsibility for the management and control of the fund. On the other hand, the limited partner(s) in an LPF who are essentially investors will not have day-to-day management rights or control over the underlying assets held by the LPF and hence their liability will generally be limited up to the commitment they make to the fund. They, however, will have the right to participate in the prescribed/agreed safe harbour activities.

A limited partnership fund will be a fund that is structured as a limited partnership and used for managing investments for the benefit of its investors. A limited partnership fund is not a legal person.

In order for a fund to qualify for registration as a limited partnership fund:

1. the fund must have one general partner and at least one limited partner;
2. the general partner must be a private company limited by shares incorporated in Hong Kong, a non-Hong Kong company registered with the Companies Registry of Hong Kong, a limited partnership (whether domestic or foreign), a limited partnership fund or an individual who is at least 18 years old;
3. each limited partner must be an individual, a corporation, a partnership, an unincorporated body or any other entity;
4. the fund must be constituted by a written agreement (i.e. limited partnership agreement);
5. the fund must have a registered office in Hong Kong;
6. the fund must have an investment manager appointed by the general partner to carry out the day-to-day investment management functions. The investment manager must be a Hong Kong resident over the age of 18 years, a Hong Kong company, or a non-Hong Kong company registered with the Companies Registry. A general partner meeting these criteria can appoint itself as the investment manager;
7. the fund must have an independent auditor appointed by the general partner to audit its financial statements annually;
8. the fund’s general partner must appoint a person (Responsible Person) to carry out anti-money laundering/counter-terrorist financing functions as stipulated under Schedule 2 to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615 of Laws of Hong Kong) (AMLO) so that the limited partnership fund can meet the standards set by the Financial Action Task Force. The Responsible Person must be an authorized institution, a licensed corporation, an accounting professional or a legal professional; and
9. if the general partner has no legal personality because it is another limited partnership fund or a non-Hong Kong limited partnership without legal personality, the limited partnership fund must have an authorized representative with a legal personality to be responsible for the management and control of the limited partnership fund. Only the following persons can be an authorized representative:
   • a Hong Kong resident who is at least 18 years old;
   • a company; or
   • a registered non-Hong Kong company

An application must be submitted by a registered Hong Kong law firm or a solicitor admitted to practise Hong Kong law in Hong Kong on behalf of the fund. The application must contain the following documents/information and a fee at a specified amount –

1. the proposed name of the LPF;
2. the name, address, identification number and signature of the proposed general partner;
3. the proposed address of the registered office of the LPF in Hong Kong;
4. the proposed investment scope and proposed principal place of business of the LPF;
5. the name and identification number of the proposed investment manager;
6. the name and identification number of the proposed responsible person;
7. a declaration and undertaking from the proposed general partner that the fund is intended to be set up as a limited partnership fund and meets the eligibility requirements, together with an acknowledgement that it is an offence to make a false, misleading or deceptive statement; and
8. the name and contact information of the law firm/solicitor submitting the application.

To cater for the operational needs of PE funds, an LPF will have freedom of contract in respect of the operation of the LPF subject to the provisions of the Ordinance. These cover admission and withdrawal of partners, organisation and governance of the LPF, investment scope and strategy of the LPF, the rights and obligations of partners, financial arrangements among the partners, custodial arrangement, etc.

Like other funds operating in Hong Kong, a limited partnership fund meeting the definition of “fund” under section 20AM of the Inland Revenue Ordinance (Cap. 112 of Laws of Hong Kong) (IRO), and subject to certain exemption conditions set out in the Inland Revenue Ordinance, will be exempt from profits tax on transactions in qualifying assets specified in Schedule 16C to the Inland Revenue Ordinance and transactions incidental to the carrying on of qualifying transactions. As regards stamp duty, it is intended that the arrangements that apply to limited partnerships will apply to limited partnership funds. An interest in a limited partnership fund is not a share, stock, debenture, loan stock, fund, bond or note issued by the limited partnership fund, nor is it a unit under a unit trust scheme. It does not fall within the definition of “stock” under section 2 of the Stamp Duty Ordinance (Cap. 117 of Laws of Hong Kong). Accordingly, an instrument under which an interest in a limited partnership fund is contributed/transferred/withdrawn is not chargeable to stamp duty. However, a limited partnership fund may accept capital contributions in cash or in kind as provided in its limited partnership agreement. In-kind capital contributions in relation to the transfer of dutiable assets (such as Hong Kong stock or immovable property) will be subject to stamp duty. The distribution of profits and assets of a limited partnership fund to the limited partner(s) will also be permitted in accordance with the terms of the limited partnership agreement. Transfer of dutiable assets by a limited partnership fund to a limited partner will be subject to stamp duty.

Sycamore Legal and SimplifyLaw are experienced in assisting clients to set up funds in Hong Kong, Australia and elsewhere. Please contact us for more information at enquiry@sycamorelegal.com.au or enquiry@simplify-law.com .