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In the investment environment, the Special Administrative Region of China is usually called Asian Switzerland. However, Covid-19 has made its own adjustments and threatens to lose this prestigious status. To remedy the situation, the HK authorities adopted a new Limited Partnership Fund regime and a number of other legislative acts, which can be considered a product of cooperation between asset managers in HK and the country's government. Next, we will describe in more detail how to establish PEF in HK and what will change for them after legislative innovations.

Investment funds regulation in HK

Today, market experts agree that the new regulatory regime will strengthen its position only after the situation with the impact of the pandemic on the Asian market stabilizes. In the near future, Luxembourg and the Caymans are expected to remain the most wanted for fund managers who value confidence and stability.

But in order to increase the credibility of those wishing to establish a PEF in HK, it is necessary to first modernize the legislation. Moreover, this must be done quickly, since the sentiments of many Asian fund managers who are ready to withdraw their funds to other jurisdictions are obvious.

PEF registration in HK: tax expectations

First of all, representatives of the government have recently announced their intention to provide carried interest tax incentives. Thus, those who want to register direct PEF in HK can be granted such benefits. At the moment, they have not yet been introduced, but are expected in the near future. 

Currently, HK does not impose capital gains tax on investment companies. It is not yet known whether the interest recorded will be treated as capital gains for tax purposes. The government may impose rate cuts within the existing structure, or limit the scope of incentives to certain qualified transactions. Nevertheless, the future tax break remains the most valuable "bait", that is, a strong economic reason for the creation of a PEF in HK.

Innovations in the structure and management of funds

Below we will summarize how direct PEFs in HK will be structured.

  • Direct PEF in HK will not have the status of a legal entity, and all managers will be given the freedom to conclude contracts;
  • An application for establishing a PEF in HK must be submitted by a local firm or a qualified local lawyer;
  • There will be no restrictions on the use of accounting methods that promote continuity between sponsor funds;
  • PEFs can be disbanded voluntarily. This happens automatically if the GP files for bankruptcy or dissolution and no replacement is scheduled within 30 days.

The hoped-for new regime has been developed with the aim of strengthening HK as the leading Asian DI center. We will continue to track trends in the formation of global funds and provide updated information. Legal advice on the PEF regulation in HK will help you better understand the current legislative trends and their possible impact on your business.