Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
Hong Kong has invested significantly in its investment fund ecosystem over the past decade, introducing two new onshore fund structures — the Open-ended Fund Company (OFC) and the Limited Partnership Fund (LPF) — to complement the established unit trust structure. These vehicles offer fund managers and investors a choice of onshore vehicles that are competitive with offshore alternatives (Cayman Islands, BVI) while benefiting from Hong Kong's tax regime, legal system, and fund ecosystem. This guide compares the three main structures and helps managers and investors determine which is best suited to their needs.
Overview: The Three Main Onshore Fund Structures
Unit Trust
The unit trust is the most established onshore fund vehicle in Hong Kong, with a history dating back decades. It is a contractual arrangement (governed by a trust deed) under which a trustee holds fund assets on behalf of unitholders. Unit trusts are widely used for both SFC-authorised retail funds and non-retail (professional investor) funds.
Open-ended Fund Company (OFC)
The OFC was introduced in 2018 and is governed by the Companies Ordinance (Cap. 622) and the Securities and Futures (Open-ended Fund Companies) Rules. It is a corporate structure specifically designed for collective investment schemes, combining a familiar corporate form with the flexibility of an open-ended fund. OFCs can be used for both SFC-authorised retail funds and privately placed professional investor funds.
Limited Partnership Fund (LPF)
The LPF was introduced in August 2020 under the Limited Partnership Fund Ordinance (Cap. 637). It is a limited partnership structure designed specifically for closed-ended investment funds, modelled closely on the Cayman Islands exempted limited partnership (ELP). The LPF is particularly suited to private equity, venture capital, and real estate funds where capital is drawn down over time and returned to investors via distributions rather than redemptions.
Key Feature Comparison
Legal Nature
| Feature | Unit Trust | OFC | LPF |
|---|---|---|---|
| Legal form | Trust (contractual) | Company (corporate) | Limited partnership |
| Separate legal personality | No (held by trustee) | Yes | No (held by GP) |
| Open or closed ended | Either | Open-ended only | Closed-ended only |
| Redemption of interests | Yes (open-ended) | Yes | No (distributions only) |
Parties and Governance
| Feature | Unit Trust | OFC | LPF |
|---|---|---|---|
| Key parties | Trustee, manager, unitholders | Custodian, investment manager, directors, shareholders | General partner (GP), limited partners (LPs) |
| Independent governance | Trustee oversight | Board of directors (majority independent for retail funds) | No requirement; GP has full management control |
| Liability of investors | Limited to subscription amount | Limited to subscription amount | LPs: limited to capital commitment; GP: unlimited (mitigated by using a corporate GP) |
Regulatory Requirements
| Feature | Unit Trust | OFC | LPF |
|---|---|---|---|
| SFC authorisation required for retail? | Yes (SFC-authorised funds) | Yes (public OFCs) | Not applicable (closed-ended) |
| Registration / filing | No separate registration (governed by trust deed) | Registered with SFC and Companies Registry | Registered with Companies Registry |
| Investment manager requirement | SFC-licensed manager (for authorised funds) | SFC-licensed investment manager required | Registered investment manager required (SFC-licensed or registered under LPF Ordinance) |
| Annual audit | Yes (audited accounts required) | Yes | Yes |
Tax Treatment
All three structures can qualify for Hong Kong profits tax exemption under the unified funds exemption regime (Sections 20AM–20AX of the Inland Revenue Ordinance), provided:
- The fund is a "collective investment scheme" or meets the relevant definition for LPFs/OFCs
- The specified qualifying transactions are carried on by or through a person carrying on a business in Hong Kong
- The fund is not a closely held fund (unless it satisfies the "private arrangement" or "family" exceptions)
In 2023, Hong Kong introduced a profits tax concession for carried interest paid by eligible LPFs and OFCs to qualifying recipients, taxed at an effective rate of 0% (100% deduction). This was a major step towards making Hong Kong competitive with Cayman for PE/VC fund formation.
