Enhanced Preferential Tax Concession Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest in Hong Kong

On 12 June 2026, the Hong Kong Government gazetted the long-awaited Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (Bill).

The Bill aims to enhance the preferential tax regimes for privately offered funds, family-owned investment holding vehicles (FIHVs) managed by eligible single family offices and carried interest, with a view to attracting more funds and family offices to establish a presence in Hong Kong. These enhancements are intended to reinforce Hong Kong's role as a global asset and wealth management centre and support growth in investment areas such as private credit, digital assets and commodities trading.

 

Key Proposed Changes

The Bill proposed amendments to three preferential tax regimes, namely the unified tax regime for funds (UFR), the tax regime for FIHVs and the carried interest tax concession.

 

Proposed Enhancements to the UFR

The proposed enhancements to the UFR reflect the Hong Kong Government's continued commitment to strengthening the city's competitiveness as an international asset and wealth management hub. The existing UFR was viewed as being too narrowly focused on traditional investment structures and asset classes. By broadening the scope of eligible fund structures, investments and transactions, the amendments seek to provide greater tax certainty, accommodate evolving investment strategies and attract more fund managers and capital to Hong Kong.

The key amendments include:

Expanded definition of "fund"

The scope of funds will be expanded to cover the following structures:

• pension funds;
• endowment funds, including charitable entities that are exempt from tax under section 88 of the Inland Revenue Ordinance (IRO);
• a fund with a governmental entity, a central bank or an international organisation as its sole investor; and
• an arrangement with only one investor and qualifying investments under management of not less than HK$240 million, provided that the investor does not have day-to-day control over the management of the property.

The proposed "fund-of-one" arrangements at (3) and (4) above are intended to accommodate institutional and ultra-high-net-worth investors seeking bespoke wholly-owned fund structures.

Expanded scope of qualifying investments

The scope of qualifying investments will be expanded to cover the following investments:

• insurance-linked securities;
• direct or indirect equity interests in an entity that is not a corporation; precious metals;
• commodities in connection with, and incidental to, the trading of over-the-counter derivative products or futures contracts;
• loans;
• immovable property outside Hong Kong;
• digital assets; and
• emission allowances, derivatives and carbon credits.

Expanded scope of eligible profits

Currently, a fund or its special purpose entities (SPEs) may enjoy profits tax exemption on profits from "qualifying transactions" and "incidental transactions", subject to a 5% cap on trading receipts from incidental transactions.

In a welcome simplification, the Bill proposed to abolish the distinction between qualifying and incidental transactions altogether, along with the associated 5% threshold. Instead, an exclusion-based approach will be adopted: profits will generally qualify for exemption unless they fall within a prescribed list of excluded income. This list includes, among others, income derived from private companies engaged in the trading or development of Hong Kong immovable property. This is intended to provide more flexibility for funds and SPEs in deriving profits, such as through interest income, from qualifying investments.

Relaxation of tax exemption for SPEs

Currently, an SPE's entitlement to profits tax exemption is proportionate to the fund's ownership interest in the SPE. Recognizing the wide variety of co-investment structures commonly adopted in the funds industry, the Bill proposed to extend full profits tax exemption to SPEs, regardless of the fund's ownership percentage. This treatment will remain subject to the existing anti-round tripping rules applicable under the UFR regime. Where those rules apply to a co-investor in an SPE, the co-investor will be subject to tax on its proportionate share of the SPE's profits derived from qualifying investments.

Also, the narrow scope of permissible SPE activities under the current UFR has been a longstanding concern for the industry. In practice, uncertainty may arise as an SPE could potentially lose its exemption status if certain operational activities are regarded as going beyond the holding and administration of investments in private companies. The Bill now proposed to expand the permitted activities of an SPE to include acquiring, holding, administering or disposing of investee private companies and/or another SPE, and activities incidental to those activities.

Refinement of the scope of anti-abuse tests applicable to transactions in private companies

In light of the proposed inclusion of loans and equity interests in non-corporate private entities as qualifying investments, the scope of the existing anti-abuse tests for investments in private companies under the UFR (namely, the immovable property test, holding period test, control test and short-term asset test) will be adjusted to cover equity investments/interests in private companies and non-corporate private entities.

Relaxation of anti-round tripping rules

To facilitate investment by resident investors in UFR funds, the following persons will be excluded from the anti-round tripping provisions:

• a resident individual;
• a resident fund exempt from profits tax under the UFR (exempted funds);
• a resident person who is not chargeable to profits tax, or whose profits from qualifying investments would not have been included in assessable profits had the assets been held, or the transactions undertaken, directly by that person (exempted person); and
• a resident person, being an interposed entity between (A) resident individuals, exempted funds, exempted persons or non-residents and (B) the fund, that:
  • is not a business undertaking for general commercial or industrial purposes;
  • does not carry on any trade or business in Hong Kong; and
  • at least 95% of its direct or indirect beneficial interest is owned by one or more resident individuals, exempted funds, exempted persons or non-residents.

Introduction of specific anti-round tripping rules

In light of the proposed inclusion of loans as qualifying investments, the Bill introduced new anti-round tripping rules 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 loans. Specifically, a financial institution, insurance company or person carrying on a money lending business or an intragroup financing business will be deemed to have derived assessable profits in respect of profits derived by the fund from loans if it:

• has, either alone or jointly with its associate(s), not less than 20% beneficial interest in a fund;
• has control or significant influence over a fund; or
• has any beneficial interest in a fund and is an associate of the fund.

