We are experienced in representing hedge funds and their managers in both the formation of funds and on the establishment of management operations. On the formation side, we advise sponsors on the selection of vehicle, structures to ensure tax efficiency and to minimize regulatory burdens as well as restrictions on the raising of capital. We represent sponsors in preparing and negotiating investor documentation, including private placement memoranda (PPMs), subscription agreements and side letters. We regularly assist with the setting up of hedge fund management groups, handling incorporation matters, advising on licensing and related regulatory issues and preparing agreements between key principals, shareholder agreements, and share option schemes with key executives.
With the gazetting on March 1, 2019 of the new Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019 (“Amendment Ordinance”), from April 1, 2019, the tax position of investment funds in Hong Kong will be governed by a new tax exemption (“Private Funds Exemption”). Though the new exemption is broadly similar to the exemption (“Offshore Funds Exemption”) previously relied upon, there are significant differences, including:
The Inland Revenue (Profits Tax Exemption Amendment) Bill represents a major step forward in allowing private funds, including hedge funds and private equity funds, managed from Hong Kong to obtain exemption from profits tax. Amongst other things, the Bill will provide bright line tax certainty for open-ended fund companies. At the same time, the Bill will allow funds to maintain their tax residency in Hong Kong, meaning that such funds will no longer be required to undertake board activities outside of Hong Kong and will no longer be required to maintain directors resident outside of Hong Kong to qualify for tax relief. Finally, the Bill will provide greater flexibility for tax relief in the context of private equity investments both in and out of Hong Kong. The Bill is on track to come into effect in April, 2019 and discussions with the IRD to date suggest that the IRD will be helpful in construing the legislation for the benefit of the asset management industry.
Contrary to the belief of some tax practitioners, the Inland Revenue Department has confirmed our firm view that the offshore funds exemption is available to open-ended fund companies. There are no features inherent in open-ended fund companies which would make it impossible to relocate central management and control outside of Hong Kong. Given the lower costs, greater administrative convenience and lower legal risks associated with open-ended fund companies for asset managers based in Hong Kong, clarity as to the tax neutrality of open-ended fund companies re-affirms that open-ended fund companies are a compelling option for fund structures.