Legislation Friendly Hong Kong
Hello. I'm Mike, a lawyer living in Hong Kong.
NOW, HONG KONG. IN THE EARLY 2010S, WHEN I WAS GENERAL COUNSEL (OR WAS IT LEGAL DIRECTOR?) OF A PE FUND IN JAPAN, I PERSUADED THE FUND TO MOVE ITS HEAD OFFICE TO HONG KONG. IN THE EARLY 2010S, I PERSUADED THE FUND TO MOVE ITS HEAD OFFICE TO HONG KONG. WHY DID I MOVE FROM JAPAN TO HONG KONG IN THE FIRST PLACE? THE REASON WAS THAT THE FUND BUSINESS IN JAPAN HAD BECOME SO CONSTRICTED BY REGULATIONS AND TAXATION THAT WE HAD TO CREATE A NUMBER OF MEANINGLESS CODES OF CONDUCT. ON THE OTHER HAND, WHEN WE LOOKED AT THE LEGAL SYSTEM IN HONG KONG, WE FOUND IT TO BE VERY EASY TO WORK AROUND.
NORMALLY, IN ORDER TO RUN A FUND BUSINESS, YOU NEED A BOX TO COLLECT MONEY FROM INVESTORS (AS WE SAID IN THE LAST ARTICLE, WE WANTED A LIMITED LIABILITY COMPANY TO PLAY THIS ROLE, BUT IT IS NO LONGER POSSIBLE, SO JAPANESE PARTNERSHIPS AND FOREIGN LIMITED PARTNERSHIPS MAINLY PLAY THIS ROLE) AND A FUND MANAGEMENT COMPANY. IF YOU SIMPLY SET UP AN INVESTMENT MANAGEMENT COMPANY IN JAPAN, IT WILL BECOME AN INVESTMENT MANAGEMENT COMPANY AND WILL BE SUBJECT TO THE SUPERVISION OF THE FSA. THIS INCREASES THE ADMINISTRATIVE COSTS CONSIDERABLY (I COULD TALK ABOUT THIS ALL NIGHT). SO IT'S A REAL-LIFE VERSION OF NAOKI HANZAWA AGAINST INSPECTOR KUROSAKI, PLAYED BY AINOSUKE KATAOKA. TO MAKE MATTERS WORSE, IF YOU MANAGE A FUND IN JAPAN THROUGH AN INVESTMENT MANAGEMENT COMPANY, THE COMPANY WILL BE ACCREDITED AS A PE (NOT PE AS IN PRIVATE EQUITY, BUT PE AS IN PERMANENT ESTABLISHMENT). IF A COMPANY OPERATES A FUND IN JAPAN, IT COULD BE PE-QUALIFIED AND THE ENTIRE FUND'S INCOME COULD BE TAXED IN JAPAN. IN ORDER TO PREVENT THIS FROM HAPPENING, A TIGHT INVESTMENT STRUCTURE AND CODE OF CONDUCT HAS BEEN PUT IN PLACE (PLEASE CONTACT US FOR DETAILS OF WHAT EXACTLY THIS IS, AS THERE IS A CHARGE).
HOWEVER, IN THE EARLY TO MID-2010S, WE RECEIVED INFORMATION THAT THE HONG KONG TAX SYSTEM WOULD BE REFORMED. HOWEVER, IN ORDER TO ATTRACT MORE FUND MANAGERS TO HONG KONG AND TO COMPETE WITH SINGAPORE, WHICH IS ALSO VYING FOR DOMINANCE IN ASIA (TOKYO IS NOT MENTIONED), THE TAX SYSTEM IN HONG KONG WILL BE CHANGED. HOWEVER, IN ORDER TO ATTRACT MORE FUND MANAGERS TO HONG KONG AND TO COMPETE WITH SINGAPORE, WHICH IS ALSO VYING FOR SUPREMACY IN ASIA (TOKYO'S NAME WAS NOT MENTIONED), PE FUNDS THAT INVEST MAINLY IN UNLISTED SHARES WILL BE INCLUDED IN THE NEW EXCEPTION. WE DECIDED TO TAKE ADVANTAGE OF THIS AND QUICKLY MOVED TO HONG KONG. IT WAS ALSO A GOOD THING THAT I WAS ABOUT TO LAUNCH MY NEXT FUND.
When we moved to Hong Kong, we immediately obtained an investment advisory license, which we had not obtained in Japan, and made the fund structure simpler. As I was setting up my business in Hong Kong, I started to see the differences between Hong Kong and Japan. It was far beyond the level I had expected. Every day was a surprise in a good way.
I'll write more about that in the next issue. See you next time.
