REALWorld Law

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

Yes.

Last modified 19 Jul 2023

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

The term ‘permanent establishment’ is a taxation concept in Hong Kong and is not a corporate vehicle as such. It is generally used in the context of double taxation treaties where the concept is relevant to the tax rights of the state in which a permanent establishment has been created.

Last modified 19 Jul 2023

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

The main types of corporate vehicle available to investors are:

• Companies (private or public)
• Branches of a foreign corporation
• Partnerships
• Trusts

Last modified 19 Jul 2023

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

Companies

Companies can be incorporated in Hong Kong under the Companies Ordinance (Cap. 622 of the Laws of Hong Kong). Only five types of companies can be formed under the Companies Ordinance:

• Limited private companies with a share capital;
• Unlimited private companies with a share capital;
• Limited public companies with a share capital;
• Unlimited public companies with a share capital; and
• Companies limited by guarantee without a share capital.

Private and public companies are similar in many respects although the articles of association of a private company will:

• limit its number of members/shareholders to 50; and
• restrict the right of its shareholders to transfer their shares in the company.

Private companies are also restricted from raising funds from the public (for example, by issuing shares or debentures in the company).

Most of the companies in Hong Kong are private companies limited by shares. Companies are considered separate legal persons, therefore, the liability of the members/shareholders of these companies is limited to their initial investment (in acquiring or subscribing for their shares) in the company.

Branches of a foreign corporation

A company which is incorporated outside Hong Kong may conduct business and hold real estate in Hong Kong by establishing a ‘place of business’ in Hong Kong. The Companies Ordinance requires a non-Hong Kong company to register its place of business in Hong Kong and register itself as a ‘non-Hong Kong registered company’ under the Companies Ordinance. The company must also obtain a business registration certificate from the Inland Revenue Department within one month of the establishment of its place of business in Hong Kong.

To register, a prescribed form (which contains information relating to the non-Hong Kong company, such as its name, place of incorporation and particulars of its directors, together with the date of establishment of the place of business in Hong Kong) must be completed and submitted to the Hong Kong Companies Registry. The constitution, latest published accounts and certified copy of the certificate of incorporation of the non-Hong Kong company must also be submitted as supporting documents to the Companies Registry for registration purposes.

Partnerships

Unlike companies, partnerships are not considered separate legal persons. This means that the partners are all jointly and severally liable for the debts and/or liabilities of the firm.

The relationship between the partners is usually set out in a partnership agreement, which will typically have clauses relating to matters such as the capital contributions required from each partner, drawings, partners' duties and powers (and any restrictions on such powers), and procedural matters relating to partner meetings and voting rights etc.

As partnerships are not considered separate legal persons, to avoid unlimited liability for all partners involved, a partnership may be structured as a limited partnership with at least one general partner (whose liability is unlimited) and the rest as limited partners (whose liability is limited to the amount of their unpaid share capital). A limited partnership must be registered as such at the Companies Registry, if not then it will be deemed to be a general partnership and all limited partners will be deemed to be general partners.

A fund set up in the form of a limited partnership (which is registered under the Limited Partnerships Ordinance (Cap. 37)) can be registered as a limited partnership fund under the Limited Partnership Fund Ordinance (Cap. 637) (LP), which came into effect on 31 August 2020. The limited partnership fund scheme is an opt-in registration scheme administered by the Registrar of Companies.

A limited partnership fund is a private fund that is used for the purpose of managing investments for the benefit of its investors. Partners of a limited partnership fund have freedom of contract in respect of the operation of the fund and the Limited Partnership Fund Ordinance expressly permits limited partners to negotiate the terms of certain contractual arrangements commonly seen in private equity funds, including admission and withdrawal of partners, management structure and governance, capital contributions, distribution, clawback obligations and dissolution procedures.

Trusts

Normally, a trust is constituted by the payment to the trustee of an amount (the settled sum) which the trustee agrees to hold on trust, together with any other money paid or property transferred to it. The trustee is the legal owner of the trust property and holds/invests such property. The capital sum and any income derived from such invested property will be held by the trustee on trust for the beneficiaries under the trust. The manner in which the trust is constituted is usually set out in a trust deed, which will define the relationship between the trustee and the beneficiaries and set out other matters such as the duties and powers of investment of the trustee.

As a real estate investment vehicle a trust can take various forms. For instance, it may take the form of a discretionary trust under which beneficiaries have no fixed entitlements to the capital or income of the trust, with the trustee having a discretion to choose beneficiaries for these purposes. A discretionary trust is more commonly used for family investment purposes.

For public investment purposes, fixed trusts (for example, property unit trusts) are more commonly used. In a unit trust, entitlement to the benefits of the trust is divided into units similar to shares in a company. The investors/unit holders (beneficiaries of the trust) hold a number of units according to their investment. Unlike discretionary trusts, entitlements are fixed and the trustee has no discretion as to distributions or entitlements to assets as these are determined by the rights attaching to the units in the trust. Unit trusts may require authorization by the Securities and Futures Commission (SFC) as well (especially if they target the general public and not just professional investors as unit holders).

Last modified 19 Jul 2023

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

Companies

The Companies Ordinance does not prescribe any requirement for a minimum amount of nominal share capital. A company limited by shares incorporated in Hong Kong can be formed by at least one founder shareholder taking at least one share in the company.

Branches of a foreign corporation

There are no minimum capital requirements.

Partnerships

There are no minimum capital requirements, although the partnership agreement may set out the initial capital that each of the partners must contribute to the partnership.

Trusts

There are no minimum capital requirements.

