On 31 March 2021, Charltons and Stuarts presented a webinar on Fundamentals of funds in Cayman and Hong Kong, covering fund entities, registration requirements, ongoing maintenance/costs, tax on funds, marketing funds in Hong Kong and general market sentiment.
Limited Investor Funds – not more than 15 investors and a majority can appoint or remove the operator
Private Funds (closed ended)
Fund Structures in the Cayman Islands
Exempted Companies / LLCs
Limited Liability
Same day incorporation
No governmental approval required
No requirement for approval by CIMA for issue or transfer of shares
Annual meetings not required and if held do not need to be held in the Cayman Islands
Tax undertakings may be obtained which provide an exemption from the imposition of any tax for up to 30 years
Fund Structures in Cayman
Segregated Portfolio Companies
Separate portfolios within one legal entity
The assets and liabilities of one segregated portfolio are “ring fenced” from those of every other portfolio within the company and from the general assets and liabilities of the company
Fund Structures in Cayman
Exempted Limited Partnerships
Limited Liability
Same day registration
No governmental approval required
Limited Partnership interests can be redeemed at any time
Interest, dividends and gains payable to the partnership free of all taxes
Tax undertakings for an exempted limited partnership may be obtained for a period of 50 years
Cayman Island Unit Trusts
Established by Trust Deed
Each trust unit is redeemable at the option of the investor
Provided none of the investors is resident in the Cayman Islands, can be registered as an exempted trust and obtain a 50-year tax undertaking
Types of Funds in Hong Kong
Fund entities to be covered today include:
the Open-Ended Fund Company (OFC)
Private and public (public being authorised by the Securities and Futures Commission)
Umbrella fund versus single fund
REITs
Limited Partnership Fund
the Hong Kong Unit Trust
Fund Structures in Hong Kong
Private Open-Ended Fund Company (OFC)
Open-ended fund in corporate form domiciled in Hong Kong
Key features of the private OFC include:
the assets of the OFC must be segregated and entrusted to a custodian for safe keeping
must appoint a licensed investment manager (Type 9 license – asset management)
the OFC can be structured as a single fund or alternatively it can have multiple sub-funds
Open-Ended Fund Company (OFC)
Key operators
Custodian
Investment manager
Directors
Private Open-Ended Fund Company (OFC)
segregated liability
single fund versus umbrella fund
multiple sub-funds each with their own investment objectives, restrictions and policies
implied terms into the umbrella OFC’s contracts to entrench the principle of segregated liability
SFC fees for a Private OFC
Umbrella OFC
Application and registration fee: HK$10,000
Post registration
Per application for each item of charge: HK$300.00
For each sub-fund
Application and registration fee: HK$1,250
Post registration
Per application for each item of charge: HK$300.00
Single OFC
Application and registration fee: HK$5,000
Post registration
Per application for each item of charge: HK$300.00
SFC fees for a Public OFC
Umbrella OFC
Application and registration fee: HK$40,000
Authorisation fee: HK$20,000
Post authorisation
Annual fee: HK$7,500
For each sub-fund
Application and registration fee: HK$5,000
Authorisation fee: HK$2,500
Post authorisation
Annual fee: HK$4,500
Single OFC
Application and registration fee: HK$20,000
Authorisation fee: HK$10,000
Post authorisation
Annual fee: HK$6,000
Fund Structures
Hong Kong Limited Partnerships
Limited Partnership Funds Ordinance came into force on 31 August 2020
similar to offshore limited partnership fund vehicles:
no regulatory approval required
no min. capital requirements in relation to limited partners
no investment restrictions
broad safe harbours
freedom to contract flexibility
Hong Kong Limited Partnerships
the LPF must have a registered office in Hong Kong
at least one general partner and one limited partner
the GP must make the following appointments:
appoint an investment manager (who may be the general partner or another person)
appoint a local auditor
there is no duty to appoint a custodian. However, the GP is under a duty to ensure the proper custody of the assets of the limited partnership fund
Hong Kong Limited Partnerships
The contractual freedoms and safe harbours under the LPFO include:
CONTRACTUAL FREEDOMS
the admission and withdrawal of partners in the fund;
the transfer of interests in the fund by the limited partners in the fund;
the organisation, management structure, governance and decision-making procedures of the fund;
the investment scope and strategy of the fund;
SAFE HARBOURS
serving on a board/committee of the limited partnership fund
advising or approving
the general partner/investment manager on the business, accounts valuation or assets of the limited partnership fund
taking part in a decision about the admission/withdrawal of any partner
appointment of the investment manager
Ongoing cost for the limited partnership fund
