Tax Treatment and Tax Incentives for Limited Partnership Funds

Annual Audit Obligations

Under the Limited Partnership Fund Ordinance (Cap. 637), Limited Partnership Funds (LPFs) have specific tax treatment regulations and obligations. Firstly, the General Partner (GP) must appoint an auditor to conduct an annual audit of the LPF’s financial statements. This auditor must meet the requirements of the Professional Accountants Ordinance and be independent of the GP and the manager. Although the law does not explicitly prescribe the specific accounting standards that the auditor must follow, the GP and the auditor can mutually agree on the applicable accounting standards.

Tax Incentives for Hong Kong Limited Partnership Funds

Hong Kong's Limited Partnership Funds enjoy several tax incentives, primarily covering profits tax, stamp duty exemption, and carried interest concessions.

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Profits Tax Exemption Provisions

According to the Inland Revenue Ordinance, companies, sole proprietorships, partnerships, corporations, or other entities operating in Hong Kong must pay profits tax on profits sourced from Hong Kong. Hong Kong adopts a territorial source principle of taxation, meaning that if an LPF can demonstrate that certain investment activities do not occur in Hong Kong, the profits not generated in Hong Kong are exempt from Hong Kong profits tax.

Carried Interest Tax Exemption

Under current regulations, GPs managing carried interest, whether as a company or individual, are subject to profits tax. However, the Hong Kong tax authorities are introducing new tax exemption policies. On August 7, 2020, the tax authorities submitted a new tax exemption policy for carried interest of LPFs to the Legislative Council. This new policy, expected to be finalized and implemented next year, will reduce the applicable tax rate. The new policy clarifies that carried interest will be tax-exempt, significantly increasing the attractiveness of LPFs.

Stamp Duty

According to the Stamp Duty Ordinance, the interests in a Limited Partnership Fund are not considered shares. Therefore, Limited Partners (LPs) are not required to pay stamp duty on the subscription, transfer, and redemption of fund units. This tax incentive significantly reduces the tax burden on LPs during the fund's operation, further enhancing Hong Kong's appeal as an international asset and wealth management center.

LPFs benefit from several tax incentives, including profits tax exemption, carried interest tax exemption, and stamp duty exemption. Additionally, the annual audit obligation ensures financial transparency for the funds. These policies not only reduce the tax burden on Limited Partners but also promote Hong Kong as a leading international investment fund center.

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