Last modified 19 Jul 2023

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

Companies

The fees for incorporating a company having a share capital include an application fee of HK$1,720 if delivered in hard copy, and HK$1,545 if in electronic form.

On the other hand, for a company not having a share capital the fee for incorporation is calculated according to the number of members stated in the company's articles of association. The fee is HK$170 (for 25 or less members), HK$340 (for more than 25 but not exceeding 100 members), and an additional HK$20 for every 50 members or less after the first 100 members. This fee is subject to a maximum of HK$1,025.

Any party that applies for the incorporation of a Hong Kong company or registration of a non-Hong Kong company under the Companies Ordinance is deemed to have made a simultaneous application for business registration. From a cost perspective, this means that the prescribed business registration fee and levy must also be paid to the Companies Registry (in addition to the incorporation fee above). There are two types of business registration certificate, namely the one year certificate and the three year certificate. The amount of fees payable under a certificate generally depends on the commencement date of the registration certificate. For a one year certificate, the amount payable (ie registration fee plus levy) is HK$2,150 (subject to review from time to time), whereas for a three year certificate the amount payable is HK$5,650 (subject to review from time to time).

Branches of a foreign corporation

In order to register a place of business in Hong Kong, the non-Hong Kong company must pay an application fee of HK$1,720 if delivered in hard copy form, and HK$1,545 if in electronic form. In addition, it must pay a business registration fee and levy to the Companies Registry. There are two types of business registration certificate, namely the one-year certificate and the three-year certificate. The amount of fees payable under a certificate generally depends on the commencement date of the registration certificate (ie the date of commencement of business). For a one year certificate, the amount payable (ie registration fee plus levy) is HK$2,150 (subject to review from time to time), whereas for a three year certificate the amount payable is HK$5,650 (subject to review from time to time).

Partnerships

The main costs of setting up a partnership are the costs involved in relation to the drafting and conclusion of the partnership agreement. A simple partnership agreement can cost around HK$50,000 to prepare, although the actual costs can vary from one partnership to another, depending on the lawyers' fees charged in preparing the partnership agreement and the complexities of the arrangements between the parties.

Also, in order to establish a limited partnership in Hong Kong, registration must be obtained (otherwise it will be deemed to be a general partnership and all limited partners will be deemed to be general partners with unlimited liability). The registration fee is HK$340, plus an additional fee of HK$8 for every HK$1,000 (or part of HK$1,000) of the sum contributed by each limited partner.

For a limited partnership fund, a registration fee of HK$2,555 plus a lodgement fee of HK$479 are payable on application for registration. The eligibility requirements of a fund to be registered as an LPF are set out in section 7 of the Limited Partnership Fund Ordinance (LPFO)

Trusts

The main cost associated with setting up a trust is the preparation of the trust deed. This could cost around HK$200,000, although the precise amount will vary depending on the type and complexity of the trust arrangement including compliance with applicable regulatory requirements. For unit trusts that require authorization, an application fee for authorization must also be paid to the Securities and Futures Commission. The amount of fee varies depending on the nature of the unit trust fund, for instance, the application fee for a single fund is HK$20,000. After authorization is obtained, an authorization fee is payable, together with the first annual fee before the authorization is effective. This fee also varies according to the nature of the unit trust fund. An authorization fee of HK$10,000 and a first annual fee of HK$6,000 is payable in the case of a single fund. Higher fees apply to ‘umbrella’ type funds.

Last modified 19 Jul 2023

What corporate governance requirements apply to each type of corporate vehicle used to invest in real estate?

Companies

To incorporate a company in Hong Kong it is necessary to submit to the Companies Registry a specified form and a copy of the constitution (articles of association) of the company as supporting documents. The incorporation fee must also be paid at the same time. Assuming that the application is in order, the certificate of incorporation of a company limited by shares will be issued on the fourth working day after the submission date (if the application is mailed to the Companies Registry in paper form) or within one hour after submission of the documents (if submitted through an online facility). The certificate of incorporation of a company limited by guarantee will be issued in about three weeks.

Branches of a foreign corporation

The place of business in Hong Kong must be registered in order to be operative. Upon the satisfaction of all registration requirements, ie the submission of the completed specified form with the requisite supporting documents (such as the constitution and certified copy of the certificate of incorporation of the non-Hong Kong company) and the payment of the requisite registration fees, the Companies Registry will issue a certificate of registration. This usually takes at least 10 working days after the submission of all requisite documents in acceptable form to the Companies Registry.

Partnerships

A partnership can become operative as soon as the relevant partnership agreement is finalized.

For a limited partnership, registration with the Companies Registry is also required and it can take about five working days for the Certificate of Registration to be issued.

For a limited partnership fund, registration with the Companies Registry is also required and it can take about four working days for the Certificate of Registration of a Specified Fund to be issued.

Trusts

Discretionary trusts are operative on the execution of the trust deed.

A unit trust that requires authorization from the SFC is operative once the trust deed has been executed, the trust property has been deposited, investor subscriptions for the minimum aggregate amount have been collected and authorization is obtained.

The amount of time it takes to obtain authorization can vary from one trust to another. To make the authorization process more efficient, SFC revised its application lapse policy in November 2013. For applications received by SFC on or after 1 January 2014, if no authorization has been granted within six months (calculated from that take-up date, (ie the date of the Take-up letter issued by SFC, generally five business days following receipt of all necessary application documents)), then the application will lapse (subject to any time extension granted by SFC in limited circumstances and at its sole discretion).

Last modified 19 Jul 2023