Hong Kong to launch Limited Partnership Funds to boost PE/VC sectors

22 April 2020 | Applicable law: Hong Kong

To boost its position as a leading center for wealth and asset management, Hong Kong is legislating for limited partnership as a new form of legal vehicle funds that are comparable to more established offshore jurisdictions. With the available exemption from profits tax, this new legal form will benefit private equity and venture funds that operate from Hong Kong. 

What do you need to form an LP Fund?

Under the Limited Partnership Fund Bill (the "Bill") gazetted in late March 2020, a limited partnership fund (a "LP Fund") must comprise one general partner ("GP") and at least one limited partner ("LP") governed by its limited partnership agreement ("LPA"). The GP has ultimate responsibility for the fund's management and control, and hence is imposed with unlimited liability for the fund's debts and obligations. In contrast, the liability of an LP will be limited up to its capital commitment to the fund. Also essential is an investment manager (which may be the GP itself or another person) to carry out day-to-day investment management functions.

In terms of qualifications, the GP can either be a local private company, a registered non-Hong Kong company, a limited partnership (whether it is registered in Hong Kong or elsewhere), an LP Fund or an individual over 18 year old. If the GP takes the form of another LP Fund or a foreign company with no legal personality, the GP must appoint an authorised representative who will generally be liable for the obligations imposed on the GP. This arrangement is to address the stakeholders' concern that there will be difficulties in attributing liability to a GP that has no legal personality.

Notably, an LP Fund cannot have all partners from the same corporate group. Instead of an outright ban, LP Funds established under the new regime will be given 24 months to add partner(s) outside the group.

How do you register an LP Fund?

A fund wishing to register as an LP Fund must apply to the Registrar of Companies through a local law firm or solicitor. The application has to contain the relevant particulars of the LP Fund, its GP, investment manager and responsible person, the fund's proposed investment scope and a declaration and undertaking from the GP that meets the eligibility requirement, as well as other prescribed information. A registration certificate will be issued as proof of successful application.

Do you need license(s) under the Securities and Futures Ordinance (Cap.571) ("SFO")?

While the definition of a "fund" under the Bill is substantially the same as a collective investment scheme under the SFO, neither the LP Fund nor its GP/investment manager would require to be licensed under the SFO unless it intends to carry on one or more of the regulated activities prescribed thereunder.

Regulated activities that are likely to be relevant to the GP or the investment managers of an LP Fund are Type1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management). As such, if the GP/investment manager wishes to remain unlicensed, this effectively means that investment undertaken by an LP Fund must be limited to shares and debentures of Hong Kong private companies and can only distribute funds in Hong Kong by way of private placement.

What are the key ongoing compliance obligations?

Similar to companies incorporated in Hong Kong under the Companies Ordinance (Cap.622), an LP Fund must have a registered office in Hong Kong and the GP has to file an annual return to the Registrar of Companies on behalf of the LP Fund. The GP will also need to file a notification of change within a prescribed time if there are changes in particulars relating to the fund, such as removal or replacement of the GP, change of the fund's registered address or investment manager.

The requirement of having a Business Registration Certificate also applies to LP Funds. Audits of the financial statements of the LP Fund shall be carried out by a qualified auditor appointed by the GP and have to be made available to all partners in the LP Fund.

On the operation side, an LP Fund has to put in place "proper custody arrangements" for its assets. The Bill does not specify whether a custodian shall be appointed to look after the assets but an independent custodian will nevertheless need to be appointed in accordance with the SFC's Fund Manager Code of Conduct if the GP/investment manager is licensed by the SFC to carry out Type 9 (asset management) activities.

The GP needs to appoint a "responsible person" to carry out anti-money laundering/counter-terrorist financing functions as stipulated under Schedule 2 of the Anti-Money Laundering and Counter-Financing of Terrorists Ordinance (Cap.615), such as conducting due diligence in relation to partners and transactions. The responsible person must be an authorised institution, a licensed corporation or an accounting or legal professional that is registered in Hong Kong.

What management involvement could compromise a LP's limited liability?

An LP will enjoy limited liability protection and will not be liable for the fund's debts and obligations beyond the amount it has agreed to contribute, unless the LP participates in the management of an LP Fund to the extent that such involvement falls outside the scope of the prescribed safe harbor activities.

In line with international practice, the Bill includes a non-exhaustive list of safe harbor activities which will not be regarded as participating in an LP Fund's management, and hence will not compromise the LP's privilege of having limited liability protection. For instances, LP may serve on a board/committee of the LP Fund or any corporation in which the fund has an interest of business relationship, advise or approve the GP/investment manager on the business, take part in a decision about admission or withdrawal of any partner and changing the investment scope of the LP Fund.

What are the beneficial tax treatments for LP Funds and Investment Fund Managers?

LP Funds will be exempted from profits tax in Hong Kong if they meet the conditions of the existing unified fund exemption regime under the Inland Revenue Ordinance (Cap.112). To qualify, the assessable profits of the LP Fund must be derived from "qualifying transactions" that are either carried out in Hong Kong, or arranged in Hong Kong by a licensed corporation or authorised financial institution. Qualifying transactions refer to transactions of securities, futures contracts, shares in private companies and foreign currencies etc.

Any distribution of profits and assets by the LP Funds to the LPs will not be subject to stamp duty as an interest in LP Funds is not a "stock".

More importantly, investment fund managers may also take advantage of the tax concession for carried interest, as recently proposed by the Financial Secretary in the 2020-21 Budget as part of the initiative to attract more PE funds to domicile and operate in Hong Kong. Although the exact concessions are yet to be clarified, they will likely mitigate the Inland Revenue Department's current position that carried interest or performance fees of HK-based investment managers could be subject to profits tax in Hong Kong.

Is it possible to migrate an existing partnership registered under the Limited Partnership Ordinance (Cap.37) ("LPO") to become a LP Fund?

The GP of a limited partnership formed under the LPO may apply for registration as a LP Fund if it meets the requirements prescribed in the Bill. Upon satisfaction of the registration requirements, the fund would preserve the identity and continuity so no new entity will be formed and existing rights and liabilities of the fund will not be affected.

How to dissolve or liquidate an LP Fund?

The Bill contains a straightforward dissolution and liquidation mechanism for the LP Funds. It gives the partners the right to agree among themselves in the LPA on the conditions and procedures under which the fund could be dissolved voluntarily. Under certain conditions, a LP Fund may also be liquidated as an unregistered company in accordance with the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32). Such process can be initiated by any partner or creditor of the fund upon presenting a winding up petition to the court.


With Hong Kong being the most active IPO market in the region for private equity funds to exit their investments and given its proximity to Mainland China, a modernised regime in the city is much needed to provide a practical alternative for the private equity funds, so that their place of registration can be the same as their operational base. The Bill comes at the right time when fund managers are actively considering alternative jurisdictions to restructure their operations in response to the introduction of economic substance requirements in the Cayman Islands.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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