The general partner of the limited partnership fund must file an annual return with the Companies Registry in Hong Kong within 42 days after each anniversary of the date on which the certificate of registration is issued to the fund
The specified fee to file the annual return is HK$105.00 (approximately US$15.00)
Hong Kong Unit Trusts
collective investment scheme that is constituted by a trust deed
two party trust deed is a common structure
unit trusts must be authorised by the SFC
Subject to the requirements of the UT Code
Registration Requirements
Registration of Cayman Islands Mutual Funds and Private Funds
Application form and fee
File Certificate of Incorporation and Offering Document (not required for Limited Investor Fund or Private Fund)
Operator affidavit (not required for Limited Investor Fund)
Administrator consent letter
Cayman auditor consent letter
Ongoing Obligations for Cayman Mutual Funds and Private Funds
Annual fee of US$4,628
Operators require minimum of 2 directors (“four-eyes” principle)
Notification of change of registered office or any material changes to CIMA within 21 days and file amended OM
Annual return in prescribed form and fee of US$366
Annual audit by Cayman auditor filed within 6 months of financial y/e
Ongoing Obligations for Cayman Mutual Funds and Private Funds (Contd)
Comply with corporate governance principles set out in CIMAS’s Statement of Guidance
Comply with FATCA and CRS exchange of information requirements, AML requirements and Data Privacy requirements
Private funds must comply with rules re asset valuation, cash monitoring and custody and safeguarding of fund assets
Hong Kong Fund Managers Code of Conduct
the SFC Fund Managers Code of Conduct (FMCC) sets conduct requirements for fund managers in Hong Kong
certain disclosure requirements in the FMCC are only applicable to fund managers who are responsible for the overall management of the fund
fact-based review is required to understand if a fund manager is responsible for the overall management of the fund
Hong Kong Fund Managers Code of Conduct
Under the FMCC fund managers must disclose information in relation but not limited to:
leverage (maximum level and basis of calculation)
securities lending, repo and reverse repo transactions policy
liquidity risks
frequency of valuations and basis of valuations
side pockets
liquidity risks
Hong Kong REITS
the SFC is the primary regulator of REITs in Hong Kong
Collective investment scheme constituted by a trust
Primarily invests in real estate
SFC Code on Real Estate Investment Trusts sets out the characteristics that a Hong Kong REIT seeking authorisation from the SFC must have
Tax on Funds
Hong Kong Tax
Two recent tax developments in relation to funds:
The Inland Revenue (Profits Tax Exemption for Funds)(Amendment) Ordinance 2019 – provides for a comprehensive tax exemption for qualifying funds (“2019 Amendment”)
The Inland Revenue (Amendment)(Tax Concessions for Carried Interest) Bill 2021 (this Bill has not come into effect yet) – aims to amend the IRO to provide tax concessions for eligible carried interest (“2021 Bill”)
Hong Kong Tax
The 2019 Amendment
A fund must must at all times during the year of assessment meet the following conditions:
it must meet the definition of fund under the IRO;
the transactions of the fund must be transactions in an asset class set out in Schedule 16 to the IRO (qualifying transactions); and
the qualifying transactions must be carried out or be arranged in Hong Kong by or through a licensed or authorised financial institution under Part V of the SFO.
Hong Kong Tax
The 2021 Bill
The 2021 Bill was published in the Government Gazette on 29 January 2021.
The 2021 Bill aims to amend the IRO to provide tax concessions for eligible carried interest distributed by eligible funds in Hong Kong.
Under the new carried interest exemption, it is proposed that eligible carried interest distributions be taxed at a 0% rate.
Marketing Funds in Hong Kong
Marketing Funds in Hong Kong
Investment funds which are not authorised by the SFC for public offering cannot be marketed to Hong Kong investors, unless an exemption applies
Marketing investment funds in Hong Kong falls within the scope of Type 1 (dealing in securities) regulated activity under the SFO
Under the SFO, a person carrying on a regulated activity must be licensed by the SFC
Exemptions
the incidental exemption – may be relied on by an investment manager who is licensed for Type 9 regulated activity (asset management) to market funds under its management
marketing by the fund as principal – may be relied on only by the fund and is very limited in its application
General Market Sentiment
General market trends in Cayman Islands
11,896 regulated funds in total
59 are licensed funds
294 are administered funds
7,972 are registered funds
583 are limited investor funds
2,988 are master funds
12,695 private funds
General market trends in Hong Kong
13 OFCs registered with the Companies Registry
More than 100 LPFs
As at 31 December 2019:
increase year-on-year of AUM of asset management and advisory business conducted by licensed corporations*;
56% of the AUM of asset management businesses were managed from Hong Kong*
*Source: SFC’s Asset and Wealth Management Activities Survey 2019, published in August 2020
