Oversight - SFC updates OFC regime

On 2 September 2020 the Securities and Futures Commission (SFC) issued its Consultation Conclusions on Proposed Enhancements to the Open-ended Fund Companies Regime and Further Consultation on Customer Due Diligence (Consultation Conclusions).

Open-ended fund companies (OFCs) were launched as a new legal vehicle in Hong Kong in July 2018. The launch was not a great success given, amongst other things, Hong Kong profits taxation for private OFCs. In addition under the OFC regime applicable to private funds, a number of deficiencies were identified by market participants including (i) restrictions on permitted investments, (ii) eligibility criteria for the custodians of OFCs, and (iii) the lack of any re-domiciliation mechanism to allow offshore funds to “onshore” themselves into OFCs.

Changes to the Inland Revenue Ordinance (IRO) have addressed the issue of taxation of private OFCs. These revisions to the IRO, effective 1 April 2019, in effect removed different Hong Kong tax treatment as between onshore and offshore funds. Recognising the other deficiencies (and perhaps because even as at the date of publication of this Oversight, only 5 private OFCs have been launched) the SFC published a Consultation Paper on Proposed Enhancements to the Open-ended Fund Companies Regime in December 2019 (Consultation). In the meanwhile in Singapore a similar vehicle, the variable capital company (VCC), has enjoyed significant take up since its launch in January 2020. As at August 2020, over 100 VCCs have been incorporated or redomiciled.

This Oversight recaps the key features of OFCs and reports the forthcoming changes as set out in the Consultation Conclusions. It also looks at how the VCC regime in Singapore addresses similar issues.