The Hong Kong SAR government has proposed sweeping enhancements to its preferential tax regimes for funds, family office investment vehicles, and carried interest — broadening qualifying investments, relaxing eligibility criteria, and introducing "fund-of-one" structures — as it seeks to cement its position as a leading global hub for asset and wealth management. 

RF Report

The Hong Kong SAR (HKSAR) government has unveiled proposals in an administrative paper to strengthen preferential tax regimes for funds, family office investment vehicles, and carried interest, following a consultation process in 2024–25.

This paper briefs Members on the legislative proposal to amend the Inland Revenue Ordinance (Cap. 112, “IRO”) to enhance the preferential tax regimes for privately-offered funds, family-owned investment holding vehicles (“FIHVs”) managed by eligible single family offices (“FOs”) and carried interest, with a view to attracting more funds and family offices to establish a presence in Hong Kong.

First flagged in the 2024–25 Budget as part of efforts to attract asset and wealth management firms to Hong Kong, the amended proposals will be introduced to the Legislative Council in the first half of 2026 and, once enacted, will apply retroactively from the 2025–26 year of assessment.

The key provisions are as follows:

Unified fund exemption (UFE)

The current UFE regime exempts funds and their special purpose entities from profits tax on income derived from qualifying and incidental transactions, with incidental transactions subject to a 5% cap, provided certain conditions are met.

Currently, under the UFR, the definition of “fund” models on the definition of “collective investment scheme” under the Securities and Futures Ordinance (which includes that the relevant contributions should be pooled). “Funds-of-one” generally  – do not satisfy this definition and are not regarded as funds.

To facilitate the usage of the tax regime by an expanded scope of funds and to attract sizeable single investors, HKSAR propose to expand the definition of “fund” to cover the following fund structures, subject to anti-avoidance measures:

(a) pension funds;

(b) endowment funds, covering charitable entities that are exempt from tax under section 88 of the IRO;

(c) a fund with a governmental entity or a central bank or an international organisation as its sole investor; and (d) an arrangement with only one investor and with the value of qualifying investments (i.e. classes of assets specified in Schedule 16C to the IRO) managed not less than HKD 240 million, provided that the investor does not have day-to-day control over the management of the property.

In particular, HKSAR proposes covering certain types of “fund-of-one” arrangements at (c) and (d) above, taking account of the common practice for institutional or ultra-high-net-worth investors to have bespoke arrangements of wholly-owned funds to cater for their investment needs. HKSAR also proposes that all the above newly scoped-in funds at (a) to (d) above, as well as sovereign wealth funds (hereinafter referred to as “excepted funds” collectively), do not need to be managed by a specified person.

To provide clarity for the industry and for the avoidance of doubt, it is also proposed to set out explicitly in the legislation that transacting in or deriving profits from qualifying investments will not by itself render an entity to be regarded as a business undertaking for general commercial or industrial purposes (otherwise, it would have caused the entity to be regarded as not a fund4 and ineligible for tax exemption). If the entity is an open-ended fund company (“OFC”), such carve-out will further apply to its transactions in non-qualifying investments and activities for deriving profits therefrom, because OFCs are also tax-exempt for profits derived from non-qualifying investments.

Qualifying investments

The proposals broaden the range of qualifying investments to include overseas real estate, carbon credits, insurance-linked securities, private equity, loans, digital assets, precious metals, and certain commodities, while also updating the definition of “private company” to cover previously listed firms. The 5% cap on incidental transactions would be removed, with all profits derived from qualifying investments becoming eligible for exemption. In its place, an exclusion list — updatable by the Commissioner — would be introduced to deny exemption for specified income, such as that derived from Hong Kong property trading or development companies.

Treatment of SPEs 

Two key proposals are put forward regarding Special Purpose Entities (SPEs):

  1. Full tax exemption for SPEs: Instead of the current proportional tax exemption based on a fund’s ownership stake, a full tax exemption will be granted to a fund’s SPE regardless of ownership percentage. Anti-round tripping provisions will still apply, and any co-investor triggering these provisions will be subject to profits tax on their share of qualifying investment profits.
  2. Expanded scope of SPE activities: The definition of SPE activities will be broadened beyond its current scope to include acquisition, holding, administration, and disposal of investee private companies and/or other SPEs, as well as any incidental activities — including financing activities related to investments to be acquired.

