Establishing Investment Funds in Hong Kong

The SFC will adopt a one-stop process for OFC registration, incorporation and business registration, which requires direct dealings only with the SFC.

The SFC will then notify the Companies Registry (CR) of the registration of an OFC, the CR will issue a certificate of incorporation, and the SFC will complete the registration process. Business registration with the Inland Revenue Department is conducted in the same manner.  For the procedures for setting up an OFC, please refer to the section “Procedures for establishing an OFC” below.

As to processing times, the SFC has said that public OFC applications should be processed within the same time frame as other public funds, i.e. between one and three months from receipt of the application. Private OFCs will be registered as soon as practicable, normally within one month.

1. end with “open-ended fund company” or “OFC”;
2. not be the same as that of an existing OFC; and
3. not be misleading or undesirable.  

An OFC’s name, and any subsequent change to it, is subject to review and approval by the SFC. The process for change of name is also conducted under the one-stop approach.

Under Part IVA of the SFO, an OFC must have an instrument of incorporation which sets out:

1. the company name;

2. a statement that the company’s registered office is situated in Hong Kong;

3. the objects of the company;

4. provision as to the types of property in which the company will invest;

5. statements that:

   1. the company is an open-ended fund company with variable share capital;

   2. the company’s paid-up share capital will always be equal to its net asset value;

   3. the company’s shareholders are not liable for the company’s debts;

   4. the company’s scheme property is entrusted to a custodian for safe keeping in compliance with the law; and

6. any other matters prescribed by the OFC Rules.

The instrument of incorporation must provide that “the object of the OFC is the operation of the company as a collective investment scheme”.

An OFC’s instrument of incorporation can be amended, and any material change must be filed with the SFC within 15 days of the change.

The template for an OFC’s instrument of incorporation is available on the SFC’s website.

An OFC’s board of directors must have at least two directors who are natural persons over 18 years old.  A director of an OFC cannot be an undischarged bankrupt, except with leave of the court.  At least one director must be an independent director who is not a director or employee of the custodian.

Subsequent board appointments are made by the OFC’s board or by shareholders’ resolution, subject to SFC approval.  A register of directors must be kept, and the current index of directors must be made available to the CR, with which the OFC must file notices of any change of directors.

Directors’ eligibility

To be eligible for appointment as an OFC director, a person must have technical knowledge, the ability to perform their duties, and satisfactory expertise in the relevant business.   A director’s qualifications will be assessed in the context of the fund’s nature, investment objectives and its policy.  

Appointed directors owe the OFC fiduciary duties and the duty to exercise reasonable care, skill and diligence, and must also comply with their statutory duties and applicable codes and guidelines when discharging their functions in respect of an OFC.

The experience and expertise of the persons appointed as directors of an OFC, taken together, must be appropriate for carrying on the business of the OFC.  According to Chapter 5 of the SFC Code, an OFC’s directors must be of good repute, appropriately qualified, experienced and proper for the purpose of carrying out the business of the OFC.   Examples of factors that the SFC will consider include:

• whether the person has relevant qualifications and/or experience; and

• whether the person, or any business with which the person has been involved, has been found by any court or competent authority to have breached any company, securities or financial markets laws and regulations, has been held for fraud or other misfeasance, or has been disciplined by, or disqualified from, any professional body.

Documents to support the eligibility of the proposed directors

An OFC applicant must submit the proposed directors’ profiles, including their qualifications, work experience, and licensing status etc.

Overseas directors must appoint a process agent, who may be:

1. an individual whose usual residential address is in Hong Kong;

2. a company formed and registered under the CO in Hong Kong; or

3. a firm of solicitors or certified public accountants in Hong Kong.

The OFC must keep a record of process agents appointed.

An OFC’s investment management function must be delegated to an investment manager which is licensed or registered with the SFC for carrying on Type 9 (asset management) regulated activity. A written investment management agreement must be in place at all times, stating the delegation of the investment management functions to the investment manager.  

The investment manager must comply with the General Principles and other relevant provisions of the OFC Code.  It will also have to comply with the Fund Manager Code of Conduct, the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, and other applicable SFC codes and guidelines.

Investment manager eligibility

An investment manager of an OFC must be:

• licensed or registered for Type 9 (asset management) regulated activity with the SFC; and

• and remain fit and proper, at and after the registration of the OFC.

