16 January 2025

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Tax Treatment of Hong Kong Limited Partnership Funds

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Since their introduction in 2020, Hong Kong Limited Partnership Funds (“LPFs”) have seen increasing popularity due to their flexibility and efficient setup and operating profile. At David Cameron Law Office (“DCLO”) we continue to see increased interest in LPFs among our clients and have advised on numerous LPF establishments.

 

One often inquired aspect is the tax treatment of LPFs, which can be a driving element in the context of the investment and proposed use. Together with Yau and Wong CPA (“YW CPA”, see www.yauandwong.com), an independent and international certified public accounting firm based here in Hong Kong, we have put together this overview of the tax treatment of LPFs, distilling the analysis down in a concise manner to the four potential categories of tax, namely (i) profits tax, (ii) tax on management fees, (iii) tax on carried interest and (iv) stamp duty tax. We will take each one of these in turn.

 

1) Profits Tax

 

LPFs are exempt from the Hong Kong Profits Tax if they satisfy the following:

 

1.  The LPF satisfies the Unified Fund Exemption’s definition of a “fund”, meaning there needs to be a legitimate pool of assets, for which, the purpose is to generate profits and returns. In addition, the LPF and the day-to-day operations of the fund must be managed by someone other than the limited partners (the “LPs”). Absent unusual features, an LPF should normally fall under the definition of a “fund”. See Appendix A for a more fulsome description of the criteria to fall within the definition of a “fund” for these purposes; or

 

2.  The fund is managed by a “Specified Person” in Hong Kong by an SFC-licensed entity or authorised financial institution registered under the SFO; and

 

3.  The profits of the LPF are derived from the list of “Qualifying Transactions”, which consists of a list of 11 types of transaction. See Appendix B for the full list. Most notable are the first two, namely (i) “securities” which is expansive and in line with its plain-meaning reading and (ii) similarly, a list of securities but of private companies.

 

With respect to transactions in private companies, those are subject to an immovable property test and a holding period test, where the assets of the investee companies do not comprise of more than 10% of immovable property, and investee companies are held longer than two years. See Appendix C for an illustrative chart.

 

Note that i) and ii) above are disjunctive meaning one does not need an SFC-licenced manager if the LPF falls within the definition of “fund”.

 

2) Management Fees

 

There are currently no tax exemptions or concessions provided to management fees paid by an LPF. Such fees considered income and therefore subject to profits tax of the manager which is typically 16.5%. Note this would not apply to a manager located outside of Hong Kong; however the requirement of “Specified Person” (immediately above) in the context of Profit Tax requires the manager to be in Hong Kong.

 

Therefore one needs to weigh zero profits tax versus the manager paying 16.5% on its profits. Note that this is a tax on the manager’s profits and not a tax on the management fee itself.

 

3) Carried Interest 

 

Carried interest distributions from an LPF to the manager are taxed at 0% provided that:

 

1.  the fund that pays the carried interest falls within the same definition of a “fund” as described above under ‘Profits Tax’ and as more fully described in Appendix A;

 

2.  distributions paid out of profits are from transactions in shares, stocks, debentures, loan stocks, bonds or notes of, or issued by, a private company, as described above in terms of ‘Qualifying Transaction’ and the second item, and as more fully described, in Appendix B; and

 

3.  the fund passes the minimum substance requirement in Hong Kong of having at least two full time employees and a minimum annual spend of HK$2 million.

 

As an administrative matter, the fund must be certified by the Hong Kong Monetary Authority as being qualified for the above.

 

4) Stamp Duty

 

A Limited Partner can freely transfer interest in an LPF without triggering Hong Kong Stamp Duty.

 

For further information, please feel free to contact the author David Cameron david.cameron@dc-lo.com  ​

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Appendix A

Criteria to Fall within Definition of a “fund”

 

The LPF must meet the conditions outlined in the Unified Fund Exemption of a fund:

 

• for the property to be managed as a whole by, or on behalf of, the person operating the arrangement; or for the contributions of the persons participating in the arrangement (participating persons) and the profits or income to be pooled;

 

• the participating persons do not have day-to-day control over the management of the property even if they have the right to be consulted on, or to give directions in respect of, the management of the property; and

 

• the purpose or effect (or pretended purpose or effect) of the arrangement must be to enable the participating persons, whether by acquiring any right, interest, title or benefit in the property or any part of the property or otherwise, to participate in or receive–

 

• profits, income or other returns represented to arise (or to be likely to arise) from the acquisition, holding, management or disposal of the property (or any part of the property), or sums represented to be paid (or to be likely to be paid) out of any such profits, income or other returns; or

 

• a payment or other returns arising from the acquisition, holding or disposal of, the exercise of any right in, the redemption of, or the expiry of, any right, interest, title or benefit in the property or any part of the property.

 

Appendix B

List of “Qualifying Transactions”

 

Schedule 16C of the IRO lists out the 11 types of transactions that qualify for Profits Tax exemption:

 

• securities;

 

• shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company;

 

• futures contracts;

 

• foreign exchange contracts under which the parties to the contracts agree to exchange different currencies on a particular date;

 

• deposits other than those made by way of a money-lending business;

 

• deposits (as defined by section 2(1) of the Banking Ordinance (Cap. 155)) made with a bank (as defined by Part 1 of Schedule 1 to the SFO);

 

• certificates of deposit (as defined by Part 1 of Schedule 1 to the SFO);

 

• exchange-traded commodities;

 

• foreign currencies;

 

• OTC derivative products (as defined by Part 1 of Schedule 1 to the SFO); and

 

• an investee company’s shares co-invested by a partner fund and ITVFC under the ITVF Scheme.

 

Appendix C

Tests on Eligibility for Tax Exemption in Respect of Profits Generated from Transaction in Specified Securities of a Private Company

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