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On 15 January 2016, Hong Kong's government gazetted proposed amendments to the Securities and Futures Ordinance to allow for the establishment of open-ended fund companies (OFCs) for both public and private funds. The Securities and Futures (Amendment) Bill 2016 (the Bill) follows from the public consultation conducted in 2014.
Outline of the OFC structure
The Bill largely follows the proposals in the original consultation, with some welcome additional flexibilities. The Bill provides for:
An OFC will be required to:
Changes from the original consultation
The Bill includes several changes from the original proposals that add flexibility to the OFC structure:
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, the government recognises the importance of tax considerations in deciding where a fund is to be domiciled. Initially, the 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. However, the government has also indicated that it will further review the existing profits tax exemption with a view to placing onshore privately offered OFCs on a level playing field with offshore privately offered OFCs.
As currently envisaged, a transfer of shares in an OFC will be subject to stamp duty.
We anticipate the OFC structure is likely to be more attractive to retail fund managers initially, given retail funds are already subject to SFC regulation and the existing profits tax exemption for public funds will apply to publicly offered OFCs. Retail fund managers will be keen to understand how the OFC Code will work with the existing Code on Unit Trusts and Mutual Funds.
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. At least initially, the restrictions on investment scope, the tax uncertainty and the higher regulatory burden as compared to various offshore jurisdictions that are typically used by Hong Kong fund managers for private funds mean take-up of the OFC structure for private funds is likely to be subdued.
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