Introduction of new tax reporting and economic substance requirements

Currently, the UFR operates on a self‑assessment basis, where funds that qualify tax exemption under the UFR do not have to perform any tax reporting in Hong Kong. Under the Bill, a new tax reporting mechanism was introduced, which requires fund managers or authorized representatives of funds, and their SPEs where applicable, to provide specified accounting information and supporting documents showing that the tax exemption conditions and economic substance requirements are satisfied.

To align with international standards against harmful tax practices, funds will be subject to economic substance requirements similar to those under the existing FIHV concessionary regime:

• an adequate average number of qualified employees, and in any event not fewer than two; and
• adequate annual operating expenditure incurred in Hong Kong, and in any event not less than HK$2 million.

 

Proposed Enhancements to the Tax Regime for FIHVs

As the tax concessionary regime for FIHVs is largely modelled on the UFR, similar enhancements will be introduced to the FIHV concessionary regime to maintain consistency across Hong Kong’s preferential tax framework, including:

• for purposes of the HK$240 million minimum assets threshold for eligible single family office (SFO), replacement of the net asset value (NAV) test with calculation of the aggregate value of qualifying investments managed by the SFO. It was specifically clarified that loans from holders of direct beneficial interests need not be deducted from the calculation (as opposed to the current approach where such loans are treated as financial liabilities and deducted from the NAV)
• expanded scope of qualifying investments
• expanded scope of eligible profits
• relaxation of tax exemption for family-owned SPEs (FSPEs)
• refinement of the scope of anti-abuse tests applicable to FIHV/FSPE's transactions in private companies
• introduction of 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 Carried Interest Tax Concession Regime

Hong Kong's existing carried interest tax concession regime was introduced in 2021, but it was viewed as too restrictive and commercially impractical. With a view to enhancing the competitiveness of Hong Kong against other fund management centres, the Hong Kong Government sought to improve the existing regime, by broadening the regime so it applies to modern asset classes and fund strategies, as well as simplifying and relaxing eligibility requirements that were preventing practical use of the concession.

Below is a summary of the key proposed amendments to the carried interest tax concession regime:

• Removal of Hong Kong Monetary Authority's (HKMA) certification requirement: the requirement for HKMA's certification of a fund has been removed.
• Removal of hurdle rate reference: reference to a hurdle rate for the distribution of carried interest has been removed. This provides better tax certainty for certain start-up funds or angel funds which may not be subject to a specific hurdle rate in their constitutive documents.
• Expanded scope of eligible profits: the source of profits of a fund which may give rise to eligible carried interest has been expanded beyond profits exempt from tax under UFR to include profits that are not chargeable to Hong Kong profits tax for reasons other than exemption under the UFR (e.g. offshore income), as well as any other taxable income. As such, carried interest derived from offshore income may still qualify even where the relevant fund does not rely on the UFR. It means fund managers of all types of tax-exempt fund and their employees can now benefit from the carried interest tax concessions.
• Expanded scope of "qualifying person": under the carried interest tax concession regime, only a "qualifying person" can receive and accrue eligible carried interest from a "qualifying payer". To align the regime with the expanded scope of funds covered by the UFR, the definition of qualifying person will be broadened to include unlicensed fund managers managing exempted funds that qualify for tax exemption under the UFR. This enhancement will extend access to the carried interest tax concession to a wider range of fund management structures.
• Broader definition of "qualifying payer": the "qualifying payer" of eligible carried interest has been broadened to include entities within the same group regardless of the entity type, to better align the tax concession regime with market practice.
• Removal of "paid through" requirement: the requirement for eligible carried interest to be "paid through the qualifying person" has been removed. This amendment is intended to facilitate arrangements under which carried interest is received through intermediary vehicles, such as carry vehicles or personal investment entities, on behalf of qualifying employees. The change recognizes the diverse structuring and distribution mechanisms commonly adopted in the funds industry and is expected to provide greater flexibility in the implementation of carried interest arrangements.

 

Implementation and Transitional Measure

Upon enactment of the Bill, the enhanced tax exemptions and concessions will apply retrospectively from 1 April 2025 (i.e. the year of assessment 2025/26). To facilitate implementation, the Inland Revenue Department (IRD) has introduced a transitional administrative arrangement under which taxpayers that expect to qualify for the proposed exemptions or concessions may file their profits tax returns for the year of assessment 2025/26 on that basis. Where revisions to a previously filed return are required as a result, taxpayers may notify the IRD in writing and submit the necessary amendments accordingly.

 

Looking Ahead

Given the proposed expansion of the above tax concession regimes, fund managers and family offices should consider undertaking a review of their structures and eligibility criteria, with the assistance of their tax advisers, to determine whether any restructuring or planning opportunities are available.

While the proposed enhancements are widely welcomed, the final form of the legislation and its practical operation will only become clearer once the legislative process is complete and further guidance is released by the IRD. Additional clarification may be provided through IRD's departmental guidance and practice notes or frequently asked questions, particularly in relation to the interpretation of the new provisions and their application in practice. Stakeholders should therefore continue to monitor developments closely. We will provide timely updates on any material changes to the Bill and any further guidance issued by the authorities.