Key tax considerations for each structure:
- Unit trust: Trust income taxed at trustee level (subject to exemption). Unitholders generally not directly taxed in Hong Kong on trust distributions
- OFC: Profits tax at entity level (subject to exemption). Dividends from OFC to shareholders not subject to Hong Kong withholding tax
- LPF: Transparent for tax purposes — income and gains allocated to partners. GP/LPs subject to profits tax on their share of fund profits (subject to exemption). Carried interest concession available
The Open-ended Fund Company (OFC) in Detail
The OFC is designed to replicate the functionality of the SICAV (Société d'Investissement à Capital Variable) structure familiar from Luxembourg and other European jurisdictions. Key features include:
- Variable capital: Shares can be issued and redeemed continuously as investors subscribe and redeem. No minimum capital requirement.
- Sub-funds: An OFC can have multiple sub-funds, each with segregated assets and liabilities (ring-fencing). Creditors of one sub-fund cannot have recourse to the assets of another sub-fund.
- Directors: The OFC must have at least two directors (one independent for private OFCs; majority independent for public/retail OFCs)
- Custodian: A custodian (bank or SFC-licensed entity) must hold and safekeep the OFC's assets
- Investment manager: An SFC-licensed investment manager must be appointed to manage the OFC's investments
- Re-domiciliation: An OFC can re-domicile from Cayman or other jurisdictions to Hong Kong (and vice versa), facilitating migration of existing funds
The Limited Partnership Fund (LPF) in Detail
The LPF is Hong Kong's answer to the Cayman ELP and is the preferred vehicle for closed-ended PE/VC funds. Key features include:
- General Partner (GP): The GP manages the fund and has unlimited liability (typically mitigated by using a limited liability company as GP). The GP must be registered in Hong Kong (or be a Hong Kong-registered non-Hong Kong company)
- Limited Partners (LPs): Investors whose liability is limited to their capital commitment, provided they do not participate in management
- Investment manager: The GP may delegate investment management to a registered investment manager (SFC-licensed or registered under the LPF Ordinance)
- Registered agent: The LPF must appoint a registered agent (similar to the Cayman concept) who must be a solicitor, accountant, or trust company registered in Hong Kong
- Confidentiality: LP names are not publicly disclosed in the Companies Registry filing, providing a degree of privacy for investors
- Anti-money laundering: The GP and investment manager must comply with AMLO AML/CFT obligations
- Continuation: An LPF established in a foreign jurisdiction can be re-domiciled to Hong Kong
Choosing the Right Structure
The choice of fund structure depends on the fund's strategy, investor base, and operational requirements:
- Open-ended liquid strategies (hedge funds, liquid alts, money market): OFC or unit trust. OFC is preferred for managers seeking a familiar corporate structure and the benefits of sub-fund ring-fencing. Unit trust is more established and familiar to Asian institutional investors.
- Private equity, venture capital, real estate, infrastructure: LPF. The closed-ended, capital call / distribution model of the LPF is purpose-built for these strategies. The carried interest concession makes it particularly attractive.
- Retail authorised funds: SFC-authorised unit trust or public OFC. Both can be sold to Hong Kong retail investors if SFC authorisation conditions are met.
- Single family offices and club deals: LPF is often used for private family investment vehicles due to its flexibility, LP confidentiality, and familiar PE fund architecture.
Comparison with Cayman Structures
For many years, the Cayman Islands exempted limited partnership (ELP) and Cayman exempted company dominated Hong Kong-managed fund structures due to their flexibility, tax neutrality, and investor familiarity. The introduction of the LPF and OFC — and the profits tax exemption and carried interest concession — has significantly narrowed the gap. Key remaining advantages of Cayman include:
- Deeper investor familiarity and longer track record for large institutional mandates
- Greater flexibility in partnership agreement terms
- No requirement for a Hong Kong-registered investment manager
However, the Hong Kong government's ongoing commitment to developing the fund ecosystem — including potential introduction of a closed-ended fund company structure — suggests that the gap will continue to narrow.
Conclusion
Hong Kong's investment fund landscape has matured considerably with the introduction of the LPF and OFC, giving fund managers genuine onshore alternatives to Cayman. The choice between unit trust, OFC, and LPF depends on fund strategy, investor base, regulatory obligations, and tax considerations. Early legal structuring advice is essential to ensure the optimal vehicle is selected and properly established.
Alan Wong LLP advises fund managers and investors on the structuring, establishment, and ongoing compliance of Hong Kong investment funds across all three structures. Contact us to discuss your fund formation requirements.