If it ceases to meet the eligibility requirements under the SFO, an investment manager must retire.

An OFC’s investment property is required to be entrusted to a custodian for safe-keeping by Part IVA of the SFO, regardless of the type of assets underlying the OFC. A custodian incorporated outside of Hong Kong must appoint a process agent, unless it is a registered non-Hong Kong company under Part 16 of the CO which has an authorised representative on whom documents may be served in Hong Kong.  

On cessation of office, a custodian must provide either a “statement of circumstances” if it considers there are circumstances to be brought to the attention of the OFC’s shareholders or creditors, or a statement to the OFC that there are no such circumstances.

Custodian’s eligibility

An OFC’s custodian must meet the eligibility requirements for custodians of SFC-authorised funds set out in the UT Code, that is, it must be:

1. a Hong Kong licensed bank or a bank incorporated outside Hong Kong which is regulated and supervised by an overseas supervisory authority acceptable to the SFC;

2. a trust company registered under Hong Kong’s Trustee Ordinance which is a subsidiary of a bank falling within (i) above; or

3. a trust company which is a trustee of any registered scheme as defined in the Mandatory Provident Fund Schemes Ordinance.

The custodian must also be:

1. independently audited and have minimum paid-up share capital and non-distributable capital reserves of HK$10 million (or its foreign currency equivalent); or

2. have minimum paid-up share capital and non-distributable capital reserves of less than HK$10 million and be a wholly-owned subsidiary of a substantial financial institution which:

   1. issues a standing commitment to subscribe sufficient additional capital up to the required amount, if so required by the SFC; or

   2. undertakes that it would not let its wholly-owned subsidiary default and would not, without the SFC’s prior approval, voluntarily dispose of, or allow the custodian to issue or dispose of, share capital if that would result in it ceasing to be a wholly-owned subsidiary of the substantial financial institution.

In the case of a private OFC, a Type 1 licensed/registered intermediary is also eligible to act as the custodian if it meets the following conditions:

1. its licence or registration is not subject to the condition that it cannot hold client assets;

2. it maintains paid-up share capital of HK$10 million and liquid capital of HK$3 million at all times;

3. the private OFC is the client of the intermediary in respect of its Type 1 regulated activity (a six-month grace period is allowed to permit a Type 1-licensed intermediary to continue to act as a custodian for a private OFC after it ceases to be the intermediary’s client in respect of its Type 1 business. The Type 1-licensed intermediary must inform the SFC prior to, or as soon as practicable upon, the private OFC ceasing to be its client and must arrange for the transfer of the scheme property to a new custodian as soon as practicable);

4. it has at least one responsible officer or executive officer responsible for the overall management and supervision of its custodial function; and

5. it is independent of the investment manager. In order to fulfil this requirement, the SFC requires the custodian to be a separate legal entity from the investment manager. Internal controls must also be in place to ensure that persons fulfilling the custodian function / safeguarding of the OFC’s scheme property are functionally independent of those fulfilling the OFCs investment management functions, which includes ensuring distinct and separate reporting lines.

Overseas entities subject to equivalent regulation to Type 1 licensed intermediaries in their home jurisdiction are also eligible to act as custodians for private OFCs if the requirements in 4.2(d) of the Code on Unit Trusts and Mutual Funds are met (i.e. that the entity is authorised to act as a trustee / custodian of a fund and is prudentially regulated and supervised by an overseas supervisory authority acceptable to the SFC).

Trust companies are also eligible to act as a custodian of a private OFC if they meet the requirements in 4.2(b) and 4.2(c) of the Code on Unit Trusts and Mutual Funds. However, under the proposed regime for regulated activity 13 regulating the trustees/custodians of SFC-authorised funds, trust companies will become ineligible unless they obtain a Type 13 licence.

Custodian’s duties

The OFC custodian’s main duties include:

1. a statutory duty to take reasonable care, skill and diligence to ensure the safe keeping of the scheme property entrusted to it (same for sub-custodian);^[2]

2. proper segregation of the OFC’s assets from:

   1. the assets of the investment manager;

   2. the assets of the custodian /sub-custodian throughout the custody chain; and

   3. the assets of other clients of the custodian throughout the custody chain and the assets of the investment manager’s affiliates, unless held in an omnibus client account with adequate safeguards to ensure that assets of the OFC are properly recorded;

3. safe-keeping and record keeping of assets. Custodians must maintain up-to-date records of all fund property belonging to the OFC; and

4. exercising due care in the selection, appointment and ongoing monitoring of its delegates, including sub-custodians.

