Hong Kong and Singapore remain keenly competitive jurisdictions that seek to attract hedge fund managers, far outpacing other APAC jurisdictions.  However, the requirements for, and benefits of, setting up hedge funds and investment management structures differ between the two.  InsightLegal Asia Consulting (www.insightlegalasia.com) specializes in ‘clarifying complexity’ and herein we examine the key legal and tax structuring issues that investment managers should consider when setting up a hedge fund or fund management company in Hong Kong and Singapore; specifically, our objective is to provide a comparative analysis of the two regimes by identifying certain material legal and tax issues that should be addressed upfront when considering an Asia-pacific presence.  

Introduction

Hong Kong and Singapore compete openly in most segments of the financial markets and hedge funds are no exception.  In this discussion, we seek to answer the following question:

What are the key benefits and disadvantages of selecting Hong Kong as opposed to Singapore from a hedge fund managers’ perspective?

In so doing, we (i) first examine the legal and regulatory issues associated with setting up a hedge fund and fund management company in Hong Kong.  Then (ii) we apply the same analysis to the Singaporean context.  Finally, we (iii) consider the most material legal and tax issues likely to arise when structuring a hedge fund and techniques for addressing them proactively--and prophylactically—rather than retroactively in litigation or investigation.

Part One: Structuring a hedge fund in Hong Kong

  1. Hong Kong Overview

Let us begin by highlighting certain obvious advantages offered by Hong Kong as a location for hedge fund managers:

  • Hong Kong is China’s premier offshore financial center and, in addition to serving as the pre-eminent PRC gateway, is a regional hub for prime brokerage, custodial and administrative services;
  • Hong Kong’s favourable low tax system grants tax exemptions to offshore funds (except for profits tax on HK “sourced” income) in terms of dividends, capital gains and interest income; furthermore, there is no stamp duty on non-HK share transfers;
  • Fund managers are well regulated, which is beneficial since it lends international credibility to compliant hedge fund managers;
  • Hong Kong’s legal system and recognizable common law heritage is a strength, providing stability coupled with a highly market-oriented government[1] and 
  • Hong Kong does not restrict hedge fund managers in terms of strategies, especially in the exempt and institutional segments of the market.
  1. Hong Kong’s Regulatory Framework
  1. “Hedge Funds” in Hong Kong?

Essentially, Hong Kong’s Securities and Futures Ordinance (“SFO”)[2] treats all funds as Collective Investment Schemes (“CIS”), which encompasses:

  • Mutual Funds;
  • Hedge Funds;
  • Structured Investments (a.k.a. structured products);
  • Unlisted Structured Investments; and
  • MPF and ORSO schemes (mandatory mutual fund schemes for employees).

The main effect resulting from Hong Kong’s regulatory approach of placing of all of the above funds under a single CIS regime is that offshore funds are overwhelmingly used (e.g., Cayman, BVI and Bermuda) due to the limited choice of HK domiciled fund structures (i.e., less aggressive permissible strategies) and slower authorization processes.

Importantly, from a tax standpoint a fund will be considered non-resident for Hong Kong tax purposes (and thus exempt from Hong Kong profits tax) if the “central management and control” of such fund is exercised outside Hong Kong, even though transactions are executed through intermediaries regulated by the Securities and Futures Commission (“SFC”) in specified asset classes; namely securities, futures and FX.

For an analysis of Hong Kong tax considerations at the fund manager structuring level, please refer to the discussion in Part Three.

