We assist in the establishment of sponsor groups, the formation of funds, and the ongoing operations of sponsors.
In fund formation, we advise on choice of vehicle, including form of vehicle and place of registration or incorporation, bearing in mind the need to facilitate capital raising and to minimize taxes. We prepare investor term sheets, limited partnership agreements, side letters, and subscription agreements as well as placement agreements and investment advisory agreements. We address regulatory and tax issues which affect the ability to raise capital in different jurisdictions.
We work with groups of individuals setting up or joining sponsor groups, advising on shareholder agreements between the principals, the recruitment of senior executives, employment agreements, and employee share ownership plans (ESOPs). We advising on tax strategies to minimize the taxation of management fees and carried interest and their onward allocation and distribution to the principals and other key executives.
On January 7, 2020, the Securities and Futures Commission (“SFC”) issued its “Circular to private equity firms seeking to be licensed” (“PE Circular”) setting out its view on the licensing obligations of private equity firms. The PE Circular suggests that a number of activities frequently undertaken by private equity firms may trigger licensing obligations. As a result, private equity firms operating in Hong Kong without a license should consider their scope of activities and whether or not they do in fact wish to run the risk of operating without a license.
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.