In relation to the safekeeping of assets, the OFC Code requires custodians to:

1. have sufficient expertise and experience in safekeeping the asset classes in which the OFC invests; and

2. maintain adequate internal controls and systems commensurate with the custodial risks specific to the type and nature of the assets in which the OFC invests.[3]

In relation to the custody of digital assets, SFC custodians should assess their expertise, competence and operational capabilities to ensure that such assets are properly safeguarded and effectively segregated. As for unlisted investments, the SFC has stated that custodians should assess and understand the nature and custody risks of such investments by an OFC to ensure that they are properly safeguarded.[4]

Additional Requirements for Custodians of Private OFCs (Appendix A to the OFC Code)

Custodians of private OFCs must also comply with the requirements of Appendix A to the OFC Code (Requirements for Safekeeping of Private OFC Scheme Property under 7.3(g) of the OFC Code) which sets out the general requirements and expectations for custodians, in addition to requirements in relation to:

1. the receipt and holding of money and securities on behalf of a private OFC;

2. the selection and appointment of sub-custodians;

3. the keeping of accounting and other records; and

4. risk management.

Sub-custodians

There are no restrictions on the eligibility of sub-custodians appointed by custodians of private OFCs. A custodian of a private OFC must however be satisfied that any sub-custodian(s) appointed are suitably qualified and competent in the safekeeping of the fund’s property and must be subject to ongoing monitoring. In any event, the responsibilities and obligations with respect to the safekeeping of the fund’s property remain with the private OFC custodian.

A private OFC custodian must have written internal control policies and procedures for:

1. the selection of sub-custodians for the safekeeping of the private OFC’s scheme property;

2. the monitoring of its sub-custodian(s) on an on-going basis; and

3. addressing any actual or potential conflicts of interest arising from the appointment and oversight of the sub-custodian.

An OFC is able to issue multiple classes of shares, and to specify the rights attached to its shares, in its instrument of incorporation. The rights attached to a class of shares may be varied only as far as the company’s instrument of incorporation provides for the variation of those rights.

The ownership of shares in an OFC is recorded by noting shareholders’ particulars and holdings in the register of shareholders, which must be kept at the OFC’s registered office, or at another address filed with the CR. The register must be kept in English or Chinese. There is no requirement for the issue of share certificates. Shareholders of an OFC have access to their own shareholding information in the register.

The process for transferring shares includes lodging an instrument of transfer with the OFC, which must register the transfer or send a refusal notice to the transferee and transferor.

Part 5 of the OFC Rules sets out key provisions relating to the conduct of OFCs’ meetings (such as the notice period for holding meetings, and the rights of relevant parties to attend) and the passing of resolutions (including voting thresholds). Chapter 8 of the OFC Code requires detailed meeting logistics to be set out in an OFC’s instrument of incorporation.  Public OFCs must also comply with relevant requirements of the SFC Products Handbook.

The directors of an OFC must appoint an auditor for each financial year.

The OFC Rules require that the auditor must be independent of the investment manager, the custodian, and the directors of the OFC.  The auditor has the right to attend and be heard at general meetings, a right of access to information and other privileges.  The auditor may either resign, or be removed by an ordinary resolution, at a general meeting.  The OFC Rules set out provisions as to auditors’ eligibility, rights and cessation of office, which are similar to those for conventional companies.

If an auditor resigns, it will need to provide a “statement of circumstances” to the OFC indicating circumstances to be brought to the attention of shareholders and creditors, or a statement that no such circumstance exist.  A copy of the “statement of circumstances” must be submitted to the SFC at the same time.

An OFC is required to prepare an annual report for each financial year, unless the SFC agrees that it need not file a financial report, and must publish it within four months of the end of the OFC’s financial year.  The OFC’s financial statements and the auditor’s report must be included in the annual report.   According to the OFC Code, the annual report is expected to contain information on the OFC’s investment portfolio, assets, liabilities, income and expenses in order to enable shareholders to make an informed judgement on the development of the activities and the results of the OFC’s performance.

Hong Kong Financial Reporting Standards or International Financial Reporting Standards may be used for preparing the report.  Public OFCs will also need to prepare an interim report as per the SFC Products Handbook, while private OFCs will be given discretion to determine whether preparation of an interim report is necessary.

