Structuring offshore hedge funds
Charltons has significant experience in advising hedge fund managers and promoters on the domicile, structuring and establishment of offshore hedge funds in a variety of jurisdictions including the Cayman Islands, the British Virgin Islands and Bermuda. Our lawyers provide an insightful and highly personalised service, delivering high impact, smart and pragmatic advice.
We advise on all forms of hedge fund vehicles, including limited liability companies, umbrella funds, protected cell or segregated portfolio companies, limited liability partnerships and unit trusts. We also advise on a variety of hedge fund structures, including open-ended and closed-end funds, master / feeder structures, fund of funds and hedge funds.
Charltons has worked on offshore hedge funds across the full spectrum of asset classes, including listed stocks, fixed income and derivative securities, property, natural resources, private equity, venture capital, and distressed debt. We have also advised on a range of hedge fund strategies including long / short, arbitrage and socially responsible investing.
For offshore hedge funds being sold into the Hong Kong market, we will advise on the applicable regulatory framework and suggest structures, selling restrictions and other solutions that will enable offshore hedge funds and hedge fund managers to avoid SFO authorisation and prospectus registration. In the case of retail and other non-exempt hedge funds, we will assist with the application for authorisation of the hedge fund in Hong Kong under the SFO.
We have an in-depth understanding of the key legal and commercial points in the capital raising process and considerable experience in advising on fund terms and negotiations with anchor investors. We will prepare information memoranda and subscription agreements, draft and negotiate the investment management, custodian, administration and other service agreements, and prepare corporate resolutions and other launch documents. We will also engage and instruct offshore counsel and coordinate multi-jurisdictional legal advice to offer a single point of contact and integrated legal solutions to the client.
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Tax treatment of hedge funds
The vast majority of hedge funds managed in Hong Kong are established offshore in tax neutral jurisdictions (where there is no or negligible tax imposed by the local authority) such as the Cayman Islands, Jersey, Guernsey, Bermuda and the British Virgin Islands. A key consideration for an offshore hedge fund structure from a Hong Kong tax perspective is to ensure that the profits of the offshore company are not subject to Hong Kong law because (i) the company is treated as carrying on a trade or business in Hong Kong through a permanent establishment; or (ii) the company is deemed to be a tax resident in Hong Kong.
An unauthorised hedge fund which is taken to be carrying on a trade or business in Hong Kong would be subject to the payment of profit tax (currently at the rate of 16.5%) on all trading profits arising from the sale of securities (other than those held as capital assets) listed on The Stock Exchange of Hong Kong Limited or from the sale of unlisted securities (in off-exchange transactions) where the contract for sale and purchase are effected in Hong Kong.
In determining whether a fund is a tax resident in Hong Kong, the place of incorporation is not by itself a decisive factor. Generally, the fund’s central management and control must not be exercised in Hong Kong – this would normally mean that the most of the directors of the funds should not be resident in Hong Kong and board meetings relevant to the management of the funds should be conducted offshore.
Non-Hong Kong resident funds are exempt from profit tax in respect of specified types of transactions carried out through or arranged by a corporation licensed with the Securities and Futures Commission to carry out fund management activities.