  1. Licensing

The sub-manager is based in Hong Kong will be required under the SFO to obtain Type 9 license (asset management).  Alternatively, a Type 4 license (advising on securities) or Type 5 license (advising on futures contracts) may be required in certain cases, which is potentially attractive in that they present lower regulatory hurdles.  The key components to obtain an SFC license are as follows:

  • Business plan/compliance manual:  These documents set out the nature and scope of the business, operational work-flow, organizational structure and internal controls.  They demonstrate to the SFC that the firm (i) understands its business, (ii) has the experience and systems to manage the business and its risks, and that it (iii) will be able to comply with SFC regulatory requirements.
  • Internal Controls:  The firm’s risk management, compliance, valuation and conflict of interest policies and procedures are examined by the SFC, but firms whose parents are licensed or registered by the U.S. Securities and Exchange Commission or the U.K. Financial Services Authority are typically fast-tracked.
  • Capital Requirements:  A firm licensed for asset management is required to have paid-up capital (“PUC”) of HK$5,000,000 and to maintain liquid capital of at least HK$3,000,000.  If the firm does not hold client assets, there are no PUC requirements and liquid capital requirements can be reduced to as low as HK$100,000.
  • Responsible Officers:  Every licensed firm must have 2 individuals approved by the SFC as responsible officers (“ROs”).  At least 1 RO must fully satisfy the SFC that they have adequate local regulatory knowledge, industry knowledge, relevant experience and management experience.  Typically, the fund manager himself will be a RO.
  • Licensing Exam:  The RO must pass a regulatory examination--unless exempt--which usually applies to individuals who are, or have previously been, licensed as a RO are normally exempt from the regulatory examination.  The following individuals are eligible for exemption at the SFC’s discretion if:
    • The individual is licensed or registered for investment management or advisory business in the US or UK, or has more than 8 years of relevant experience in other recognized markets;
    • The firm for which the individual will act as RO will only serve professional investors;
    • The firm is able to confirm that regulatory and compliance support will be provided to the individual; and
    • The individual takes a post-licensing refresher course on local regulations.
  • Relevant Experience: To satisfy the requirement for relevant experience, the SFC generally requires a RO to have at least 3 years of experience in the management of public funds (i.e. CIS sold to the public), proprietary trading, alternative investments or investment research.
  1. Marketing

Offers and invitations to the public to acquire shares or other interests in hedge funds are subject to regulatory authorization requirements--unless exempt.  Although the SFC has a regulatory framework for the authorization of hedge funds, it is rarely used.  Fund managers prefer to rely on exemptions to save time and to have greater flexibility in terms of capital-raising, investor reporting and investment strategies.  The most commonly used exemptions are as follows:

  • Professional Investors[3]:  SFC authorization may not be required if the hedge fund is sold only to professional investors (“PIs”).  PIs includes institutional investors and non-institutional investors.  The former includes bankers, dealers, insurance companies and certain regulated CIS. The latter includes:
    • High net worth individuals (“HNWIs”), meaning individuals with a portfolio of not less than HK$8 million;
    • Corporations whose sole business is to hold investments and which are wholly-owned by HNWIs (as defined above);
    • Corporations or partnerships with a portfolio of not less than HK$8 million or total assets of not less than HK$40 million;
    • Trust corporations registered under the Trustee Ordinance or regulated under the laws of a place outside Hong Kong having total assets under 
  • Sophisticated Investors: Marketing materials for a hedge fund structured as a company may be exempt from the authorization requirements if the shares are offered only to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent.
  • Minimun Subscription: Marketing materials of a hedge fund structured as a company may be exempt from the authorization requirement if (i) the materials contain a prescribed warning statement, and (ii) the minimum denomination or the minimum consideration payable by any person for the shares to be subscribed is not less than HK$500,000.

Part Two: structuring a hedge fund in Singapore

  1. Singapore Hedge Fund Overview

Singapore has established itself as a key hedge fund center and competes closely with Hong Kong for market share.  The growth of hedge funds in Singapore can be specifically attributed to several factors, including:

  • Excellent tax and regulatory incentives for fund managers (in sharp contrast to the EU’s taxation juggernauts and the ill-conceived Directive on Alternative Investment Fund Managers (“AIFMD”));
  • The Monetary Authority of Singapore (“MAS”) proactively promotes Singapore as a hedge fund hub, without over-burdening start-ups with excessive licensing and other regulatory hurdles[4];
  • Singaporean regulations are efficient and clear, thereby providing faster licensing and access to the market; and
  • Singapore’s stable economy, skilled workforce, reasonable industry regulations and a pro-business environment complement the hedge fund industry.
  1. Singapore’s Regulatory Framework
  1. “Hedge Funds” in Singapore?

According to the MAS’s Code on Collective Investment Schemes (“CCIS”)[5], “there are different characteristics and investment strategies that define hedge funds.  Generally speaking, a hedge fund seeks to deliver an “absolute” return independent of the directional move of equity, fixed income or cash markets".  In considering whether a fund constitutes a hedge fund, the MAS will consider whether the fund:

  • Engages in strategies that use leverage, short selling, arbitrage or derivatives; and
  • Involves investment in non-mainstream asset classes (i.e., investments other than listed equities, bonds and cash).
  1. Hedge Fund Structures – Onshore and Offshore

 

  1. Onshore Funds:  A fund constituted in Singapore is subject to the hedge fund licensing and regulatory regime of Singapore.  Onshore funds can be marketed to both domestic investors as well as foreign investors, although in practice they are primarily marketed to domestic retail investors. The permitted fund structures for onshore funds are as follows:
  • Close-ended funds (i.e., corporations);
  • Open-ended unit trust funds; and
  • Limited Liability Partnerships (“LLPs”).
  1. Offshore Funds:  Funds constituted in offshore jurisdictions are subject to offshore legislation.  Offshore funds can be offered to domestic investors in Singapore, subject to certain conditions.  Sophisticated investors typically prefer offshore funds as they offer a degree of privacy.  
  1. Licensing
  1. Onshore Fund Managers and Distributors

Small fund managers with less than 30 qualified investors are exempt from licensing requirements.  To conduct one or more of the regulated financial services activities, all other fund managers and distributors (unless otherwise exempt) need to hold a single license, which is either (i) a Capital Markets Services license or (ii) a Financial Advisers license.

The Securities and Futures Act (“SFA”) regulates the following activities and issues a Capital Markets Services Licence (“CMSL”) to persons engaged in:

  • Dealing in securities;
  • Trading in futures contracts;
  • Leveraged foreign exchange trading;
  •  Advising on corporate finance;
  • Fund management;
  • Real estate investment trust ("REIT") management;
  • Securities financing; and
  • Providing custodial services for securities.

The Financial Advisers Act (“FAA”) regulates the following activities and issues a Financial Advisers Licence (“FAL”) to persons engaged in:

  • Providing advice on investment products, including securities (which includes unit trusts), futures contracts, foreign exchange and leveraged foreign exchange contracts, and life insurance policies (which includes investment-linked life insurance products) and structured products;
  • Issuing reports on investment products;
  • Marketing collective investment schemes (i.e., unit trusts); and
  • Arranging life insurance products.
  • Except for fund managers with less than 30 qualified investors (or those who are exempted under other conditions), any corporation or person who wishes to carry on business in any of the above regulated activities needs to obtain the requisite CMSL/FAL license or CMSL/FAL Representative license.  A hedge fund manager operating under the exemption can market funds managed by itself, but cannot market third-party funds without a license.  Importantly, there are no capital requirements for fund managers operating under an exemption.  However, exempt managers are required to comply with similar market conduct and practices as licensed bodies.
  1. Offshore Fund Managers

Offshore fund managers marketing offshore funds to Singapore investors must be licensed or regulated in the offshore jurisdiction and must be ‘fit and proper’ (as per the MAS Guidelines on Fit and Proper Criteria).

  1. Marketing
  1. Onshore Funds to Retail Investors
  • Disclosure requirements:  All hedge fund marketing material including the cover page of the hedge fund prospectus should disclose the inherent risks of investing in a hedge fund and important information, such as:
    • Some investments may not be actively traded and may involve uncertainties;
    •  Only limited information on how the schemes will be managed will be available;
    • That there is limited liquidity; and
    • Most of the underlying hedge funds are subject to minimal regulation.
  •  Minimum initial subscription requirement:  Different categories of funds have the following minimum subscription requirements:
  • For Single Hedge Funds, S$100,000 per investor;
  • For Fund of Hedge Funds (“FoHF”), S$20,000 per investor; and
  • For capital protected/guaranteed hedge funds, no minimum subscription amount.
  • Qualifications of Fund Managers: Hedge fund managers should have at least 2 executives.  Each executive must have at least 5 years of hedge fund management experience.  An additional requirement of 3 years FoFH management experience is required for managers of FoFHs.
  • Investing in other schemes: A Singapore single hedge fund may invest in another single hedge fund which is not a feeder fund.  Similarly, a Singapore FoHF may invest in another FoHF, which should only invest directly in other hedge funds and not through another FoHF or feeder fund.
  •  Limited liability:  The liability of investors must be limited to their investment in the scheme.
  • Diversification of FoHFs:  A FoHF should be diversified across at least 15 hedge fund managers.
  1. Offshore Funds to Retail Investors

An offshore fund can be marketed to retail investors in Singapore subject to the following conditions:

  • The fund must be recognized by the MAS.  The fund manager must be licensed or regulated in the offshore jurisdiction (where its principal place of business is based) and must be ‘fit and proper’;
  • The offshore fund’s prospectus or profile statement must be approved by the MAS;
  • The offshore jurisdiction in which the scheme is constituted must offer adequate protection to investors in Singapore, comparable to that provided by the Singapore Securities and Futures Act (“SFA”) for onshore funds;
  • The investment guidelines of the offshore jurisdiction that govern offshore funds must be substantially similar to that of Singapore’s; 
  • There must be a Singapore based representative for the fund to act as a liaison between investors and the foreign manager (such representative must be an individual, a company incorporated in Singapore, or a foreign company registered in Singapore under the Companies Act);
  • A prospectus in compliance with the SFA must be lodged and registered with the MAS; and
  • The fund manager (together with its related companies) must manage at least S$500m of discretionary funds in Singapore.
  • The minimum initial subscription requirement for different categories of funds is as follows:
    • For Single Hedge Funds, S$100,000 per investor;
    • FoHFs, S$20,000 per investor; and
    • For capital protected/guaranteed hedge funds, no minimum subscription amount.
  1. Marketing Exemptions
  • Marketing Onshore and Offshore Funds to Accredited Investors and Other Relevant Persons:Onshore and offshore hedge funds that are marketed to "accredited investors" (as defined in Sec 4(A) of the SFA) do not require the submission of a prospectus or any other offering document to the MAS[6].
  • Marketing Onshore and Offshore Funds to Institutional Investors:  Onshore and offshore hedge funds that are offered to "institutional investors" (as defined in Sec 4(A) of the SFA) are exempt from prospectus requirements and there is no requirement for submitting any other offering document to the MAS.  Furthermore, there are no minimum subscription requirements.

 

  1. Hedge Fund Taxation

Singapore uses a territorial basis for taxation.  In other words, companies and individuals are taxed on Singapore sourced income.  Foreign sourced income (branch profits, dividends, service income, &c.) will be taxed when it is remitted--or deemed remitted--into Singapore, unless the income was already subjected to taxes in a jurisdiction with headline tax rates of at least 15%.  Although the concept of locality of the source of income seems simple, its application can often be complex and contentious.  No universal rule applies to every scenario.  

For a fuller analysis of tax considerations when structuring a Singaporean hedge fund, see the discussion in Part Three (iv)(b).

  1. Other Incentives

Enhanced Tier Fund Management Scheme:  With effect 1 April 2009 to 31 March 2014, an enhanced tier was introduced to the existing fund management incentives for funds with a minimum size of S$50 million, at the point of application, amongst other conditions.  Under the enhanced tier system restrictions are imposed on neither the residency status of the fund vehicles, nor that of investors.  The enhanced tier also applies to funds that are constituted in the form of Limited Partnerships.  Additionally, the 30% or 50% investment limit imposed on resident non-individual investors has been lifted for funds that fall under this enhanced tier.