As of 11 September 2020, all investment restrictions on private OFCs under the OFC Code have been removed. However, the OFC Code has been amended to require that:

1. custodians and investment managers must have sufficient expertise and experience in managing and safekeeping asset classes in which the OFC invests;

2. offering documents must contain clear disclosure of all material risks specific to the type and nature of assets in which an OFC may invest;

3. proper records must be kept; and

4. adequate internal controls and systems commensurate with the custodial risk specific to the type and nature of the assets in which the OFC invests must be in place.

An OFC which will be publicly offered in Hong Kong must be authorised by the SFC under section 104 SFO. SFC authorisation will only be granted if the OFC meets the requirements of the UT Code which include the core investment restrictions set out in Chapter 7.  The key restrictions are:

1. Spread of investments: limits on single entity and group exposure

   The fund must not invest in, or be exposed to: (a) a single entity in an amount equal to 10% of the fund’s total net asset value; or (b)  entities within the same group in an amount equal to 20% of the fund’s total net asset value, through:

   1. investments in the securities of the entity or entities;

   2. exposure to the entity or entities through the underlying assets of financial derivatives; and

   3. net counterparty exposure to the entity or entities arising from transactions in over-the-counter financial derivative instruments.

2. Cash deposits

   A fund cannot invest 20% or more of its total net asset value in cash deposits with the same entity or group of entities.

3. Shares of a single entity

   A fund cannot hold more than 10% of the ordinary shares of any single entity.

4. Unlisted products

   A fund cannot invest 15% or more of its total net asset value in securities, financial products or instruments that are neither listed, quoted nor dealt in on a market.

5. Government and other public securities

   Despite the restrictions under paragraphs (i) and (iii) above, a fund can invest up to 30% of its total net asset value in Government and other public securities of the same issuer.

6. Commodities

   Funds cannot invest in physical commodities unless approved by the SFC on a case-by-case basis taking into account the liquidity of the commodities and appropriate additional safeguards where necessary.

7. Real estate

   Retails funds cannot invest in any type of real estate (including buildings) or interests in real estate (including options or rights).  The prohibition does not however extend to shares in real estate companies and interests in real estate investment trusts.

The following restrictions also apply to retail funds:

1. Retail funds cannot lend, assume, guarantee, endorse or otherwise become liable (directly or contingently) for another person’s obligation or indebtedness;

2. No short sales are allowed which would result in the fund’s liability to deliver securities exceeding 10% of its total net asset value;

3. Short selling is only allowed in securities which are actively traded on a market which permits short selling;

4. A fund cannot invest in any security of any class in a company or body in which a director or officer of the management company individually owns more than 0.5% of the total nominal amount of all the issued shares of that class, or where the directors and officers of the management company collectively own more than 5% of those securities;

5. A fund cannot borrow more than 10% of its total net asset value; and

6. Specific restrictions apply to investments in financial derivative instruments.

Hong Kong profits tax is charged on every person carrying on a trade, profession or business in Hong Kong in respect of profits arising in or derived from Hong Kong from such trade, profession or business (excluding profits arising from the sale of capital assets) by section 14 of the Inland Revenue Ordinance (Cap. 112) (the IRO).  Certain exemptions are available.

A mutual fund, unit trust or similar investment scheme is exempted from Hong Kong profits tax if it is:

1. authorised as a collective investment scheme by the SFC; or

2. a bona fide widely held investment scheme which complies with the requirements of a supervisory authority acceptable to the SFC.[5]

Accordingly, a public OFC authorised by the SFC is exempt from Hong Kong profits tax.

An exemption is available for “funds” [6] which are defined in similar terms to the definition of a “collective investment scheme” under the SFO.[7] 

The IRO defines a “fund” as an arrangement in respect of property where:

1. either:

   1. the property is managed as a whole by, or on behalf of, the person operating the arrangement; or

   2. the contributions of the participating persons, and the profits or income from which payment is made to them, are pooled under the arrangement, or both;

2. the participating persons do not have day-to-day control over the management of the property (whether or not they have the right to be consulted on, or to give directions in respect of, the management); and

3. the actual or pretended purpose or effect of the arrangement is to enable the participating persons, whether by acquiring any right, interest, title or benefit in the property or any part of the property or otherwise, to participate in or receive profits, income, payments or other returns.

