Oversight: Overhaul of the private OFC regime

The open-ended fund company (OFC) regime came into effect on 30 July 2018. Although this Firm acted on the first public OFC platform (the Global X Exchange Traded Funds Series OFC with three listed funds) there have only been, to date, two private OFCs registered in Hong Kong.

The slow take-up is perhaps surprising given that the Securities and Futures Commission (SFC) published its consultation conclusions in respect of the proposed rules and code for the new OFCs back in May 2018. The consultation itself had commenced in June 2017. The launch of OFCs had been preceded on 23 June 2017 by the publication of the Inland Revenue (Amendment) (No.4) Bill 2017 which amended the Inland Revenue Ordinance (IRO) to provide for a profits tax exemption in respect of certain privately offered OFCs. Earlier still saw the enactment of the Securities and Futures (Amendment) Ordinance (Amendment Ordinance) in 2016 which amended the Securities and Futures Ordinance (SFO) to establish the legal framework for the incorporation of OFCs. The OFC regime was in fact the culmination of many years' lobbying by the fund industry of the Hong Kong Government. Impetus was given by the recommendations in November 2013 of the Financial Services Development Council and the Financial Services and Treasury Bureau set out in a consultation paper of March 2014.

Whilst a major criticism of the OFC regime had related to the limited and complex exemption from taxation for private OFCs, this was addressed more recently with further revisions to the IRO. These in effect extend the tax exemption for funds to those domiciled in Hong Kong and remove any advantage previously enjoyed by overseas-domiciled funds. The changes to the IRO took effect in April 2019. Accordingly the lack of interest in OFC-structured funds has caused the SFC to look further at enhancements to the regime. With this in mind the SFC published its Consultation Paper on Proposed Enhancements to the Open-ended Fund Companies Regime (Consultation) at the end of last year (December 2019). The SFC has requested feedback by no later than 20 February 2020.

This Oversight recaps the key features of OFCs and examines the SFC's proposed changes.