On 12 June 2026, the long-awaited Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (Bill) was gazetted.
This legislative proposal forms a critical component of the Government’s strategic initiative to consolidate Hong Kong’s status as a pre-eminent international asset and wealth management centre, with a view to enhance its competitive edge and attractiveness against other major financial jurisdictions.
The Bill introduces substantive liberalisations across three key tax concessionary regimes:
- The Unified Tax Regime for Funds (UFE);
- The regime for family-owned investment holding vehicles (FIHVs); and
- The tax concession regime for carried interest.
Key proposed changes include the following:
Key changes to the UFE
- Expanding definition of a “fund”: Under the Bill, the definition of a “fund” is expanded to cover pension funds, endowment funds of section 88 charitable institutions, a fund with a government entity, a central bank or an international organisation as its sole investor, and importantly, a single investor arrangement provided that the value of qualifying investments managed is not less than HK$240 million (subject to the investor not having day-to-day control over the management of the property) (together with sovereign wealth funds shall hereinafter collectively be referred to as “excepted funds”). To be eligible under the current UFE regime, a fund must engage a specified person (i.e. a type 9 (asset management) licensed or registered entity). Under the Bill, the excepted funds do not need to be managed by a specified person. The proposed change in particular aims to allow bespoke structures for institutional and ultra-high-net-worth investors to fall within the scope of UFE.
- Expanding Qualifying Investments: The Bill introduces an expansion of eligible investments from the existing list of qualifying investments, to include loans (including private credit investments), digital assets, immovable property situated outside Hong Kong, emission derivatives/emission allowance and carbon credits, insurance-linked securities, equity interests in non-corporate private entities, precious metals (subject to 20% limit of the total investment portfolio for those other than gold or silver traded on the Hong Kong Gold Exchange), and specified commodities (i.e. those in connection with and incidental to the trading of over-the-counter (OTC) derivative products or futures contracts. The expansion of the list of qualifying investments is a significant development, particularly in respect of including private credit and debt funds, which aims to bring Hong Kong on par with competing jurisdictions which offers tax certainty for such types of investment strategies.
- Removing Incidental Transactions Threshold: Under the current regime, a fund (or its special purpose entity (SPE)) can be exempt from profits tax on income from incidental transactions (i.e. transactions incidental to the carrying out qualifying transactions), subject to such incidental profits cannot exceed 5% of the total transaction proceeds. The 5% threshold requirement for incidental transactions are proposed to be removed, however, to be eligible for tax exemption, certain conditions must be fulfilled.
- Relaxing Requirements for SPE: The Bill seeks to expand the functions of an SPE to allow activities related to the acquisition, holding, administration and disposal of investee private companies and/or interposed SPEs, and any incidental activities. In addition, tax exemption for the SPE is proposed to be granted regardless of the fund’s ownership in such SPE and a co-investor’s tax status, subject to anti-round tripping provisions in order to facilitate co-investment arrangements.
- Anti-round tripping: The Bill provides for specific exclusions from the current anti-round tripping provisions which may deem certain Hong Kong residents investing in a fund to be taxable. In addition, in consideration of the expansion of the UFE to cover loans as a qualifying investment, the Bill introduces new specific anti-round tripping provisions where tax-exempt profits of the fund derive from loans (and related income).
- Economic substance requirement: In line with international tax standards, the Bill proposes to implement economic substance requirements for funds in terms of local employment and spending, with the proposed thresholds being an average number of qualified employees as considered adequate to the Inland Revenue Department (IRD) and in any event of not less than 2, and a total annual operating expenditure incurred in Hong Kong being adequate in the opinion of the IRD and in any event not less than HK$2 million.
- Tax reporting: As part of the enhanced UFE, the Bill proposes the implementation of a tax reporting mechanism for funds and their SPEs benefiting from the enhanced UFE to provide certain accounting information on funds and SPEs concerns and to demonstrate tax exemption conditions and economic substance requirements are met. The IRD is expected to provide further guidance on such reporting or notification procedure in due course.
Key changes to the FIHVs
Given that the tax concession for FIHVs is largely modelled on the UFE, similar enhancements as those proposed under the UFE regime are introduced for the FIHVs.
Key changes to the carried interest tax regime
- Removal of HKMA certification: Under the current tax concessionary regime for eligible carried interest, a fund must go through a certification process implemented by the Hong Kong Monetary Authority (HKMA). Such certification requirement is removed under the Bill.
- Broadening of scope of qualifying income: Eligibility for carried interest incentives are proposed to be no longer confined to profits from private equity transactions but would extend to profits arising from all asset classes that fall within the UFE, non-taxable income such as dividends and offshore income and the fund’s other taxable profits. This would mean that other than benefiting private equity managers, investment managers managing hedge fund portfolios could also enjoy tax concessions on performance fees, subject to conditions.
- Removal of hurdle rate requirement: Currently, to qualify for the carried interest tax concession, there must be a hurdle rate (preferred rate of return) in the carried interest arrangement. Under the Bill, the requirement for a hurdle rate will be removed.
- Application to employees: The tax concession regime is also extended to employees who have a contractual right to share in carried interest or performance fee allowing key investment team members to benefit in a similar manner to the investment manager or general partner entity. The move demonstrates the Government’s dedication to attracting and retaining talent in Hong Kong.
What fund managers should be doing
The Bill represents a significant enhancement of Hong Kong’s tax framework for the asset and wealth management industry. By introducing new measures, the Government is seeking to reinforce Hong Kong’s position as Asia’s premier international asset and wealth management centre and to reinforce Hong Kong as a key capital gateway for the Greater China region.
To benefit from the enhanced tax regime, fund managers should commence a full review of their existing fund structures (or discretionary mandates) and documentation. Given the expanded coverage of the UFE, fund managers may be able to take advantage of more simple onshore structures, in particular in order to fulfil economic substance requirements under the enhanced UFE.
In addition, the tax concessions with respect to carried interest and performance fee, would require fund documentation, fund agreements and employment contracts to reflect and clearly contain legally binding terms meeting the pre-requisite conditions under the proposed Bill in order to fulfil the IRD’s expectations (e.g. containing contractual rights to share in carried interest or performance fees, such fees being subject to significant risk, etc).
At Deacons, we work closely with tax advisers in order to provide a comprehensive solution to our clients. Please reach out to us to learn more.