Exclusions from the “fund” definition

The exemption is not available for the following arrangements which are excluded from the “fund” definition:

1. public funds authorised by the SFC - as noted above, SFC-authorised funds are already exempt from profits tax under section 26A(1A) of the IRO;

2. business undertakings for general commercial or industrial purposes – these include activities involving the purchase, sale  or exchange of goods or commodities, supply of services, production of goods or construction of immovable property, property development or property holding, insurance and finance (other than through eligible private equity investments); and

3. intra-group arrangements – these are arrangements: (a) in which all the participants in the arrangement are corporations in the same group of companies as the operator of the arrangement; or (b) in which all the participants in the arrangement are employees or close relatives of such employees of the same corporate group as the operator of the arrangement.

Subject to anti-avoidance provisions, a fund is exempt from profits tax on profits earned from the following transactions (section 20AN IRO):

1. Qualifying transactions

   These are transactions in asset classes specified in Schedule 16C to the IRO which include: securities; shares, debentures, bonds, etc. issued by a private company; futures contracts; foreign exchange contracts; deposits made with a bank; certificates of deposits; exchange-traded commodities; foreign currencies; OTC derivative products; and an investee company’s shares co-invested under the Innovation and Technology Venture Fund Scheme;

   Eligibility for the profits tax exemption for qualifying transactions requires the fund to satisfy one of following conditions:

   1. the qualifying transactions of the fund are carried out or arranged in Hong Kong by or through a person licensed or registered with the SFC; or

   2. the fund is a qualified investment fund, i.e. a fund in respect of which:

      • at all times after the final closing of sale of interests: (A) the number of independent investors exceeds 4; and (B) the capital commitments made by investors exceed 90% of the aggregated capital commitments; and

      • the originator of the fund (i.e. the person who originates or sponsors the fund and has the power to make investment decisions on behalf of the fund) and its associates are entitled to no more than 30% of the net proceeds of the fund’s transactions, after deducting the portion attributable to their capital contributions (which is proportionate to that attributable to the investors’ capital contributions).

The key steps required to establish an OFC are:

1. registration of the OFC by the SFC;

2. issue of a Certificate of Incorporation by the Registrar of Companies; and

3. issue of a Business Registration Certificate by the Registrar of Companies on behalf of the Inland Revenue Department (IRD).

A one-stop approach applies and the applicant submits all application documents and associated fees to the SFC.  

An applicant has to submit to the SFC:

1. all application documents for: (a) registration with the SFC; (b) incorporation with the CR; and (c) business registration with the IRD; and

2. fees payable to the SFC, CR and IRD.

Application documents for OFC registration with the SFC

The documents which need to be submitted for registration of the OFC are:

1. a duly signed and completed Application Form which:

   1. for public OFCs or publicly offered sub-funds refers to the “Application Form for Registration of a Public Open-ended Fund Company or Establishment of a Publicly Offered Sub-fund of an Open-ended Fund Company” set out in the Annex to the “Application Form for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products”. The information required includes (among others):

      • whether the proposed public OFC is a single fund or an umbrella fund with sub-fund(s)

      • name of the single proposed public OFC or the umbrella proposed public OFC and its sub-fund(s)

      • names of the proposed directors (each of whom must be at least 18 years of age and must not be an undischarged bankrupt);

      • name of the investment manager (which must be licensed or registered for Type 9 (asset management) regulated activity or have made an application for a Type 9 licence or registration);

      • name of the custodian; and

      • registered office address.

   2. for private OFCs or privately offered sub-funds of an OFC, Application Form refers to the “Application Form for Registration of a Private Open-ended Fund Company or Establishment of a Privately Offered Sub-fund of an Open-ended Fund Company”. The information required includes (among others):

      • whether the proposed private OFC is a single fund or an umbrella fund with sub-fund(s);

      • name of the single proposed private OFC or the umbrella proposed private OFC and its sub-fund(s);

      • names of the proposed directors (each of whom must be at least 18 years of age and must not be an undischarged bankrupt);

      • name of the investment manager (which must be licensed or registered for Type 9 (asset management) regulated activity or have made an application for a Type 9 licence or registration) ;

      • name of the custodian; and

      • registered office address.

