The onshoring of funds in Asia

By Daryl Liu; Viola Lui, Clifford Chance LLP

Published: 28 September 2020


A large proportion of alternative investment funds distributed and/or investing in Asia have traditionally been established in "offshore" jurisdictions (principally, the Cayman Islands and other tax neutral jurisdictions where the fund manager has limited substance).  That is slowly but noticeably evolving.  Over the last decade, a confluence of factors have contributed to a pronounced shift to "onshore" jurisdictions (typically, tax advantageous jurisdictions with a network of double taxation treaties where the fund manager is also located). 

Evolving global investor preferences, substance concerns from a tax perspective (including related political and public relation issues in the EU and elsewhere), anti-money laundering related concerns, increasing familiarity with onshore vehicle options and regulatory developments in both onshore and offshore jurisdictions have all contributed to a discernible move towards the adoption of Asian fund domiciles.

In recent years, Asian financial centres like Hong Kong and Singapore have both added onshore vehicle options to the toolbox of available fund vehicles, and aggressively promoted the growth of the local fund and asset management industry.  If one were to survey the global landscape of fund domiciles and fund management businesses today, there are jurisdictions that are renowned for being attractive fund domiciles and others well-known for being financial centres with a supportive ecosystem for establishing a fund management business.  However, there are few jurisdictions that serve both functions well, and that is exactly what Asian financial centres are aiming to do.  It is this co-location of fund manager and fund domicile (and the related ease of operation and administration, robustness of tax structuring, and increasing familiarity to international investors) that makes these onshore jurisdictions such a compelling offering for Asia-focussed funds.

Singapore introduced the Singapore limited partnership in 2009, and Hong Kong's new limited partnership fund regime will come into operation on 31 August 2020.  As the limited partnership remains the dominant vehicle of choice for private funds globally, these onshore limited partnership vehicles present a serious alternative to the traditional offshore option for Asian fund managers.  In the last several years, Hong Kong and Singapore have also introduced variable capital corporate vehicles (e.g., the Hong Kong open-ended fund company and the Singapore variable capital company) that target use by the funds and asset management industry across a broad variety of open-ended and closed-end funds.  With increasing adoption of these vehicles by fund managers and investors alike, these onshore options have been rapidly gaining traction in the market – a consideration that is key to any fund manager aiming to raise a successful fund product.

Asian financial centres have been just as keen to create a straight-forward and business friendly regulatory framework for fund managers.  For example, Singapore introduced a two-tiered licensing and registration regime for fund managers based on AUM, and rolled out a simplified licensing regime for managers of venture capital funds in recognition of their business model, investor base and in support of start-up and growth stage businesses.  For Hong Kong, in addition to the relaxations to the Securities and Futures Commission (SFC) licensing requirements of hedge fund managers that were introduced in 2007, the SFC recently provided guidance for private equity firms seeking to be licensed by the SFC.  Moreover, the SFC has offered a concession rate for the annual licensing fees payable by fund managers and their licensed individuals.

For tax certainty and mitigation of exposure of funds managed by onshore fund managers, Singapore and Hong Kong have both also introduced safe harbours for funds managed on a discretionary basis by fund managers located in the jurisdiction.  For example, the Resident Fund Scheme, Enhanced Tier Fund Scheme and Offshore Fund Scheme allow a wide range of specified income from an extensive list of designated investments to be exempt from Singapore tax.  Furthermore, Singapore fund managers that qualify for the Financial Sector Incentive for Fund Managers also enjoy a concessionary corporate tax rate for fund management and investment advisory services.  Similarly, Hong Kong has exempted qualifying assessable profits of non-resident "offshore" funds from Hong Kong profits tax since 2006.  Beginning April 2019, a new "unified funds tax exemption" regime came into effect in Hong Kong which, subject to qualifying conditions being met, provides funds, regardless of their tax residency, exemption from Hong Kong profits tax on their assessable profits arising from qualifying transactions as well as transactions incidental thereto.  Besides expanding the scope of funds eligible for tax exemption, the new Hong Kong unified funds tax exemption regime also removes certain problematic features under the offshore funds tax exemption regime and expands the scope of qualifying investments.  These improvements provide greater flexibility and more certainty to fund managers seeking to "onshore" their funds in Hong Kong.  In addition, the Hong Kong government has announced its intention to provide a tax concession for carried interest.  While details have not been released, clarity on the tax treatment of carried interest, together with tax relief, have been warmly welcomed by the funds industry.  Efforts by both Singapore and Hong Kong to introduce tax incentives and provide clarity of tax treatment have been a key part of their efforts to become attractive fund domiciles that present an alternative to traditional tax neutral offshore jurisdictions.

Finally, the availability of an extensive double tax treaty network in both Hong Kong and Singapore make them a preferred jurisdiction for structuring investments across key Asian destinations.  The comparative ease of designing administration, operation and governance arrangements when fund manager, fund vehicles and investment holding structures are located in a single jurisdiction is increasingly attractive at a time when running a multi-national structure that traverses several jurisdictions is becoming more complex and coming under greater scrutiny.  

With Asian financial centres determined to provide a competitive offering to fund and asset managers and with the increasing adoption of fund vehicles available in those jurisdictions, all signs point to the continued onshoring of funds in Asia.