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Hong Kong Consults On New Investment Company Structure

by Mary Swire, Lowtax.net, Hong Kong
24 March, 2014

The Financial Services and the Treasury Bureau (FSTB) has launched a three-month consultation on introducing a new open-ended fund company (OFC) structure to expand Hong Kong's legal framework for investment-fund vehicles.

The consultation follows the Financial Secretary's announcement in the 2014 Budget that Hong Kong would provide the additional legal and regulatory structures necessary to strengthen its position as a premier international asset-management center. As such, it is thought that Hong Kong could benefit from more offering choices on the legal forms of investment funds to fund managers worldwide.

The consultation will seek views from the public and the financial services industry on the policy and legal framework for OFCs. Currently, an open-ended investment fund may be established under Hong Kong law in the form of a unit trust, but not in corporate form, due to restrictions on capital reduction under the Companies Ordinance.

As the more popular fund structure from an international perspective is the corporate fund structure, it is hoped that the provision of an additional corporate option, providing market participants more flexibility in establishing and operating funds in Hong Kong, will attract more funds to domicile in Hong Kong.

As of March 31, 2013, Hong Kong had 1,847 publicly offered unit trusts and mutual funds authorized by the Securities and Futures Commission (SFC) with total assets under management of over USD1.2 trillion. There has also been a growing trend in the number of funds domiciling in Hong Kong, reaching 305 at end-March 3013, having increased by more than 60 percent between the three years 2011-2013.

OFCs are to be introduced either as a public or private fund. While publicly offered OFCs will be subject to the same regulatory requirements applicable to existing publicly offered funds, it is proposed that privately offered funds be given some flexibility to pursue their investment strategies, subject to compliance with basic governance principles and conduct requirements to be observed by their managers that are in line with international regulatory standards.

The new OFC vehicle will be established under the Securities and Futures Ordinance (SFO) and be regulated and supervised by the SFC. Enabling provisions will be provided in the SFO to create separate OFC subsidiary legislation governing the detailed regulation of these new vehicles.

It is proposed that the OFC will be structured in corporate form with limited liability and variable share capital. Given the nature of an OFC, the day-to-day management and investment functions of the OFC must be delegated to an investment manager licensed by or registered with SFC. It is therefore also proposed that the investment scope of an OFC should be aligned with those types of investment activities, which are subject to licensing and regulation by SFC under the SFO, namely, securities, futures, and over-the-counter derivatives.

Within the tax regime applicable to OFCs, the existing profits tax exemption for public funds will apply to publicly offered OFCs. For privately offered OFCs, profits tax exemption will be available under the existing regime for offshore funds with their central management and control (CMC) located outside Hong Kong. Careful consideration will also be given to the provision of an exemption, or to the extent of exemption that should be applied, to privately offered OFCs with CMC located onshore, having regard to possible implications in other areas.

Finally, with regard to the proposed stamp duty treatment on transfer of shares in OFC, it is believed, considering that stamp duty is charged on transfers of Hong Kong stocks and that shares in OFCs by definition are Hong Kong stocks, their transfer should, prima facie, be subject to stamp duty.

Comments on the consultation should be provided in writing to the Financial Services Branch of the FSTB by no later than June 19, 2014.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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