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The Hong Kong Limited Partnership Fund vs. Cayman Islands’ Exempted Limited Partnerships (“ELP”)

Insights / 18-08-2020 / Cayman Islands, Hong Kong

The Difference between two types of Limited Partnership Funds

Establishing a limited partnership in Hong Kong via the Limited Partnership Fund Ordinance (Cap. 637) (“LPFO”) regime may offer a cost-effective alternative to establishing an ELP in Cayman Islands. The two regimes are very similar in nature, they both do not have separate legal personality; are subject to their respective jurisdiction’s tax exemptions; and have at least one General Partner (“GP”), who has unlimited liability, and at least one Limiting Partner (“LP”) who has limited liability (they do not participate in the management of the fund). Both types of investment vehicles are constituted by a Limited Partnership Agreement (“LPA”).

Practically, setting up a Limited Partnership Fund (“LPF”) in Hong Kong would be more cost effective than establishing in the Cayman Islands. The GP and LP may minimize costs relating to setting up the limited partnership and legal costs to comply with Cayman Island’s laws and regulations to administer the fund (such as those required to prepare a PPM document for investment purposes in Cayman Islands).

Other key differences of LPFs and ELPs are summarized below.

 

LPF (HK)

ELP (Cayman)

Establishment Cost

Fixed fee of HK $3,034 + legal cost.

Initial registration fee of USD $1,220 + legal cost.

Tax Implications

Profit tax exemptions may apply where the LPF meets the definition of “fund” (and are qualifying assets) under the Inland Revenue Ordinance (Cap. 112). Interest in a LPF is not subject to stamp duty as it does not fall within the definition of “stock” under the Stamp Duty Ordinance (Cap. 117).

No capital gains, income, withholding, estate or inheritance tax.

Duties of the GP

The GP must:

-        appoint an Auditor to carry out annual audits of financial statements; he must be independent.

-        appoint an Investment Manager to carry out day-to-day investment management functions (could be the GP).

-        appoint an Authorized Representative (could be the GP).

-        appoint a Responsible Person to carry out Anti-money Laundering and Counter-terrorist Financing measures, that person must be either an authorized institution; a licensed corporation; an accounting professional; or a legal professional.

At least 1 GP must be either: a resident in the Cayman Islands; a company registered under the Cayman Islands’ Companies Law; a partnership registered according to certain requirements; or a limited partnership registered that is registered according to certain requirements

 

A GP shall always act in good faith and, subject to any express provisions of the limited partnership agreement to the contrary, in the interests of the ELP.

A GP shall proper books of accounting including material underlying documentation such as contracts and invoices, with respect to, all sums of money received and expended by the ELP, all sales and purchase of goods by the ELP, and the assets and liabilities of the ELP.

Rights of LPs

A LP has the right to participate in the income and profits rising from the management of the assets and transactions of the fund.

 

A LP does not owe any fiduciary duty to the GP or any other LP in the fund, and does not have day-to-day management rights or control over the assets held by the fund.

 

A schedule is set in the Proposed Bill as safe harbour provisions for the LP to interfere with the business of the fund and is not deemed as taking part in the management of the fund.

A LP will be liable for all debts and obligations of ELP if he takes part in the conduct of the business of an ELP in its dealings with persons who are not partners. There are some safe harbour provisions in the Cayman Islands’ law where a LP can interfere with the business of an ELP and is not deemed as taking part in the conduct of business.

Dissolution

Upon the occurrence of an event stipulated within the LPA; with a court order; or without a court order in certain default situations

Voluntarily winding up at any time; or upon the occurrence of an event stipulated within the LPA.

A more cost-effective fund raising platform

The Hong Kong LPFO regime is beneficial to lots of Hong Kong based investment and fund managers. Other than the fact that it is based in Hong Kong, lots of cost can be saved from establishing and following the legal rules of other jurisdictions, such as that of the Cayman Islands. This new business investment vehicle will be a big development in the asset management industry and is what investors, potential businesses and overseas fund managers should look out for when considering the establishment of a new business or investment entity in Hong Kong.

Please contact us if you have any question. Our solicitors are more than happy to advise and assist on any queries relating to Hong Kong’s new LPFO regime. 

The above does not constitute legal advice nor does it consider a complete list of issues to consider in the context of the new LPFO regime. Should you have any queries, please do not hesitate to contact the authors of this article or your usual contact at Ince.

Eric Lui

Eric Lui Partner

Kevin Woo

Kevin Woo Associate