Furthert to these changes , an expansion of the current Qualified Foreign Institutional Investor (QFII) is reported to be in the pipeline. Dubbed Mini-QFII, it will allow institutions to reinvest offshore RMB deposits in mainland capital markets. Offshore RMB deposits have increased dramatically since these measures were announced. RMB deposits in Hong Kong reached 300 billion at the end of 2010, five times the amount a year earlier, and are expected to exceed 500 billion at the end of this year.
2010 saw the launching of Hong Kong first RMB retail fund with more expected to follow. As the Hong Kong Securities and Futures Commission (SFC) is receptive to a variety different fund structures, There is no requirement for the fund to be domiciled in Hong Kong. Most funds are domiciled offshore, with Luxembourg and the Cayman Islands being the most popular.
Step across the border
For Chinese funds looking to leverage their local expertise and n the ground experience to tap into both offshore RMB and foreign capital markets Hong Kong is the obvious location. The Hong Kong authorities have taken a number of steps in recent years to grow asset management and attract more fund managers to the SAR. The government has abolished all estate taxes and exempted offshore funds from the profits tax. Last year the government introduced fresh tax incentives for exchange-traded funds, qualified debt instruments, and offshore funds engaged in futures trading.
In order to set up a Hong Kong establishment, a Chinese fund management company must adhere to regulations laid down by both the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC).
In China this means compliance with the Measures for the Administration of Securities Investment Fund Management Companies (Order No.22 of the CSRC). They must comply with the internal decision-making procedure for companies, have clear business objectives and planning, have proper arrangements with the administration of the Hong Kong establ ishment and, be capable of remaining in good financial condition after making financial contributions to the Hong Kong establishment.
The CSRC requires an application report, a business plan and a legal opinion issued by a PRC law firm. The application report should set out the place of registration of the Hong Kong establishment, form of organization, business scope, level of investment and impact on the company business operations. The business plan should contain a study of the necessity and feasibility of setting up the Hong Kong establishment and an analysis on the market environment and legal environment of Hong Kong.
The CSRC is required to review the application and issue a decision of approval or disapproval within 60 days from the date when the application is accepted. A decision of approval made by the CSRC is to be valid for 6 months, and the FMC concerned must set up an establishment in Hong Kong within the valid period of the decision.
In order for individual funds to be marketed in Hong Kong ,FMC must register them with the SFC. Investment funds should comply with the commission Code on Unit Trusts and Mutual Funds ("Mutual Fund Code"). To obtain authorization, overseas investment funds must meet SFC requirements regarding their structural and operational requirements, investment restrictions and the suitability of their investment manager. But as mentioned, there is no need to domicile in Hong Kong. Funds are permitted to domicile wherever they find conditions most favorable to their business.
The Islands
The Cayman Islands Monetary Authority (CIMA) regulates funds in the Cayman Islands. To register a hedge fund with CIMA, the directors, general partner or trustee must ensure that the fund has provided CIMA with a fund-filing form, the current offering document , consent letters from an administrator and an approved auditor agreeing to act for the fund. There is no requirement to have local directors or maintain assets in the Cayman Islands. Company registration documentation can be provided in Cantonese or Mandarin. There are a number of factors that highlight the Cayman Islands advantages as a jurisdiction for investment fund business:
There are no currency exchange control regulations or restrictions in the the Cayman Islands. Funds can be freely transferred in unlimited amounts.
The Cayman Islands has no direct taxes of any kind. There are no corporation, capital gains, income, profits or withholding taxes.
The Cayman Islands law derives from English common law, supplemented by local legislation. The legal system is well developed and experienced and may be familiar to those with experience of Hong Kong law.
The Cayman Islands is a British overseas territory and has a long history of security and stability. The British government retains responsibility for internal security, defense and legal affairs.
As the Cayman Islands entities can be formed on the day of filing and there are no lengthy regulations or filing procedures, transactions can be brought to market extremely quickly. The cost of establishing and maintaining the Cayman entities is competitive and usually minimal in the context of most transactions.
In short, the Cayman Islands offers a simple, fast and low cost framework for establishing an investment fund. For Hong Kong authorized funds, the appropriate levels of regulation and investor protection in the Cayman Islands, combined with the positive investment terms under the Cayman fund legislation, should prove to be very attractive. The Cayman Islands trust laws, together with experienced service providers and professionals will continue to enable the Cayman Islands to attract Asian private clients. As the leading offshore jurisdiction for investment funds, the Cayman Islands is well placed to tap into China's growing demand for alternative investment vehicles.
Home in Europe
For many fund managers looking for access to European capital markets Luxembourg will be the first location on their list. Despite not having as relaxed a regulatory climate as the Cayman Islands, Luxembourg may be attractive as Europe leading centre for the creation and international distribution of investment funds. Managers wishing to set up a fund in Luxembourg must have it registered with the Commission de Surveillance du Secteur Financier (CSSF). This registration consists of drafting the fund constitutional documents, submitting an application to the CSSF and incorporating the fund's before a notary. This registration process could take as little as two months. The CSSF registration fees are very competitive. Luxembourg has many specific advantages as a fund domicile.
Luxembourg benefits from a location in the heart of the EU. It maintains a strategic position in the one of the largest monetary and economic regions of the world.
Luxembourg is consistently rated as one of the most politically stable countries in the world.
Luxembourg tax regime is highly competitive. Funds are exempt from corporate tax, excise tax and asset tax. In addition Luxembourg has double taxation treaties with many countries including Hong Kong.
High reputation of Luxembourg as a Financial Services centre and ease of registering Luxembourg Funds overseas. Last year the Luxembourg Fund Association ALFI opened an office in Hong Kong to assist Luxembourg based funds in their dealings with the SFC.
Further to the above advantages, Luxembourg is the world most popular domicile for UCITS funds. These funds meet the criteria of the ndertakings for Collective Investment in Transferable Securities Directives as laid down by the EU, which give funds a assport to operate throughout the territory. UCITS funds are looked on favorably by many countries regulatory bodies, including the SFC. In Hong Kong, Singapore and Taiwan more than 70% of authorized investment funds now comply with the UCITS directives. If a manager is looking to provide regulators and investors with a stable and well-regulated investment product whilst benefiting from a prime location for access to EU capital markets, Luxembourg seems to be the domicile of choice.
Watch this space
As is often the case in the case with regulatory changes in China the legal framework accompanying the liberalization of the RMB is somewhat undeveloped. As it stands institutions still have to use current QDII and QFII quotas for cross border investment. Simon Vince of Bonnard Lawson International Law Firm in Shanghai says: ur experience is that sometimes when liberalization happens, there is no rule book, or the officials will be using an unpublished and somewhat grey rule book. The government introduced measures to enable taxation of offshore transactions involving Chinese companies over a year ago but they are yet to be widely implemented. For the time being it may be wise to proceed on a case-by-case basis.
