Limited Partnership Funds in Hong Kong: Formation, Operation, and Tax Treatment

Introduction

The Limited Partnership Fund (LPF) regime, which came into force in August 2020 under the Limited Partnership Fund Ordinance (Cap. 637), introduced a dedicated fund vehicle for Hong Kong that has rapidly become one of the most popular structures for private equity, venture capital, and private credit funds in the Asia-Pacific region.

Prior to the LPF, fund managers seeking a limited partnership structure for their funds typically turned to the Cayman Islands exempted limited partnership. The LPF provides a credible onshore alternative, combining the flexible limited partnership framework with Hong Kong's robust legal system, tax efficiency, and regulatory environment. This article examines the key features of the LPF and the considerations that should guide a manager's decision to adopt this structure.

What Is a Limited Partnership Fund?

An LPF is a limited partnership registered under the LPF Ordinance. Like other limited partnerships, it has two categories of partner:

• General partner (GP): Manages the fund and bears unlimited liability for the fund's obligations. The GP must be a body corporate or an individual registered in Hong Kong.
• Limited partners (LPs): Provide capital and benefit from limited liability (their liability is capped at the amount of their committed capital), provided they do not participate in the management of the fund.

An LPF must appoint an investment manager (which may be the GP itself or a separate entity) that is licensed by the SFC for Type 9 (asset management) regulated activity, or qualifies for an exemption.

Registration Requirements

An LPF is registered with the Companies Registry. Registration requires:

• A limited partnership agreement (LPA) between the GP and at least one LP
• Appointment of a registered agent who is a solicitor, accountant, or trust or company service provider licensed in Hong Kong
• Designation of a responsible person—an SFC-licensed investment manager (or exempt person) responsible for the fund's AML/CTF obligations
• Payment of a registration fee

Registration is typically completed within a few business days, compared to several weeks for a Cayman Islands fund. This speed-to-market advantage has been widely recognised by managers.

The Limited Partnership Agreement

The LPA is the constitutional document of the LPF and governs the relationship between the GP and LPs, the investment strategy, capital commitments and drawdowns, the allocation of profits and losses, the waterfall, the management fee and carried interest arrangements, key person provisions, investment restrictions, removal of the GP, transfer of LP interests, and winding up.

The LPF Ordinance does not prescribe the contents of the LPA in detail, giving managers broad flexibility to customise the terms for their particular strategy and investor base. Market standard documentation developed by the Hong Kong law community is widely available and provides a solid drafting precedent.

Governance and Investor Protection

Limited Liability Safe Harbour

LPs who participate in the management of the LPF risk losing their limited liability. The LPF Ordinance provides a safe harbour listing activities that LPs may perform without being deemed to have participated in management—including attending advisory board meetings, providing advice to the GP, approving the annual accounts, and consenting to GP removal. LPs should ensure that any advisory board roles or consent rights they exercise fall within the safe harbour.

Investor Advisory Committee

Most LPFs establish an investor advisory committee (IAC) comprising representatives of significant LPs. The IAC reviews and approves conflicts of interest, related party transactions, and valuations, and provides a forum for GP-LP dialogue. The LPA should specify the IAC's composition, powers, and decision-making procedures.

Audit Requirements

LPFs are required to have their accounts audited annually by a certified public accountant in Hong Kong. Audited accounts must be distributed to all partners and filed with the Companies Registry, promoting transparency and accountability.

Tax Treatment of LPFs

Profits Tax Exemption

LPFs benefit from a profits tax exemption on qualifying transactions in the same way as other collective investment schemes under the unified fund exemption in the Inland Revenue Ordinance (Cap. 112). Qualifying transactions include dealings in stocks, shares, bonds, futures contracts, and foreign exchange.

To qualify for the exemption, the LPF must be managed by an SFC-licensed investment manager in Hong Kong, and the fund must not be closely held (broadly, it must not be beneficially owned by a small number of related persons).

Carried Interest Tax Concession

A dedicated carried interest tax concession applies to carried interest received by qualifying persons (including fund managers and key employees) from qualifying LPFs. Under this concession, qualifying carried interest is subject to a reduced profits tax rate of 0% (for corporations) or a concessionary salaries tax rate (for individuals), subject to meeting substance, minimum investment period, and other conditions.

This concession makes Hong Kong highly competitive with jurisdictions such as the United Kingdom (which has a similar carried interest regime) and is a material factor in managers' decisions to establish and manage funds in Hong Kong.

Comparison with Cayman Islands Structures

The LPF compares favourably to a Cayman Islands exempted limited partnership in several respects:

• Domicile: Hong Kong domicile provides greater comfort to investors sensitive to offshore jurisdiction reputational considerations, particularly institutional investors subject to AIFMD or similar regulations.
• Legal certainty: Hong Kong's common law courts and mature commercial law provide strong legal certainty for fund documents and LP rights.
• Speed: LPF registration is faster than Cayman fund formation.
• Cost: Ongoing administration and regulatory compliance costs for an LPF can be lower than for a Cayman structure, particularly where the manager has an existing Hong Kong infrastructure.

Some managers continue to prefer Cayman structures for their established market familiarity, the depth of the Cayman service provider ecosystem, and the ability to distribute to investors in jurisdictions where Cayman funds have established regulatory recognition.

Practical Considerations for Fund Managers

Managers considering the LPF should address the following at the outset:

• Ensuring the investment manager holds the appropriate SFC licence or qualifies for an exemption
• Appointing a suitably qualified registered agent
• Drafting a robust LPA that addresses carried interest mechanics, investor rights, and fund governance
• Structuring the fund to satisfy the conditions for the profits tax exemption and carried interest concession
• Establishing AML/KYC onboarding procedures for LPs

Conclusion

The LPF has established itself as a world-class fund vehicle that has materially strengthened Hong Kong's position as an asset management centre. Its combination of flexibility, tax efficiency, regulatory credibility, and speed of formation makes it an attractive alternative to traditional offshore structures for managers focused on the Asia-Pacific market.

Alan Wong LLP advises fund managers, general partners, and institutional investors on the establishment, structuring, and operation of Limited Partnership Funds and other investment fund vehicles in Hong Kong. Contact us to discuss how the LPF can serve your fund strategy.