Following the launch of the limited partnership fund (LPF) regime in August 2020 (Withers client alert: Hong Kong to launch Limited Partnership Funds to boost PE/VC sectors) and what is practically an exemption of profits tax on carried interest in April 2021 (Withers client alert: Profits tax exemption for private equity funds in Hong Kong), the Hong Kong government has rolled out legislative proposals in early July 2021 to allow existing offshore funds to re-domicile to the city.
A foreign fund in the form of a limited partnership or a corporate is eligible for re-domiciliation as an LPF or open-ended fund companies (OFC) respectively if it meets the same eligibility requirements as a new LPF or OFC in Hong Kong.
Eligibility requirements for a LPF include having one general partner, at least one limited partner and an office in Hong Kong, whereas those for an OFC require at least two natural person directors, an investment manager licensed in Hong Kong and a custodian etc.
Similar to a fresh registration, a foreign fund seeking to re-domicile to Hong Kong as a LPF has to apply to the Companies Registry through a Hong Kong law firm, with a statement confirming that:
- any consent to or approval for the proposed registration as an LPF and de-registration in the place of establishment of the fund as required by any contract or undertaking has been obtained or waived;
- the intended de-registration in the fund’s place of establishment is not prohibited under the law of such jurisdiction or by any agreement between the partners in the foreign fund; and
- the proposed general partner understands that the Companies Registry may strike its name off the LPF register if the de-registration requirement cannot be met within 60 days.
The Companies Registry, which is in-charge of LPF registration and maintains the LPF register, will issue a certificate of registration upon successful application. If the original fund does not hold a valid business registration certificate before re-domiciliation, its general partner must apply for one within a month after registration.
For a foreign corporate fund to re-domicile itself as an OFC, it has to apply to the Securities and Futures Commission (SFC) with its constitutive documents and a statement confirming, among other things, the solvency of the fund and each of its sub-funds, the absence of any petition of winding-up or liquidation and the service of notice of the proposed re-domiciliation to its creditors.
The SFC will register the foreign corporate fund as an OFC and notify the Companies Registry once its application is successful. The foreign corporate fund should then apply for a certificate of re-domiciliation with the Companies Registry and a business registration certificate by delivering the prescribed documents to the SFC.
De-registration in original jurisdiction
Unless an extension is granted, the re-domiciled OFC or LPF has to complete de-register in its place of incorporation or establishment within 60 days after the re-domiciliation. Failure to do so could result in the registration with the SFC being cancelled, or its name being struck off from the Companies Registry’s LPF register.
Effect of re-domiciliation
The re-domiciliation of a foreign fund to OFC or LPF will neither create a new legal entity nor prejudice the continuity of the re-domiciled fund. Existing contracts, legal proceedings, right, obligation or liability of the original fund will not be affected. Upon registration, all properties of the original fund will belong to the re-domiciled OFC or LPF.
The legislative proposals also confirm that the re-domiciliation process does not amount to a transfer of assets or a change in beneficial ownership of the assets, and hence there should not be any stamp duty implications.
The re-domiciliation proposal is expected to take effect on 1 November 2021.
The concept of re-domiciliation of funds is not new in other mainstream offshore fund jurisdictions. For instance, the Cayman Islands has in place a streamlined process for market players to migrate out of the jurisdiction. Under the current regime, a Cayman exempted company, limited liability company and exempted limited partnership may apply to be de-registered and migrate to another jurisdiction by filing a declaration/affidavit confirming a set of prescribed matters, subject to a de-registration fee.
In May 2021, the Government launched a scheme to subsidize the listing of a real estate investment trusts on the Hong Kong Stock Exchange and incorporation/re-domiciliation of an OFC. The scheme covers 70 percent of eligible expenses paid to Hong Kong-based service providers, subject to a cap of HK$8 million per REIT and HK$1 million per OFC.
We believe the re-domiciliation proposal coupled with the grant scheme would provide many welcomed incentives for the asset and wealth management industry in Hong Kong.