27 March, 2014
On 20 March 2014, Hong Kong’s government issued a three-month public consultation paper on proposals for a new open-ended company structure for both public and private funds.
The concept of a corporate variable capital vehicle, which has seen such success in other fund centres, has been advocated for some time by investment management industry groups, keen for Hong Kong to explore an alternative to the unit trust structure. The proposal was first mooted by the government in last year’s budget address. In November 2013, the Financial Services Development Council issued a proposal paper on the legal and regulatory framework for open-ended investment companies and a soft consultation of industry stakeholders ensued.
Outline Structure
The current proposals envisage a structure, referred to as an open-ended fund company (OFC), which is:
- a company with variable capital
- established under the Securities and Futures Ordinance (SFO)
- regulated and supervised by the Securities and Futures Commission (SFC)
- registered with, but not licensed by, the SFC
Under the proposals, an OFC will:
- delegate all investment management functions to an asset manager holding an SFC type 9 licence
- entrust all assets to a Hong Kong-incorporated custodian acceptable to the SFC
- comply with an OFC Code, to be the subject of a future consultation, whether the OFC is publicly or privately offered
- have at least two directors, at least one of which will be independent of both the investment manager and the custodian, and at least one will be a Hong Kong resident
Investment Scope
The consultation paper argues that since investment activities will be delegated to a type 9 licensee, the OFC’s scope of investment should be restricted to managing investments which are regulated by the SFO, namely securities and futures, and OTC derivatives once the new OTC regime is in force. This would seem to preclude investments in other asset classes such as cash or real property which we consider unduly restrictive.
Tax Position
Publicly offered OFCs, which are required to be authorised by the SFC in the ordinary course, will enjoy a level playing field with existing authorised funds in terms of tax concessions: the existing profits tax exemption for public funds will apply to publicly offered OFCs.
For privately offered OFCs, it is proposed that profits tax exemption will be available under the existing regime for offshore funds provided the OFC’s central management and control is located outside Hong Kong. This highlights the artificiality of the current exemption.
As currently envisaged, a transfer of shares in an OFC will be subject to stamp duty.
Moving Forward
For the private funds industry, much depends on the nature of the registration process, the supervisory approach adopted by the SFC and the detail of the OFC Code, to be the subject of a separate consultation. Retail fund managers will be keen to understand how the OFC Code will work with the existing Code on Unit Trusts and Mutual Funds.
The government is seeking feedback on the consultation on or before 19 June 2014.
For further information, please contact:
Susan Gordon, Partner, Deacons
Deacons Investment Funds Practice Profile in Hong Kong