Oversight – Hong Kong Limited Partnership Funds

The Limited Partnership Fund Ordinance of Hong Kong (LPF Ordinance) comes into effect on 31 August 2020. The LPF Ordinance creates a new Hong Kong domiciled legal vehicle called a limited partnership fund (LPF) which shares many, if not all, the characteristics of a Cayman Islands exempted limited partnership registered under the Exempted Limited Partnership Law (2020 Revision) of the Cayman Islands. LPFs will be able to be used by venture capital (VC), private equity (PE) and buy-out funds, real estate (RE) funds, infrastructure and project funds, special situation and hybrid funds, credit funds, and funds that target digital assets (including any cryptocurrency and other virtual assets). The bill received the Chief Executive's assent on 31 July 2020 having been published/gazetted on 20 March this year.

The LPF Ordinance's history is relatively brief. The Hong Kong Financial Services Development Council (FSDC) issued "A Paper on Limited Partnerships for Private Equity Funds" - FSDC Paper No. 17 (FSDC Paper) in December 2015. The FSDC Paper highlighted Hong Kong's lack of suitable vehicles domiciled in jurisdiction for use as VC or PE funds. The FSDC Paper identified a number of benefits for Hong Kong if a suitable limited partnership regime were to be created: (i) the substantial community of VC and PE firms already based in Hong Kong, which are otherwise motivated to establish onshore entities in other jurisdictions (such as the Cayman Islands or those with a good double tax agreement (DTA) network), will be able to use Hong Kong DTAs, (ii) foreign VC and PE firms that wish to benefit from Asian investment returns may set up in Hong Kong, (iii) the number of Mainland VC and PE investors (encompassing State Owned Enterprises, pension and insurance funds and domestic VC and PE funds) using Hong Kong that are expanding their outbound investment activities may be increased, and (iv) the Hong Kong based advisory firms which provide services to VC and PE firms in fund administration, accounting, legal and tax advice will benefit from more business.

Hong Kong has a Limited Partnership Ordinance (LPO) of 1912 which is based on the United Kingdom's Limited Partnership Act of 1907 - although unlike the latter, the LPO has not been materially modified or updated during the more than a century of its existence. The difficulty of utilising a limited partnership established under the LPO to date has been due to (i) the LPO not covering issues relating to the distribution of capital; (ii) the general partner (GP) of such limited partnership would possibly be subject to licensing requirements under the Securities and Futures Ordinance (SF0); and (iii) such a limited partnership and its GP would likely be subject to Hong Kong profits tax. However, rather than update the LPO, the Government of Hong Kong stated in the 2019¬20 budget speech that it proposed the establishment of a limited partnership regime for funds. This Oversight summarises and comments on the LPF Ordinance as well as the related issues of (i) taxation, and (ii) licensing by the Securities and Futures Commission (SFC).