Tests applicable to transactions in private companies 

The UFR features immovable property test, holding period test, control test and short-term asset test in relation to a fund or SPE’s investment in shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company to avoid tax abuse. In view of the proposed inclusion of loans, as well as equity interests in non-corporate private entities, as qualifying investment, it is proposed to adjust the scope of the four tests to equity investment/interest in private companies and non-corporate private entities (vis-Ă -vis the current rule of investments in private companies in general, which include both equity and debt investments).

Anti-round tripping 

To facilitate resident investors’ investment in UFR funds, HKSAR proposes relaxing the anti-round tripping provisions by adopting the exclusions under the tax concession regime for FIHVs. Specifically, the following persons (investors) would be excluded from the application of the anti-round tripping provisions –

(a) a resident person who is a natural person;

(b) a resident person who is a fund exempt from the payment of tax under the UFR (“an exempted fund”);

(c) a resident person who is not chargeable to profits tax or whose profits derived from qualifying investments would have not been included in the person’s assessable profits if the assets had been held, or the transactions in those assets had been undertaken, directly by the person in the same manner as that of the fund (“an exempted person”); and

(d) a resident person being an entity that –

  • is not a business undertaking for general commercial or industrial purpose;
  • does not carry on any trade or business in Hong Kong;
  • a certain percentage of direct or indirect beneficial interest of which was owned by one or more than one resident individuals, exempted funds, exempted persons or non-residents; and
  • which are interposed between the resident individuals, exempted funds, exempted persons or non-residents and the fund.

Separately, in light of the proposed inclusion of loans as qualifying investments, it is proposed to introduce specific anti-round tripping provisions against financial institutions, insurance companies or persons carrying on a money lending business or an intragroup financing business in respect of profits derived by the fund from loans12.

Tax reporting and substantial activities requirement

For the purposes of effective regulation and meeting the international standards for tax transparency, it is proposed to implement a tax reporting mechanism for funds (and their SPEs if any) benefiting from the enhanced UFR, under which their fund managers or authorized representatives are required to provide certain accounting data of the funds and SPEs concerned, as well as information showing that the tax exemption conditions and substantial activities requirements are satisfied. When formulating the details of the tax reporting mechanism, the Government will take into consideration the industry’s views and strive to minimise the compliance burden on funds and SPEs.

FIHVs managed by single family offices

To align with international standards against harmful tax practices, substantial activity requirements would be introduced for funds, mirroring those already proposed for FIHVs. Funds would need to maintain at least two qualified employees and incur a minimum of HK$2 million in annual Hong Kong operating expenditure, with the Commissioner of Inland Revenue retaining discretion to require higher thresholds where appropriate.

Proposed enhancements to the tax regime for FIHVs 

As the tax concession regime for FIHVs is largely modelled on the UFR, similar enhancements for the tax regime for FIHVs in the following aspects will be introduced –

(a) qualifying investments

(b) profits eligible for profits tax concession

(c) treatment of family-owned special purpose entities (“FSPEs”)

(d) tests applicable to an FIHV/FSPE’s transactions in private companies; and

(e) specific anti-round tripping provisions against financial institutions, insurance companies or persons carrying on a money lending business or an intragroup financing business in respect of profits derived by the FIHV from loans.

Proposed enhancements to the tax regime for carried interest

Streamlined certification: The requirement for HKMA certification before a fund qualifies as a “qualifying payer” would be removed, simplifying the process for funds seeking to offer eligible carried interest.

Expanded qualifying persons: The definition of “qualifying person” would be broadened to include unlicensed fund managers of funds exempt under the UFE regime, extending the concession to a wider range of managers.

Wider associate coverage: The definition of “associate” under both qualifying payer and qualifying employee tests would be extended to cover all entities within the same group as the fund or investment manager, regardless of legal form, going beyond the current restriction to corporations and partnerships.

Flexible distribution arrangements: The requirement to distribute carried interest through the qualifying person would be removed, and carried interest received by a personal investment company on behalf of qualifying employees would become eligible for tax exemption.

Removal of hurdle rate requirement: The current condition that carried interest must arise only after a specified hurdle rate is met would be eliminated, broadening the circumstances under which a sum can qualify as eligible carried interest.

Broader profit sources: Eligible carried interest could arise from a wider range of fund profits, including tax-exempt profits under the UFE regime, other non-taxable income such as offshore income, and other taxable income including amounts on the proposed exclusion list.