Investment Funds Update

Re-domiciliation of Foreign Funds to Hong Kong – What it Means and Why it Matters

July 8, 2021

The Limited Partnership Fund Ordinance (Cap. 637) (LPFO) came into effect on August 31, 2020. The LPFO introduced a new domestic legal regime for private investment funds, including private equity funds and venture capital funds, to be established in Hong Kong in the form of limited partnership funds (LPFs).

Despite its positive reception by the industry, the LPFO nevertheless does not currently cater to the majority of limited partnership funds that have been established in foreign jurisdictions (Foreign Funds) and may wish to re-domicile to Hong Kong as LPFs. This prevents the LPF regime from being used to its full potential.

To address this key area in the LPF regime, the Limited Partnership Fund and Business Registration Legislation (Amendment) Bill 2021 (Bill), published in the Gazette on July 2, 2021, has been introduced with the aim of establishing a statutory mechanism for the re-domiciliation of Foreign Funds to Hong Kong as LPFs.

When does the new law commence?

The re-domiciliation portion of the Bill is expected to become law on November 1, 2021.

Why is this development so significant?

The majority of the private funds managed from Hong Kong have typically been established in foreign jurisdictions. In the absence of a mechanism for re-domiciliation, these Foreign Funds would need to transfer their assets and shareholders to a new fund vehicle in Hong Kong to effectively re-domicile under existing law. As a result, the investors’ existing rights and liabilities may be adversely affected. In addition, exposure to additional stamp duty may arise. This lack of a commercially viable re-domiciliation mechanism is a major deterrent for Foreign Funds to re-domicile to Hong Kong.

To address these issues, the Bill aims to introduce a statutory re-domiciliation mechanism into the LPFO that

preserves the history and continuity of the Foreign Funds that re-domicile to Hong Kong as LPFs (Re-domiciling Funds) with legal certainty so that existing rights will not be adversely affected
provides certainty in tax treatment to the effect that the registration of Foreign Funds as LPFs do not amount to a transfer, or a change in beneficial ownership, of the assets of the Re-domiciling Funds so that no additional stamp duty will be incurred
is easy and convenient to apply

The Bill enhances the scope and use of the LPF regime and is expected to further sharpen the city’s competitiveness as a primary international asset and wealth management hub.

Key Features of the Bill

Set forth below is a high-level summary of the key features of the Bill.


	Key Features of the Bill
Legal Certainty in Respect of Preserving the History and Continuity of the Re-domiciling Fund	To enhance legal certainty in the preservation of the history and continuity of the Re-domiciling Fund, the Bill provides, among other things, that the original partnership continues in existence as a LPF and the registration of a Foreign Fund as a LPF does not operate to create a new legal entity; prejudice or affect the continuity of the Re-domiciling Fund; affect any contract made, resolution passed, or any other act undertaken; affect any function, property, right, privilege, obligation, or liability acquired, accrued, or incurred; or render defective any legal proceedings that have been commenced or continued.
Easy and Convenient Application Procedures	For a simple and cost-effective re-domiciliation mechanism, the Bill, among other things, provides that a Foreign Fund will be eligible to be registered as an LPF if it meets the same eligibility requirements as a new LPF registrant in Section 7 of the LFPO requires the application to provide the similar information as a new LPF applicant, and, among other things, state the original name of the Re-domiciling Fund and its place of establishment and include a statement and declaration confirming that any consent or approval, for the proposed registration as an LPF and the intended deregistration of the Re-domiciling Fund in its place of establishment, that is required by any contract or undertaking given by the Re-domiciling Fund, has been obtained or waived; the intended deregistration of the Re-domiciling Fund in its place of establishment is not prohibited under the laws of its place of establishment or any agreement among its partners; and if the Re-domiciling Fund is registered as an LPF, the registrar may strike the name of the LPF off the LPF Register if the Re-domiciling Fund is not deregistered in its place of establishment within 60 days (or such permissible extended period) after the LPF registration date; and requires payment of application fee of HK$479 and registration fee of HK$2,555
Certainty in Tax Treatment	To provide certainty in tax treatment, the Bill provides that the registration of Foreign Funds as LPFs does not amount to a transfer, or change in beneficial ownership, of the assets of the Re-domiciling Funds so that no additional stamp duty will be incurred.
One-stop Application – Simultaneous Business Registration	The Business Registration Ordinance (Cap. 310) and the Business Registration Regulations (Cap. 310 sub. leg. A) will be amended to provide for, among other things, the simultaneous business registration application to be made by LPFs that do not have a valid business registration certificate in Hong Kong at the time of their application for LPF registration.
Applications for LPFs
Effective Date of Commencement	The re-domiciliation portion of the Bill is expected to become law on November 1, 2021. The Simultaneous Business Registration portion of the Bill will become law on a later, as yet unspecified, date to be published in the Gazette.

Sidley can assist you further as to

the requirements of the new statutory re-domiciliation mechanism and the best manner in which to re-domicile your Foreign Fund to Hong Kong as an LPF
the requirements of the Hong Kong LPF regime and other traditional fund structures commonly used in the Hong Kong market
the fund structuring opportunities and benefits that exist
the opportunities and benefits that exist for service providers to the private fund industry including custodians, administrators, and placement agents
the AML and licensing requirements that will apply in respect of private funds that seek to use the Hong Kong LPF regime

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Contacts

If you have any questions in relation to the new statutory redomiciliation mechanism and/or the existing Hong Kong LPF regime and would like to explore how you can capitalize on these opportunities, please contact one of the following: