Hong Kong Open-ended fund company (OFC) - regulatory memo
About Hong Kong open-ended fund company (OFC)
As part of a series of local market infrastructure enhancements to further develop the city as a full-service international asset management centre and a preferred fund domicile, the Securities and Futures Commission (SFC) has been working closely with the government of Hong Kong to establish the legal and regulatory framework for a new open-ended fund company (OFC) structure.
It is expected to be operational in 2018.
The current Companies Ordinance prohibits the increase or reduction in capital or payment of dividends without approval of the shareholders of the company, and investment funds in Hong Kong usually use a unit trust structure which is more flexible. With the new OFC structure, they will benefit from another flexible option and it should help attract more funds to domicile in Hong Kong.
Key features of the proposed OFC rules and code
An OFC will be established and incorporated under the Securities and Futures Ordinance. It will not be subject to the Companies Ordinance unless otherwise provided in the new OFC Code and rules. It is proposed that for winding-up and disqualification orders, the “Companies (Winding Up and Miscellaneous Provisions) Ordinance provisions” are to be applied to OFCs as well. This approach is to align Hong Kong’s legislation for similar corporate fund vehicles with overseas jurisdictions such as the UK and Ireland
- An OFC must be registered with the SFC and incorporated by the Companies Registry
- OFCs can be public or non-public. A public OFC will have to comply with the detailed requirements as set out in the SFC’s products handbook
- An OFC must have a board of directors with at least two individual directors
- An OFC must have a custodian to whom all scheme property must be entrusted for safekeeping
- The local authorities envisage a profits tax exemption for private OFCs, subject to a separate legislative process
Source: Consultation Paper on the Securities and Futures (Open-ended Fund Companies) Rules and Code on Openended Fund Companies, June 2017.
- Local and global asset managers
The Hong Kong OFC will support umbrella and sub-funds structures and cross-investment of sub-funds.
This new OFC regime provides an attractive alternative for funds domiciled in Hong Kong with its flexible features that are currently not available under Companies Ordinance. In addition to encouraging new funds to set up in Hong Kong in competition with other fund domiciles, the new structure should encourage greater funds passporting with Hong Kong as a home country.
Along with the Mutual Recognition of Funds signed with Switzerland (December 2016) and France (July 2017), the OFC framework should facilitate distribution of Hong Kong-domiciled funds to Europe, with a choice of structure that is internationally recognisable, particularly in Europe.
BNP Paribas Securities Services’ view
We believe that the benefits of the new proposed OFC regime increases the competitiveness of Hong Kong-domiciled funds and their marketability across the globe.
With the launch of similar new company structures in Australia and Singapore however, competition between fund jurisdictions in the Asia-Pacific region is getting more intense. Australia is due to launch its new Collective Investment Vehicles (CIV) scheme in 2018, and Singapore plans the launch of the Singapore Variable Capital Company (S-VACC) and the Corporate Collective Investment Vehicles (CCIVs) also in 2018.
However, Hong Kong can benefit from its longe-stablished fund management industry and its privileged access to China. The proposed profit tax exemption for onshore private open-ended fund companies would be a key factor in the success of the new OFC scheme.
Leveraging its broad expertise in depobank in Europe, BNP Paribas Securities Services has the experience and track record to assist you in Hong Kong in every aspect, from setup, trustee, custody and transfer agency services, to fund administration and portfolio valuation. In addition, as the leading European bank, with deep and comprehensive cross-border distribution services, we are ideally positioned to support broader international distribution of Hong Kong funds in the region and beyond.
June 2015 – consultation conclusion
July 2017 – proposed legislation to offer profit tax exemption to onshore private OFC
August 2017 - closing of the formal consultation paper on the OFC code and rules
2018 - expected launch
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