2. a duly signed and completed Information Checklist;

   1. for public OFCs or publicly offered sub-funds, the Information Checklist is the “Information Checklist for Application for Registration of a Public Open-ended Fund Company or Establishment of a Publicly Offered Sub-fund of an Open-ended Fund Company” set out in the Schedule to the “Information Checklist for Application for Authorization of Unit Trusts and Mutual Funds under the Revamped Process”;

   2. for private OFCs or privately offered sub-funds of an OFC, the Information Checklist refers to the “Information Checklist for Application for Registration of a Private Open-ended Fund Company or Establishment of a Privately-offered Sub-fund of an Open-ended Fund Company”;

3. a copy of the instrument of incorporation signed by each of the proposed directors;

4. documents (including any confirmations and/or undertakings) required to be submitted by the Information Checklist; and

5. a cheque payable to the “Securities and Futures Commission” in respect of the registration fee for a private OFC or the authorization fee for a public OFC.

The fee payable to the CR for the incorporation of an OFC is HK$3,034.

The fees payable in respect of the OFC’s business registration (BR) are as follows:

1. for a one-year BR certificate, a fee of HK$2,000 and a levy of HK$250 are payable;

2. for a three-year BR certificate, a fee of HK5,200 and a levy of HK$750 are applicable.

Please refer to the websites of the CR and the IRD for updates as to any fee waiver that may be applicable from time to time.

Note: Separate cheques should be issued for the fees payable to the SFC and to the CR respectively.

The principal steps for terminating an OFC include:

1. the OFC submits a termination proposal with an explanation of the proposed arrangements with a solvency statement approved by the board of directors which confirms the OFC’s ability to meet its liabilities within the following 12 months;

2. the OFC issues a termination notice to shareholders (the SFC’s approval is required for public OFCs), after which the OFC must not be marketed and must not accept new subscriptions;

3. after realisation of the assets, settlement of liabilities and distribution of proceeds to shareholders, an OFC should apply to the SFC for cancellation of its registration by submitting:

   1. a duly signed and completed “Application Form for Cancellation of Registration of an Open-ended Fund Company or Termination of a Sub-fund of an Open-ended Fund Company” to the SFC; and

   2. for a private OFC, a duly completed “Information Checklist for Termination of a Private OFC or Privately Offered Sub-fund under Chapter 10 of the Code on Open-ended Fund Companies”;

   3. for a public OFC, the applicable requirements under the SFC Products Handbook should be complied with, and a duly completed “On-Going Compliance Form For Notice of Mergers/Restructuring/Termination/Withdrawal of Authorization” should be submitted;

   4. certain documents should be submitted with the above forms, for example:

      • the OFC’s final accounts accompanied by the auditor’s report;

      • a declaration signed by the OFC’s board of directors and the investment manager confirming that the realisation of assets and distribution of proceeds are complete, and that there are no outstanding liabilities.

      Note: the applicant should ensure that the OFC has no outstanding tax liabilities by obtaining a tax clearance letter from the IRD.

   5. in the case of a public OFC, an application for withdrawal of authorisation;

4. the OFC must notify investors in writing prior to and upon cancellation of registration, explaining the reasons for the termination and cancellation of registration;

5. cancellation of registration with the CR takes place automatically upon cancellation of registration with the SFC. No separate application to the CR is required.

6. an application for termination will lapse if no approval is granted within the applicable processing time period as indicated in the first requisition issued by the SFC.

The SFC has the power to cancel registration of an OFC (other than on an OFC’s application) in any of the circumstances described in section 112ZI of the SFO, i.e. if:

1. it appears to the SFC that, with respect to the company, the requirements for registration are no longer met;

2. it appears to the SFC that the company or a director, an investment manager, a custodian or a sub-custodian of the company has contravened:

   1. any of the relevant provisions (being any provision of the SFO);

   2. any notice or requirement given or made by the SFC under or pursuant to the SFO; or

   3. any condition imposed in respect of the OFC’s registration;

3. it appears to the SFC that the company or a director, an investment manager, a custodian or a sub-custodian of the company has knowingly or recklessly provided to the SFC any information that is false or misleading in a material particular in purported compliance with:

   1. any of the relevant provisions (being any provision of the SFO);

   2. any notice or requirement given or made by the SFC under or pursuant to the SFO; or

   3. any of the conditions imposed in respect of the registration of the company;

4. the SFC is not satisfied that the continued registration of the company is in the interest of the investing public; or

5. an order for the winding-up of the company has been made by a court under the OFC Rules.

