Open-ended Fund Company (“OFC”) – the Corporate Investment Fund Vehicle in Hong Kong

Traditionally, due to the restrictions of the Companies Ordinance (the “CO”) of Hong Kong, an open-ended investment fund which proposes to be domiciled in Hong Kong is usually established in the form of a unit trust. However, launched in 2018, the open-ended fund companies (the “OFC”) regime in Hong Kong provides the option for Hong Kong-domiciled investment funds to be structured in a corporate form rather than as a unit trust.

This OFC regime provides an attractive alternative for funds domiciled in Hong Kong with its flexible features that are currently not available under the CO; thus, enhancing the market infrastructure to enable Hong Kong’s sustained growth as a full-service international asset management centre and a preferred fund domicile.

Besides, the recent legislative amendments in the Cayman Islands, the leading domicile for investment funds, have introduced important changes to the regulatory and supervisory framework, such as the reporting and economic substance requirement under the Economic Substance Law, therefore fund managers may consider opting for locally-domiciled fund structures, which includes the OFC in Hong Kong.

II. Regulatory Framework:

The regulatory framework governing the OFC regime consists of: (i) the Securities and Futures (Amendment) Ordinance 2016 (the “SFO”) (including Part IVA on OFCs); (ii) the Securities and Futures (OFC) Rules; (iii) the Securities and Futures (OFC) (Fees) Regulations (with application and registration fee HK$10,000 for the umbrella fund and HK$1,250 for each sub￾fund); (iv) the Code on OFC; (v) the Cap. 32 Companies (Winding Up and Miscellaneous Provisions) Ordinance (for court winding-up of OFCs); and (vi)

the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) (granting profits tax exemption).

Given that the OFC structure is designed to be used by both retail and private funds and retail funds in Hong Kong must be authorised by the Securities and Futures Commission (the “SFC”) for public sale under the SFO, publicly offered OFCs must also be in compliance with essentially the same requirements under the Code on Unit Trusts and Mutual Funds (the “UT Code”) and the Overarching Principles in the SFC Products Handbook.

Further, pursuant to the latest Inland Revenue Ordinance, profits tax exemption applies for onshore and offshore funds alike, so certainOFCs are eligible for enhanced profits tax exemption.

III. Key Features of OFCs:

· An OFC is established as a legal entity, either as a standalone investment fund or as an umbrella fund with different sub-funds with different strategies, and the assets and liabilities of an individual sub￾fund would be legally segregated from other sub-funds;

· An OFC is able to vary its share capital in order to meet redemption requests of shareholders and may distribute out of share capital subject to solvency and disclosure requirements instead of being bound by restrictions on reduction of share capital and distribution out of share capital applicable to companies formed under the CO, which allow investors to come in and out of a fund more easily than fixed capital structures;

· An OFC may be used by both public and private funds; however, at least 90% of the gross assets value of a privately offered OFC must consist of (i) asset classes covered by Type 9 regulated activities (i.e. securities, futures contracts, OTC derivatives); and (ii) cash, bank deposits, certificates of deposits, foreign currencies and foreign exchange contracts, while a maximum of 10% of gross asset value may be invested in other asset classes; and

· An OFC may be used for both open-ended and close-ended funds, and for close-ended OFCs, redemption terms and conditions must be appropriately imposed and subject to clear disclosure.

IV. Comparison of Different Types of Funds: