Comparison of cross-border fund tax structure

With the growing demand for global asset allocation from mainland investors, cross-border funds have become an important investment tool. Hong Kong Limited Partnership Funds (“LPFs”), Hong Kong Open-ended Fund Companies (“OFCs”) and Cayman funds are attracting attention for their tax advantages. From a tax perspective, this article provides an in-depth analysis of the differences between compliance, cost-effectiveness and risk factors, and provides decision-making reference for mainland investors.

I. Comparison of Tax Policies

1. Hong Kong Limited Partnership Fund (LPF).

Key Benefits:

• Profits Tax Exemption: Hong Kong LPFs are exempt from profits tax on profits derived locally, and capital gains tax does not apply.
• Bilateral Tax Treaties: Hong Kong has signed Double Taxation Agreements (DTAs) with the Mainland and other countries to enhance the tax treatment of dividends, interest and other income.
• Low compliance costs: Only need to meet the annual audit and tax reporting requirements in Hong Kong, and the process is transparent.

 

Potential limitations:

• Geographical limitations: If the fund invests primarily outside Hong Kong (e.g. the United States, Europe), it may be subject to local withholding tax or other indirect taxes.

2. Hong Kong Open-ended Fund Company (OFC).

Key Benefits:

• Flexible tax structure: OFC has the flexibility to choose investment strategies (e.g. stocks, and bonds) and is subject to Hong Kong’s profits tax exemption policy.
• Tax-neutral design: no tax is levied before profit distribution, supporting capital reinvestment.
• Localization advantages: Similar to LPF, it can enjoy the Hong Kong DTA network and low tax rate (16.5% profits tax).

3. Cayman Funds

Key Benefits:

• Zero direct tax burden: The Cayman Islands is exempt from income tax, capital gains tax and inheritance tax, making it suitable for global asset allocation.
• Offshore structure flexibility: support a variety of fund types (e.g. closed-ended, open-ended) without foreign exchange controls.

 

Potential limitations:

• Indirect tax risk: Withholding tax is payable when investing in the U.S. or Europe (e.g. 30% U.S. dividend withholding tax).
• Compliance complexity: Comply with international tax reporting requirements such as FATCA and CRS, and increase operating costs due to the Economic Substance Act (ESL).

II. Tax Implications

Dimension	Hong Kong LPF	Hong Kong OFC	Cayman Funds
Direct tax burden	Local profits are exempt from tax and foreign profits are taxed at source	As with LPFs, real estate investments may involve stamp duty	Worldwide profits are tax-free (no direct tax in Cayman)
Indirect tax burden	Rely on DTAs to reduce withholding taxes	Same as LPF	There is no DTA protection, and there is a high risk of withholding tax
Setup costs	Relatively low (about HK$20,000 for Hong Kong registration)	Medium (subject to incorporation and license fees)	Higher (CIMA registration fee from about $30,000)
Operating costs	Low (controllable audit and compliance costs)	Medium (subject to asset class compliance)	High (ESL and international tax filings are required)

III. Risk and Compliance Challenges

1. Hong Kong LPF & OFC:

• Advantages: As an onshore financial centre, Hong Kong has a stable tax policy and is less affected by the BEPS 2.0 global minimum tax rate.
• Challenge: It is necessary to pay attention to the restrictions on capital flows imposed by the Mainland’s capital controls and foreign exchange policies.

2. Cayman Funds:

• Advantages: The offshore structure has a large space for tax optimization, which is suitable for high-net-worth investors to have a global layout.
• Challenges: International anti-avoidance pressures (e.g., EU tax blacklists) and rising costs of compliance with economic substance laws.

IV. Advice to Mainland Investors

1. Scenarios where Hong Kong structure is preferred:

• Regional concentration: If the investment is mainly in Greater China or Southeast Asia, Hong Kong LPF/OFC can maximize the advantages of DTA and low tax rate.
• Ease of compliance: Hong Kong and the mainland have close regulatory convergence, making it easier to operate the entry and exit of funds.

2. Scenarios for choosing a Cayman fund:

• Global diversification: Cayman structures are more competitive when it comes to covering the European and American markets and being able to bear the complex cost of compliance.
• Long-term tax planning: Combined with family trusts and other tools, to achieve tax optimization of asset inheritance.

3. Integrated Strategy:

• Hybrid structure design: Hold offshore companies through Hong Kong LPF/OFC to balance tax efficiency and compliance risks.
• Professional advisory support: Cross-border tax planning requires the help of professional law firms to ensure that the structure complies with multi-national regulations.

V. Conclusion

With the advancement of global tax transparency (e.g. CRS, FATCA) and BEPS 2.0, the tax advantages of traditional offshore structures may gradually weaken. With its “onshore and offshore” positioning, Hong Kong is poised to become a more sustainable cross-border fund hub. Mainland investors should dynamically assess policy changes and give preference to structures that combine tax efficiency and compliance robustness.

Hong Kong LPFs, OFCs and Cayman funds have their own merits, and the tax choice should be based on investment strategy, regional distribution and risk appetite. Mainland investors should combine professional advice to tailor a cross-border tax plan to achieve the dual goals of asset appreciation and risk control.