The OFC’s registration with the CR will be automatically removed when the cancellation of its registration takes effect.

On a termination of an OFC by way of a statutory winding-up, the OFC must comply with the OFC Rules. The OFC’s registration will be automatically cancelled upon completion of the winding-up. The OFC should keep the SFC informed as to the material progress of the winding-up, comply with any SFC information requests regarding the winding-up, and provide such notifications to the SFC as are required under the OFC Rules.

Overseas corporate funds will (upon completion of the legislative process) be able to re-domicile in Hong Kong as OFCs where the key requirements for the registration of newly established OFCs under the SFO and OFC Rules are met. The key requirements include the appointment of an investment manager, custodian and directors who fulfil the eligibility requirements under the SFO, OFC Rules and OFC.

Any changes to the fund structure which do not affect the fund’s ability to meet the requirements may be made after re-domiciliation.

There is no restriction on the restructuring of unit trusts into OFCs provided that:

1. the requirements for establishing an OFC under the SFO, OFC Rules and OFC Code are met; and

2. the restructuring can be conducted in accordance with the unit trust’s constitutive documents.

Where SFC-authorised funds in unit trust form are restructured into OFCs with a similar investment objective and management, information about their past performance and track records may continue to be used in the funds’ advertisements.

Subsequent to re-domiciliation and if certain conditions are met, the OFC may be eligible for the profits tax exemption. Profits tax may however arise if a private OFC makes investment in certain situations under which the profits tax exemption under the new unified profits tax regime for funds does not apply (i.e. in the situations set out in section 20AS of the IRO)

Trusts are a common law concept and the legislative source of law on trusts in Hong Kong is the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong).  A unit trust is a form of collective investment scheme constituted under a trust deed, which enables a number of investors to pool their assets and have those assets professionally managed by an independent manager. The most common form of unit trust structure in Hong Kong is the two party trust deed.

Essentially, the trust vehicle pools the money of investors and invests in assets with a specific goal, such as investing in emerging markets. The investment manager purchases assets, such as equities, and pools these in a fund.  The fund’s investors are issued with units of the fund and become the beneficiaries, that is, unit holders. This allows the manager to retain sole investment power over the underlying assets which are held in trust by the trustee for the unit holders who have a beneficial interest in the fund.

The trustee must act in the best interests of the investors/beneficiaries, and exercises a supervisory role.  Although there is no exhaustive list of responsibilities and specific obligations are set out in the trust deed, the typical responsibilities of a trustee include:

1. assisting in the legal set-up of products;

2. ensuring the fund is invested in accordance with the trust deeds – including monitoring the investment strategy and the investment restrictions;

3. maintaining and disclosing a clear statement of the risks and objectives of the trust together with a transparent fee structure;

4. ensuring that fees of the trustee’s delegates and agents are fair and reasonable;

5. ensuring the segregation of assets (in practice, this role is usually performed by the custodian);

6. carrying out administrative tasks, for instance, maintaining the registers of unitholders;

7. monitoring the investment manager; and

8. fulfilling regulatory obligations, such as the obligations under the Trustee Ordinance and the SFC Products Handbook.

In general, business and trading profits sourced in Hong Kong are charged to profits tax. The charging provision for profits tax is found in section 14 of the RO and can be broken down into three cumulative requirements:

1. there must be a person as defined in the IRO;

2. that person must carry on a trade, profession or business in Hong Kong, whether as a principal or through a dependent or independent agent; and

3. that person must derive profits arising in or derived from Hong Kong, which are his ‘assessable profits’, from that trade, profession or business.

A trust has no separate legal personality and is not deemed a person under section 2 of the IRO.  However, a trustee is expressly defined as a taxable person in the IRO. It should follow that a trustee carrying on a trade, profession or business in Hong Kong as trustee of a trust would be the person taxable in Hong Kong on the profits of that trade, profession or business to the extent such profits have a Hong Kong source. Accordingly, trust profits falling within section 14 of the IRO would be chargeable to profits tax in the hands of the trustee.

As discussed under “Profits Tax Implications” under OFC structured funds above, an unit trusts which is authorised by the SFC for public distribution is exempt from profits tax under section 26A(1A) of the IRO.  For privately offered unit trusts, please refer to the above section for the applicable profit tax exemptions.