Part Three: Hedge fund structuring – Legal and tax issues

  1. Overview of Structuring

The first point of inquiry of fund managers looking at establishing an APAC presence concerns where to locate the fund’s management and operations.  Below, we look at the core legal and tax issues relevant to structuring hedge funds in general; subsequently, we extract aspects of our above analysis of the HK and Singapore specific issues to better clarify the structuring options available to hedge fund managers operating in Asia-pacific.

  1. Key Tax and Legal Issues When Structuring a Hedge Fund

How the manager envisages the capital-raising process and where his target investors are likely to be based is the analytical starting point in terms of structuring a hedge fund, most importantly:

  • Will it be a global strategy marketed to a range of global investors?
  • Is the intent to raise money from US tax payers and US tax-exempt investors?
  1. US Tax Considerations

US investors can be split into two categories:

  • US taxable investors:  For these investors, investing in a hedge fund may be subject to onerous tax rules applicable to investments in a passive foreign investment company (“PFIC”).  These rules penalize the sheltering of passive investment income in a PFIC to defer tax.  To avoid PFIC rules, US taxable investors prefer to invest in flow-through entities such as partnerships or corporations that can elect to be treated as a partnership for U.S. tax purposes[7]; and
  • US tax exempt investors: For investors in this category (eg., pension funds, endowments, &c.), investing in flow-through entities, by contrast, may be subject to tax on unrelated business taxable income (“UBTI”) where the fund earns income using leverage.  For this reason, U.S. tax exempt investors prefer to avoid flow-through entities such as partnerships and instead opt for a corporation structure in a tax favourable jurisdiction.  

The former wish to have opaque tax structures (e.g., LLPs), whereas the latter (and non-US investors) prefer tax transparent structures (e.g., Cayman companies).  Therefore, a critical initial distinction is how each legal vehicle will elect to be classified for US tax purposes.  Typically, a manager will wish to establish at least two vehicles to support these different types of investors and such vehicles are commonly referred to as ‘feeder funds’.

  1. Structuring Master Feeder Funds

In a classic master-feeder fund, three separate vehicles comprise the hedge fund:

  1. A U.S. feeder fund established as a LLP in the US;
  2. A non-U.S. feeder fund established as a corporation in a tax neutral jurisdiction; and
  3. A master fund established in a tax neutral jurisdiction either as a LLP, or as a non per se corporation that elects to be treated as a partnership for U.S. tax purposes.  

Under this master-feeder structure, U.S. taxable investors invest in the U.S. feeder fund, while non-U.S. investors and U.S. tax exempt investors (e.g., pension funds) invest in the non-U.S. feeder fund.  Both the U.S. feeder fund and the non-U.S. feeder fund then invest all their assets into the master fund, which holds all the assets and executes all the trades with the prime broker(s).  In short, the two feeder funds provide a dual entry point into the master fund[8]

  1. European Structures

For hedge fund managers targeting EU investors, the most suitable fund structures are (i) Irish Qualifying Investor Funds (“QIFs”) and (ii) Luxembourg Specialized Investment Funds (“SIFs”).  Both QIFs and SIFs are more flexible than UCITS[9] fund structures, but not as flexible as Cayman fund structures.  This EU onshore-regulated route might benefit the hedge fund manager in terms of raising capital, but they will have to accept that EU regulators are potentially going to intervene and instruct them to do things differently.

  1. Legal and Regulatory Issues When Structuring the Management Entity

What is often more critical than the structure of the fund itself is the proper establishment of the fund management entity.  To be successful, this requires a solid management structure and a clear partnership agreement to help avoid potential future disputes and reputational issues.  In particular, hedge fund disputes tend to originate within the fund management structure as opposed to the funds themselves.

