What we do
Structuring Offshore Hedge Funds
Charltons has significant experience in advising hedge fund managers and promoters on the domicile, structuring and establishment of offshore hedge funds in a variety of jurisdictions including the Cayman Islands, the British Virgin Islands and Bermuda. Our lawyers provide an insightful and highly personalised service, delivering high impact, smart and pragmatic advice.
We advise on all forms of hedge fund vehicles, including limited liability companies, umbrella funds, protected cell or segregated portfolio companies, limited liability partnerships and unit trusts. We also advise on a variety of hedge fund structures, including open-ended and closed-end funds, master / feeder structures, fund of funds and hedge funds.
Charltons has worked on offshore hedge funds across the full spectrum of asset classes, including listed stocks, fixed income and derivative securities, property, natural resources, private equity, venture capital, and distressed debt. We have also advised on a range of hedge fund strategies including long / short, arbitrage and socially responsible investing.
For offshore hedge funds being sold into the Hong Kong market, we will advise on the applicable regulatory framework and suggest structures, selling restrictions and other solutions that will enable offshore hedge funds and hedge fund managers to avoid SFO authorisation and prospectus registration. In the case of retail and other non-exempt hedge funds, we will assist with the application for authorisation of the hedge fund in Hong Kong under the SFO.
We have an in-depth understanding of the key legal and commercial points in the capital raising process and considerable experience in advising on fund terms and negotiations with anchor investors. We will prepare information memoranda and subscription agreements, draft and negotiate the investment management, custodian, administration and other service agreements, and prepare corporate resolutions and other launch documents. We will also engage and instruct offshore counsel and coordinate multi-jurisdictional legal advice to offer a single point of contact and integrated legal solutions to the client.
Tax treatment of hedge funds
The vast majority of hedge funds managed in Hong Kong are established offshore in tax neutral jurisdictions (where there is no or negligible tax imposed by the local authority) such as the Cayman Islands, Jersey, Guernsey, Bermuda and the British Virgin Islands. A key consideration for an offshore hedge fund structure from a Hong Kong tax perspective is to ensure that the profits of the offshore company are not subject to Hong Kong law because (i) the company is treated as carrying on a trade or business in Hong Kong through a permanent establishment; or (ii) the company is deemed to be a tax resident in Hong Kong.
The Inland Revenue Ordinance (“IRO”) of Hong Kong imposes tax on property rental income, employment income and business profits. As the Fund does not intend to directly own any land or buildings situated in Hong Kong that derive rental income and will not be generating any employment income, its exposure to Hong Kong tax under the IRO would generally be in connection with business profits only (i.e., “profits tax”).
In general, exposure to Hong Kong profits tax will only arise if the fund is regarded as carrying on a trade, profession or business in Hong Kong either on its own account or through another person (e.g. the Investment Manager) and/or constituting a permanent establishment in Hong Kong. The Inland Revenue (Amendment) (No.6) Ordinance 2018 introduced a new definition of permanent establishment in Hong Kong for non-residents of a non-treaty jurisdiction under which a person, including a corporation or partnership irrespective of its place of incorporation or establishment, may potentially be subject to Hong Kong profits tax.
If the fund is regarded as carrying on a trade, profession or business and/or constituting a permanent establishment in Hong Kong, a liability to profits tax, the rate of which is currently up to 16.5 per cent., will only exist in respect of any profits which arise in or are derived from Hong Kong from that trade, profession or business and which are not capital in nature. Such amounts may include profits arising from the disposal of securities listed on the Hong Kong Stock Exchange, unlisted securities where the purchase or sale contracts are effected (i.e. negotiated, concluded and executed) in Hong Kong and interest income arising from certain debt instruments where the loan funds were first made available to the issuer in Hong Kong to the extent that the fund is not regarded as carrying on a money lending business. Whether a gain is regarded as being capital in nature is a question of fact which has to be determined based on the specific facts and circumstances of each case.
Notwithstanding the general rules as described above, the Inland Revenue Profits Tax Exemption For Funds (Amendment) Ordinance 2019 (“Exemption Amendment Ordinance”), which came into operation on 1 April 2019, introduced a new “unified profits tax fund exemption regime” (“Unified Fund Exemption”), which may allow “funds”, meeting the relevant definition and qualifying conditions to benefit from profits tax exemption even though its profits may otherwise be treated as taxable.
Under the Unified Funds Exemption, a “fund” may enjoy profits tax exemption without restriction as to its structure, size or location of its central management and control. In addition, where a “fund” qualifying for tax-exemption carries out a transaction which does not qualify for tax exemption, this does not necessarily taint or impact the tax exemption status of other qualifying transactions of the “fund”.