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Private Equity Rapidly Adopting Hong Kong Limited Partnership Funds
5 New LPFs Registered Each Week on Average
Our research shows that as of September, 2022, there were 527 limited partnership funds (LPFs) registered under Hong Kong’s Limited Partnership Fund Ordinance
Let’s look at why LPFs are gaining in popularity
LPFs Offer a Highly Flexible Fund Structure
The partners of an LPF are generally free to agree upon the commercial and structural terms and conditions of the fund
The fund can be customized for specific investment scope and strategy, decision-making procedures, and admission and withdrawal procedures for limited partners
Unlike companies, there are no mandatory statutory arrangements in respect of governance
No Regulatory Vetting Required to Establish an LPF
Registering an LPF requires a simple application form to the Companies Registry
Registration requires no SFC vetting and can often take place within 4 working days
The process is similar to the incorporation of a company limited by shares
Sponsors of LPFs Can Earn Carried Interest Tax Free
Though sponsors of offshore limited partnerships may be able to earn carry tax free on the basis that they carry on no business in Hong Kong, the IRD does not always agree with such arrangements
With an LPF, carried interest earned in Hong Kong can be specifically exempted from Hong Kong tax
LPFs Can Offer Tax Neutrality for Portfolio Investments
Quite apart from tax benefits for LPF sponsors, LPFs themselves can enjoy clear preferential tax treatment in Hong Kong
Tax exemption is available for profits earned from transactions in specified asset classes as well as on profits earned from transactions incidental to those qualified transactions
No tax liability arises for individual LPs as a result of being an LP where an LPF is tax exempt
LPFs Offer Confidentiality and Discretion for LPs
Limited partners in LPFs can keep details of themselves and their investments in an LPF confidential
Though an LPF is required to keep specified records at its registered office, including details of its LPs, the general public has no right to view or access such records
LPFs Offer Limited Liability for LPs
Limited partners in LPFs have no liability beyond their committed capital unless they take part in the management of the limited partnership fund
Participation in internal partnership matters (e.g. serving on LP advisory committee) does not affect liability
LPFs Offer a Single Unified Legal Regime for Hong Kong Based Private Equity
LPFs enable Hong Kong based private equity sponsors to operate under a single legal regime
The sponsor can be licensed in Hong Kong
The LPF can be registered in Hong Kong
The sponsor need only comply with Hong Kong anti-money laundering and counter-terrorist financing rules
The sponsor need neither lose operational flexibility nor incur costs to artificially place their tax presence outside Hong Kong
The sponsor can deal with service providers in only 1 jurisdiction - there’s no need to double up on law firms and accountancy firms in Hong Kong and an offshore jurisdiction
Hong Kong Remains a Preferred Choice for Private Equity
Hong Kong is a real financial centre, not simply an offshore fund jurisdiction
Hong Kong serves as the gateway to the Greater China market
The LPF structure is the obvious choice for consolidating fund activities in a single jurisdiction