  1. Limited Liability Partnerships (“LLP”)

Essentially a tax-transparent corporate entity, LLPs help to avoid double taxation.   Specifically, management fees and incentive fees pass straight through to partners as if they were earning such fees themselves directly (i.e., not through the fund).  Also, the fact that they are partners in the firm--not employees--avoids employee related tax and compensation issues.  It is crucial to understand that the success or failure of most LLPs is determined by the quality of the partnership agreement.

  1. Partnership Agreements (“PA”)

The PA must be carefully constructed to address any relevant default provisions that will apply by operation of law in the jurisdiction of the fund manager, unless the manager does not specifically exclude them in the PA.  Examples of material default provisions may include:

  • All members may be entitled to share equally in the capital and profits of the LLP;
  • Every member may take part in the management of the LLP; and
  • No majority of the members can expel any member unless such a power to do so has been expressly conferred in the PA.

Secondly, the PA should determine the extent to which duties of good faith are exercised within the partnership.  Any partnership arrangement is subject to fiduciary duties (or duties of good faith).  However, it is somewhat uncertain the extent to which the partners of an LLP owe duties of good faith either to the entity or to individual members.

Another area to consider in the PA is what happens when one of the partners decides to leave the firm.  Managers should consider buy-out options so that each partner is clear on the financial implications of leaving: either voluntarily to pursue their own interests, or because of a dispute.  There should be nothing left open to interpretation in a well-drafted PA.

Finally, another difficult area that might arise relates to non-performance of individuals. This can lead to a potentially destabilizing environment, but how one defines non-performance is far from straightforward and should be addressed in the PA.

  1. Profit arrangements in an LLP

The economic returns of the management company are derived from (i) management fees (typically between one to two per cent of the fund’s AUM) and (ii) incentive fees, which are typically 20 per cent of the fund’s profits.  These fees go to the LLP, and the PA must provide for what is termed “residual profit”; specifically, the amount left over after operational costs, regulatory capital requirements, remuneration of employees, &c.

  1. Regulatory Considerations

This raises the final material issue of consideration when establishing the management company--regulation.  

For example, under the poorly conceived European AIFMD[10] that came into effect in July 2013, a deferral mechanism will need to be established, which could become an issue.  This means that under the PA, rather than each partner receiving his full profit allocation, profits need to be re-invested back into the fund and distributed back to the partner over a three- to five-year period.

However, most sophisticated fund managers will rarely use just a UK LLP; instead, they will have a Cayman management entity, which then appoints a UK LLP to operate in an advisory capacity.

Under the AIFMD, start-up managers have to therefore decide whether to structure the management company purely as an LLP (and fall within the Directive), or remain outside of it by placing the balance of power with a Cayman management entity. This structure is useful for managers who succeed in building the business and end up with management entities in, for example, New York, Singapore, Hong Kong or London, all of which would be contracted to the Cayman entity.

  1. Tax Considerations in APAC Hedge Fund Structures

In many instances, structuring a hedge fund is driven as much by tax considerations as it is by capital-raising, target investors and fund strategies.  The fund manager will typically wish to minimize its own tax liability and--to facilitate capital raising--ensure that the fund’s profits are sheltered whenever possible from tax.

  1. Hong Kong Based Fund Managers

For hedge fund managers based in Hong Kong, the asset management company (or investment manager) is typically established in a tax neutral jurisdiction (e.g., Cayman, BVI) and the sub-management company (sub-manager) in established in Hong Kong.  This allows the investment manager to delegate discretion over investments to the sub-manager, which in turn employs the local hedge fund manager to manage the fund.  Under this structure, investment management and performance fees go to the asset management company in the tax neutral jurisdiction.  The investment manager pays the sub-manager a small fee, which covers the operational costs of the sub-manager with a modest markup.

This structure avoids the management and performance fees being taxed by Hong Kong, since Hong Kong only taxes the sub-manager on the modest fees earned by it from the offshore asset management company.  As one might expect, the tax neutral jurisdiction does not tax the management and performance fees earned by the offshore investment manager, therefore all such fees remain tax exempt throughout the life of such a structure.