Transfers of units in unit trusts typically occur by way of fund managers issuing or redeeming units, which are exempt from the payment of ad valorem stamp duty.[10]  The fixed rate duty of HK$5 is however payable on the instrument of transfer.  Stamp duty does not apply to overseas funds in the form of unit trusts.  

The marketing of investments funds to potential investors in Hong Kong generally falls within the scope of Type 1 (dealing in securities) regulated activity as defined in the SFO.   According to the SFO, any person carrying on a business in a regulated activity needs to be licensed by the SFC for the relevant regulated activity.

An investment manager of funds in the form of a Hong Kong OFC or unit trust must be licensed for Type 9 (asset management) regulated activity in relation to its fund management business.  According to the SFC, an investment manager who is already licensed for Type 9 regulated activity can rely on the incidental exemption of its Type 9 licence to market the funds under its management without the need to have a Type 1 licence.  However, if the investment manager wishes to market funds which are not under its management, it must additionally hold a licence for Type 1.

In general, investment funds which are not authorised by the SFC for public offering cannot be marketed to Hong Kong investors, unless an exemption applies. 

1. Hong Kong funds

   Hong Kong private OFCs and unit trusts can be marketed only to professional investors as defined in the SFO and the Securities and Futures Ordinance (Professional Investors) Rules (Cap. 571D of the Laws of Hong Kong).  Professional investors include:

   1. SFC licensed corporations;

   2. Banks and insurance companies;

   3. High net worth individuals with an investment portfolio of HK$8 million or more;

   4. Companies and partnerships that have an investment portfolio of HK$8 million or more or total assets of at least HK$40 million;

   5. Trust companies that have total assets of at least HK$40 million;

   6. Authorised collective investment schemes (i.e. funds) and their operators;

   7. Governments.

   A Hong Kong unit trust can also be marketed in Hong Kong in circumstances in which it does not constitute an offer to the ‘public’.  Public means the public of Hong Kong and it is generally considered that an offer to not more than 50 potential investors in Hong Kong will not amount to a public offer requiring SFC authorisation.

   OFCs and unit trusts cannot enjoy the additional exemptions under the Seventeenth Schedule to the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of Laws of Hong Kong) (CWUMPO) which apply only to companies which are either incorporated in Hong Kong under the Companies Ordinance (Cap. 622 or its predecessor Ordinance), or are incorporated outside Hong Kong but have a registered place of business (which includes a share registration office) in Hong Kong.  Although an OFC is in corporate form, it is established and incorporated under the SFO, not under the Companies Ordinance.  Hong Kong unit trusts, as non-corporates similarly cannot rely on the exemptions under CWUMPO.  

2. Offshore funds

   SFC authorisation requirement

   An offshore fund (whether established as a corporate fund or unit trust) will not require SFC authorisation if it is offered in Hong Kong only to professional investors, or in circumstances in which it is not offered to the public.

   An offshore corporate fund can also benefit from the exemptions under the Seventeenth Schedule to CWUMPO which also operate to exempt the fund from the requirement for SFC authorisation.  The Seventeenth Schedule exemptions allow a fund which is a “company” to be marketed in Hong Kong:

   1. to no more than 50 persons in a 12-month period;

   2. for a total consideration of no more than HK$5 million in a 12-month period; or

   3. at a minimum subscription level of HK$500,000 per investor.

   SFC licensing requirement

   The marketing of offshore funds to potential investors in Hong Kong will amount to “dealing in securities” for which a Type 1 SFC licence is required.  Any person who offers the fund in Hong Kong must therefore hold a Type 1 licence, or appoint a Type 1 licensed broker, to market the fund on its behalf. 

   Where an offshore corporate fund is marketed to Hong Kong investors, this may amount to the offshore fund manager marketing its fund management services to Hong Kong persons, which is prohibited by the SFO.  In these circumstances, the offshore fund manager would need to appoint a Hong Kong Type 1 licensed broker to market the fund to Hong Kong investors, and ensure that there is no marketing of the fund manager’s services.

   Alternatively, an offshore corporate fund could market itself to potential investors in Hong Kong, without a licence, provided that it only markets to persons in circumstances falling within the Seventeenth Schedule to CWUMPO (e.g. the fund is marketed only to Hong Kong professional investors, to no more than 50 Hong Kong persons, or with minimum subscription amounts of HK$500,000).  This would require all marketing activities to be conducted by directors of the fund and not by any third party on their behalf.