Key features of an OFC

Purpose of an OFC

An OFC is an investment fund vehicle that manages investments for the benefit of its shareholders, who are entitled to the income and profits generated by the investments made by the OFC. An OFC is not established for the purposes of trades and businesses undertaken by conventional companies.

Legal personality

An OFC is a legal person.

Fund structure

An OFC can be a single fund or an umbrella fund with various sub-funds.

Each of the sub-funds enjoys segregated liability so that properties of each sub-fund are only available to the particular sub-fund.

Parties outside of the sub-fund are not able to take hold of the assets even under insolvency.

Investment scope

·      Private OFCs: all asset classes subject to the restrictions in the OFC’s offering documents.

·      Public OFCs: must be authorised by the SFC and are obliged to comply with the requirements under the Code on Unit Trusts and Mutual Fund (“UT Code”).

Parties

Directors

·      An OFC must have at least two individual directors; at least one of them is an independent director who is not a director or employee of the OFC’s custodian.

·      A body corporate cannot be appointed as a director.

·      A director residing outside Hong Kong must appoint a process agent to receive any process or notice.

·      A director owes fiduciary duties and the duty to exercise reasonable care, skill and diligence to the OFC.

Investment Manager (“IM”)

·      The OFC board must delegate the investment management function to an IM.

·      An IM must be registered or licensed for carrying out Type 9 (asset management) regulated activity.

·      An IM carries out day-to-day investment management activities of the OFC.

Auditor

·      An OFC must appoint an auditor to carry out annual audits of financial statement for each financial year.

·      The auditor must be independent of the IM, the custodian and the directors of the OFC.

Custodian

·      The OFC should appoint a custodian for safe-keeping of the OFC’s assets.

·      For public OFCs, the eligibility requirement for a custodian is the same as that listed in the UT Code.

·      For private OFCs, apart from the custodians qualified under the UT Code,  intermediaries who are licensed or registered to carry out Type 1 (dealing in securities) regulated activity are also eligible to act as their custodians, subject to further requirements including but not limited to:

i.         its SFC licence is not subject to the condition that it shall not hold client assets;

ii.       it maintains a paid-up share capital of not less than HKD10 million and liquid capital of not less than HKD 3 million;

iii.     the private OFC is, and remains at all times, a client of such licensed corporation or registered institution in respect of its business in Type 1 regulated activity (dealing in securities);

iv.     it has at least one responsible officer or executive officer responsible for overall management and supervision of its custodian function; and

v.       it is independent of the IM.

·      Custodians can delegate their custody responsibilities to sub-custodian(s). The custodian of a private OFC should have proper oversight over the sub-custodian(s), who must be suitably qualified and competent in safekeeping any of the OFC’s scheme property.

Registration of an OFC

Application submission

One-stop approach: applicants submit the required documents along with the fees for incorporation and business registration to the SFC.

Business registration

Once the SFC approves the application, the Hong Kong Companies Registry (“CR”) will register the documents and issue a Certificate of Incorporation of the OFC and a Business Registration Certificate.

SFC registration or authorisation

Registration with the SFC is a prerequisite for the incorporation of an OFC.

Corporate filings

Hong Kong Companies Registry.

Name of the OFC

An OFC’s name must end with “OFC” or “Open-ended Fund Company”. If it has a Chinese name, it must end with “開放式基金型公司”.

Operation of an OFC

Registered office

An OFC’s registered office must be in Hong Kong.

SFC licence

To carry out regulated activities in Hong Kong, an IM must be properly licensed by the SFC. Should you need advice on obtaining a SFC licence, please feel free to contact us.

Post completion approval from the SFC

Obtain approval in the event of:

·      changing the name of an OFC or its sub-fund;

·      appointing key operators, including directors, IM and custodian;

·      establishment of sub-funds; and

·      termination of the OFC or its sub-fund.

Post registration filing to the SFC

·      Annual report;

·      Interim report (if any);

·      Offering documents; and

·      Alteration of instrument of incorporation.

Report certain changes to the CR

·      Change of address of registered office;

·      Change of location of registers and records;

·      Cessation of directors;

·      Resignation of directors;

·      Change of particulars of a director or a process agent of a director;

·      Removal or resignation of auditor; and

·      Alteration of instrument of incorporation.

Winding up

·      Apply for voluntary winding up with the SFC.

·      An OFC may also be liquidated as an unregistered company under the Companies (Winding Up and Miscellaneous Provision) Ordinance (Cap. 32 of the Laws of Hong Kong); a creditor may present a winding up petition to the Court in Hong Kong.

Stamp duty

Transfer of shares of an OFC would be subject to stamp duty.

However, re-domiciliation from an offshore fund to the Hong Kong OFC structure does not attract stamp duty because there is no change in the legal personality of the corporate fund.

Profit tax

An OFC is eligible for profits tax exemption under the Unified Fund Exemption (“UFE”) regime provided that the requirements under the Inland Revenue Ordinance (Cap. 112 of the Laws of Hong Kong) (“IRO”) are fulfilled. Under section 20AN(2)(c) of the IRO, an OFC is exempted from payment of profits tax if the profits are earned from transactions in assets of a class that is not specified in Schedule 16C to the IRO (“non-Schedule 16C class”). However, profits tax exemption is inapplicable where the OFC carries on a direct trading or direct business undertaking in Hong Kong in assets of a non-Schedule 16C class or holds assets of a non-Schedule 16C class that are used to generate income.

HK OFC

Cayman Fund

Regulator

The SFC and the CR

Cayman Islands Monetary Authority (“CIMA”) and if applicable, the SFC (if the fund relates to Hong Kong)

Name

·      Must end with “OFC” or “Open-ended Fund Company”

·      Must not be misleading or undesirable in the opinion of the SFC

·      Must not be the same as another existing company

·      Sensitive words are unacceptable

·      May omit “Limited” or “Ltd”

Amend Name

Require the SFC’s approval

Need not obtain approval from the CIMA but filing is required

Constitutional Documents

Instrument of Incorporation

Memorandum and articles of Association

Amend Constitutional Documents

Require the SFC’s approval

Need not obtain approval from the CIMA but filing is required

Investment Scope

·      Private OFCs: no restriction

·      Public OFCs: comply with the UT Code

No restriction

Directors

·      At least 2 individual directors (at least 1 independent director)

·      Require the SFC’s approval

·      Fit and proper  

·      Requires directors to register

·      Need not obtain approval from the CIMA

IM

·      Mandatory IM

·      Must be licensed or registered with SFC for Type 9 (asset management) regulated activity

·      SIBL registration required

·      In practice, usually hold Type 9 licence (asset management)

Custodian

·      Mandatory custodian

·      Require the SFC’s approval

·      Custodian not a must but in practice is usually appointed

Ongoing compliance

·      Yes

·      Yes

Hong Kong profit tax exemption

·      Covered by the enhanced tax exemption regime provided that the requirements under the IRO are fulfilled

·      Exempted if the central management and control are outside Hong Kong

·      Otherwise, covered by the enhanced tax exemption regime provided that the requirements under the IRO are fulfilled