Oversight: Re-domiciliation of Foreign Funds into Hong Kong

On 2 July 2021, the Securities and Futures (Amendment) Bill 2021 (SFO Revision) and the Limited Partnership Fund and Business Registration Legislation (Amendment) Bill 2021 (LPF Revision) (collectively, the Bills) were gazetted. The first reading and the commencement of the second reading in respect of the Bills took place on 7 July 2021. The Bills represent further steps by the Hong Kong Government to develop Hong Kong as an attractive fund domicile.  Potentially this will strengthen Hong Kong's new fund vehicles' regime - the open-ended fund company (OFC) and limited partnership fund (LPF) - as well as build Hong Kong's position as an asset and wealth management centre. It is proposed that the Bills will come into operation on 1 November 2021.

The establishment of the OFC regime and LPF regime, by virtue of amendments to the Securities and Futures Ordinance (SFO) and the enactment of the Limited Partnership Fund Ordinance (LPFO) in July 2018 and August 2020 respectively broadened the choice of fund vehicles domiciled in Hong Kong and was aimed at reducing the widespread use of exempt companies incorporated in the Cayman Islands for mutual funds and exempt limited partnerships registered in the Cayman Islands for closed-end funds.  Prior to the OFC regime, private open-ended corporate funds could not be established in Hong Kong because of company law.  Similarly prior to the LPF regime, whilst Hong Kong law provided for limited partnerships the Limited Partnership Ordinance had not been updated to cater for fund vehicles.  Hence OFCs have been provided for under the SFO and a new fund-specific limited partnership, the LPF, has been provided for under a new statute, the LPFO. However, for some reason no re-domiciliation mechanisms were put in place in respect of the OFC and LPF regimes in Hong Kong when the changes to the SFO and the new LPFO were drafted.  Re-domiciliation occurs when a legal entity is able to change its jurisdiction of establishment.  This entails legislation allowing this in both the jurisdiction from where an entity was first established and the jurisdiction to which an entity wishes to be established in future.  The advantage of re-domiciliation in the context of funds is that, subject to approvals by investors if required by the relevant fund's documentation, investors do not need to redeem and subscribe or exchange their interests from one fund to a new fund.  The same fund continues to exist but moves from being governed by the laws of one place to another by way of a filing process.  This concept has long been recognised by "offshore" fund jurisdictions such as the Cayman Islands, the British Virgin Islands and the Bahamas.  More recently Singapore provided a re-domiciliation mechanism in respect of variable capital companies (VCCs).  The Bills aim to provide a commercially viable re-domiciliation mechanism for OFCs and LPFs.  Given legal and tax certainty this may attract funds established overseas to re-domicile to Hong Kong.

This Oversight summarises the Bills, including the proposed eligibility requirements, application process, appeal mechanisms, as well as tax and stamp duty treatment in respect of the re-domiciliation mechanisms. It then discusses practical implications regarding the implementation of the proposed re-domiciliation mechanisms in Hong Kong.