The presence of a sub-manager in Hong Kong who makes discretionary investment decisions on behalf of the fund is unlikely--by itself--to result in the “central management and control” of the fund being deemed to be exercised in Hong Kong.  However, to ensure that the “central management and control” standard is not reached, it is advisable to:

  • Hold board meetings outside of Hong Kong; 
  • Appoint a majority of non-Hong Kong directors;and
  • Ensure that the board has an actual function.
  1. Singapore Based Hedge Fund Managers

In relation to hedge funds, the place of business will determine the source of income.  For instance, an offshore hedge fund managed by a Singapore based fund manager may be liable to tax in Singapore by virtue of the active role played by the fund manager in managing the investments of the fund.  In other words, the fund will be deemed as “carrying out business in Singapore” and income derived from the fund may be considered as Singapore sourced income--therefore liable to tax in Singapore.  However, Singapore has introduced certain tax incentives and exemptions to reduce or eliminate such tax liability, including:

  1. Offshore Funds:  An offshore fund that is managed by a Singapore-based fund manager is exempt from Singapore tax on specified income from designated investments, provided the offshore fund is a qualifying fund.  Specified income refers to profits, gains, dividends and interest from designated investments.  Designated investments include traditional investments such as stocks, shares, securities, bonds, deposits, futures contracts, &c.  

A qualifying fund is one that:

  • Is not 100% beneficially owned by Singapore investors including Singapore resident individuals, Singapore resident corporate entities and Singapore-based permanent establishments of non-residents;
  • Does not have a Singapore presence; and
  • Can only be in the form of companies, trusts or individual accounts.

A qualifying investor also enjoys tax exemptions on income derived from qualifying funds.  A qualifying investor is:

  • An individual investor; or
  • A bona fide non-resident non-individual investor that:
    • Does not have a Singapore presence or business activity (other than as a fund manager);
    • Has a Permanent Establishment in Singapore but does not use funds from its operation in Singapore to invest in the qualifying fund;
    • Certain specified Singapore government entities; and
    • A Singapore resident corporate investor that owns not more than 30% or 50% (if the fund has 10 or more investors) of the qualifying fund.
  1. Onshore Funds:  In 2006, the Singapore government introduced the Singapore Resident Fund Scheme, under which the above mentioned tax exemption scheme for offshore funds was extended to funds constituted in Singapore as well, subject to the following conditions:
  • The fund vehicle must only be a company;
  • The fund must be constituted in Singapore and have its administration performed in Singapore, and
  • The fund must be approved by the MAS.
  1. Concessionary Tax Rate for Fund Managers:  Under the Financial Sector Incentive Scheme for Fund Managers, fund managers in Singapore are taxed at a concessionary rate of 10% on fee income, subject to certain conditions and MAS approval.  This scheme applies to fund managers who employ at least three fund management or investment advisory professionals. The professionals’ basic monthly income must exceed S$3,500.

These schemes have bolstered the fund management industry in Singapore, since it offers the additional advantage of Singapore’s extensive treaty network that helps to reduce tax liability in treaty countries that the fund invests in.

Conclusion

As is the case elsewhere, the essential questions of capital-raising, fund strategy, tax, legal and regulatory issues remain critical to the establishment of fund management structures in APAC.  Within APAC, Hong Kong and Singapore remain keenly competitive in terms of attracting hedge fund managers and the key features of each jurisdiction in terms of their legal, regulatory and tax frameworks have been analyzed above.  The domicile of the fund itself remains primarily a matter of tax, licensing and marketing concerns, whereas the fund management structure is driven by a combination of legal issues involving control of the fund as well as tax implications based on the choice of legal entities and jurisdictions.  Although there is no one-size-fits-all answer to the question posed at the beginning of this comparative analysis, hopefully this discussion highlights the more challenging issues that need to assessed and tackled upfront before setting up hedge fund structures in Asia-Pacific—not retroactively in litigation or investigation.