What is an LPF?
A Limited Partnership Fund ("LPF") is a type of fund that has the structure of a limited partnership and manages assets for the benefit of its investors. In Hong Kong, LPFs are regulated by the Limited Partnership Fund Ordinance (Cap.637) ("LPFO"). Given the opt-in nature of the LPF regime, it is not compulsory to register the LPF.
''Hong Kong distinguishes itself from other established jurisdictions by allowing LPs to engage in 'safe harbor' operations under the LPFO.''
Structure of the fund
Under this mechanism, two types of partners are involved: general partners ("GPs") and limited partners ("LPs"). Each LPF would have one GP in charge of overseeing the fund’s assets. GPs are responsible for the day-to-day operation and management of the fund, for example, ensuring proper custodian of the assets, appointing an independent auditor to assess the fund's financial statements annually as well as a responsible person to oversee the fund's anti-money laundering compliance. Besides, GPs must hire a law firm or a lawyer in Hong Kong to assist them with the application procedure when registering the LPF with the Company Registry.
LPs are entitled to a share of the fund’s profits, but they are not involved in the fund’s day-to-day management or control. They are only liable for the fund's debts and obligations up to the amount of their initial contribution. Hong Kong distinguishes itself from other established jurisdictions by allowing LPs to engage in “safe harbor” operations under the LPFO, including discussing with or advising the GP or investment manager of the limited partnership and participating in partners meetings. However, if the LPs take on more active responsibilities outside the realm of “safe harbor”, they may be personally responsible for the fund's additional indebtedness.
All relevant procedures and requirements are governed by the LPFO and the Partnership Ordinance (Cap. 38) ("PO"). To establish an LPF, the general partner and the initial limited partner must sign a written Limited Partnership Agreement ("LPA"), and the LPF must have a registered office in Hong Kong.
''...there is no minimum capital requirement for each partner and no need for approval from the Securities and Futures Commission ("SFC")...''
Pros and Cons of an LPF
The Hong Kong LPF scheme provides a high degree of flexibility in the LPA, such as rights and obligations of the partners, scope of investment, transfer of interests between partners and custodial arrangement. Different from OFCs, which cannot undertake business activities for general commercial or industrial purposes, there is no investment restriction for LPFs. The partners can freely negotiate and decide on such an agreement, which has a constitutional effect on the limited partnership.
The LPF policy in Hong Kong is more cost effective than other prominent offshore jurisdictions for LPF. Since there is no minimum capital requirement for each partner and no need for approval from the Securities and Futures Commission ("SFC"), setting up an LPF in Hong Kong is relatively simple. Unlike the costly registration charge in other countries, which may easily exceed USD 10,000, the registration fee for establishing an LPF in Hong Kong is around HKD 3,000 only.
From a tax perspective, an LPF may be exempted from profit tax if it meets the requirement for the Unified Profits Tax Exemption in private funds ("UFE"). Generally, this tax exemption regime applies to LPFs managed by an SFC-licensed manager, or otherwise the ones that satisfied requirements such as the requisite number of outside investors in a LPF regime, the minimum threshold of capital contributed by investors, and the amount of profits that can be distributed to the funds’ sponsors and affiliates. Fund manager is recommended to consult proper legal advice on the UFE requirements before establishing the LPFs.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
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