The Cayman Islands have long been the pre-eminent jurisdiction for investment funds which typically take the form of a segregated portfolio company (“SPC”) or a limited partnership despite its high formation and maintenance cost. It is mainly due to the fact that the Cayman Islands have no direct taxes of any kind. However, its tax efficiency has been largely discoloured by legislation in relation to economic substance.
In an attempt to attract investment funds to establish and operate in Hong Kong and lead Hong Kong into becoming a premier international asset and wealth management centre, the Hong Kong Government has made great effort to further enhance Hong Kong’s position in asset and wealth management by diversifying Hong Kong’s fund structures and offering tax relief. Further to the introduction of the new open-ended fund company regime in July 2018, the Limited Partnership Fund Ordinance (Cap. 637) (the “Ordinance”) came into effect on 31 August 2020, under which a new fund structure named limited partnership fund (“LPF”) is now available within the international financial hub.
A LPF is a private fund that is structured in the form of a limited partnership. LPFs established under the Ordinance will not only enjoy the necessary contractual flexibility and flexibility in capital contribution and distribution of profits, but it also provides tax exemptions as well as simplified registration process and dissolution mechanism.
The table below makes a brief comparison of the major elements of the most popular investment vehicles in Cayman Islands, i.e. SPC and exempted limited partnership (“ELP”), with the forthcoming LPF regime in Hong Kong :-
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Cayman SPC |
Cayman ELP |
Hong Kong LPF |
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Formation & Registration |
A SPC requires 3 separate registrations:
1) Incorporation of an exempted company; 2) Registration of the exempted Company as an SPC; and 3) Separate registration with the Cayman Islands Monetary Authority. Both open-ended and close-ended fund are required to be registered with the Cayman Islands Monetary Authority |
ELP requires only 1 registration after constitution of an ELP by way of a written limited partnership agreement
Registration is made with the Registrar of Exempted Limited Partnerships |
LPF requires only 1 registration after constitution of a LPF by way of a written limited partnership agreement
Registration is made with the Companies Registry (*Note: A business registration certificate for the LPF must be applied for from the Inland Revenue Department within one month after the registration date) |
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Ownership |
Can be owned by foreigners or foreign entities
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Privacy |
Owners’ (shareholders’ and members’) names are required to be filed with the Companies Registrar, but are not part of any public records | No requirement under the Exempted Limited Partnership Law (2018 Revision) for reporting particulars of the limited partner(s) in an ELP to the ELP Registrar | No requirement under the Ordinance for reporting particulars of the limited partner(s) in a LPF to the Companies Registry |
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Flexibility |
SPC can be divided into separate portfolios which operate independently from each other |
Do not offer mechanism for segregation of assets and liabilities
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Costs |
1) Incorporation of an exempted company and registration as an SPC: ~US$5,000 – $8,000 (depending on the size of registered capital) 2) Annual fee: |
1) Registration fee: ~US$5,500 2) Annual fee: |
1) Registration with the Companies Registry: ~US$390 (inclusive of lodgment fee and registration fee)
2) Business registration fee and levy: ~US$32 (1-year certificate) or US$508 (3-year certificate) |
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Tax |
Foreign owned SPCs conducting business outside of the Cayman Islands are not liable to pay any tax (but note, this exemption does not apply to those SPCs conducting business inside the Cayman Island)
Moreover, dividends are not subject to taxation and there is no withholding requirement for any tax However, it is mandatory for companies established on or after 1 January 2019 to comply with the substance requirements from the time they commence the relevant activities |
Neither an ELP nor any partner is subject to any form of direct taxation in the Cayman Islands
ELPs are not affected by the economic substance requirements. |
A LPF can generally enjoy profits tax exemption in Hong Kong (no matter whether the investments made by the LPF are conducted inside or outside Hong Kong).
No stamp duty is payable when an interest in a LPF is contributed, transferred, or withdrawn |
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Exchange Control |
No exchange control or currency restriction
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Management/ Regulation |
Can be managed by an individual or management entity located anywhere in the world, but note that the individual or management entity providing services to the SPC outside the Cayman Islands are subject to their local regulations | Ultimate responsibility for the management and control of the fund lie with the general partner(s), at least one of whom must be :-
1) an individual resident in the Cayman Islands; 2) a Cayman exempted company; 3) a registered foreign company; or 4) an ELP or a registered foreign limited partnership |
Ultimate responsibility for the management and control of the fund lie with the general partner(s), who can be :-
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Registered Agent |
Every Company in the Cayman Islands is required to appoint a local registered agent |
No requirement for registered agent
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Governance |
Both open-ended and close-ended SPCs are regulated by the Cayman Islands Monetary Authority | Regulated by the Cayman Islands Monetary Authority | The LPF regime is a registration scheme administered by the Companies Registry
A LPF would not require authorization from the Securities and Futures Commission at the fund level unless it is offered to the public |
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Termination/ Dissolution |
A SPC may be wound up by making a petition to the Court in Cayman Island
A segregated portfolio which has no assets or liabilities attributable to it may be terminated by resolution of its directors (or such other authority as may be provided for in, and subject to the provisions of, its articles of association) |
An ELP may be dissolved in accordance with the provisions of the partnership agreement | A LPF may be: (1) dissolved in accordance with the limited partnership agreement of the fund, or by a court order; and (2) deregistered by application to the Registrar of Companies. |
While SPC, ELP and LPF all feature high privacy and tax exemption, and are free from exchange control, Hong Kong LPF is relatively cost-effective by way of its one-off registration fee and relatively low sustaining fee, and unlike running a segregated portfolio company, the LPF has streamlined management which further reduces the administrative costs. Moreover, its simplified registration procedures allow the investors and fund managers to manage and operate the investment vehicles more easily.
Subsequent to the implementation of the economic substance requirements in the Cayman Islands in January 2019, unless there are special needs for mechanism of segregated portfolios (e.g. investors wishing to switch their investments and/or assets between segregated portfolios at some point during the term), the Hong Kong based LPF would be a favourable option for investors from Hong Kong and all over the world.
For more information or advice on the Hong Kong Limited Partnership regime please contact Hank Lo, Osbert Hui or Ann Chan.
This newsletter is for information purpose only. Its content does not constitute legal advice and shall not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage.