Hong Kong Poised to Modernize Tax Framework to Attract Global Fund Managers

Hong Kong is actively reforming its preferential tax regimes following the publication of the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (Bill) on June 12, 2026. This comprehensive legislation cements Hong Kong’s position as Asia's premier asset management hub.

These legislative amendments apply retroactively from the year of assessment 2025-26 (commencing April 1, 2025). The framework codifies the Financial Services and Treasury Bureau's 2024 consultation proposals into concrete law, significantly upgrading three key areas:

• the Unified Fund Tax Exemption (UFE) regime
• Family-Owned Investment Holding Vehicle (FIHV) tax concessions
• carried interest tax relief provisions

Unified Fund Tax Exemption Regime Enhancements

The most significant change involves the broadening the definition of an eligible “fund”. The updated definition in the Bill includes pension funds, endowment funds, and single-investor “funds-of-one”. To qualify, a "fund-of-one" must hold a minimum asset value of HK$240 million under management, and the sole investor must not hold day-to-day control over asset management. Notably, loans injected by participating investors are excluded from asset deduction liabilities, making it easier to meet the threshold.

The scope of qualifying investments under the UFE has been vastly expanded. It now includes highly sought-after alternative assets such as direct lending and private credit instruments, interests in non-corporate private entities such as partnerships and Japanese silent partnerships, virtual assets, insurance-linked securities, precious metals (subject to a 20% portfolio cap), and specified commodities (subject to a 15% trade volume settlement cap).

Furthermore, the Bill completely eliminates the 5% threshold for incidental transactions. All profits derived from qualifying investments are tax exempt, regardless of whether it is incidental. This change removes a competitive disadvantage for private credit and fixed-income managers whose interest income was historically capped. The legislation also eases requirements for Special Purpose Entities (SPEs) granting them full tax exemption regardless of the fund's ownership percentage in co-investment scenarios, while expanding eligible SPE activities to include asset administration and financing.

Family Office and Carried Interest Reforms

The FIHV regime mirrors the UFE enhancements to maximize Hong Kong’s allure for ultra-high-net-worth families. The 5% incidental income cap is completely removed, switching the focus to total profits derived directly from Schedule 16C assets. However, the Bill introduces a strict anti-round tripping rule for private credit: if specified financial or money-lending institutions hold a 20% or greater interest in the fund (or any percentage if it is an associate), loan profits remain subject to standard Profits Tax.

For carried interest, the Bill radically streamlines fund management operations by completely cutting out the cumbersome Hong Kong Monetary Authority (HKMA) certification process and removing mandatory fund hurdle rates. Crucially, the concession has been expanded to explicitly include performance fees across all strategies (including hedge funds and private credit) and refines the rules to protect unlicensed fund managers of newly scoped “excepted funds”. Under these provisions, institutional structures like pension funds, endowment funds, and single-investor "funds-of-one" are legally deemed eligible by definition rather than by regulatory status. This statutory designation completely frees them from the historical mandate to route transactions through an SFC-licensed corporation, allowing global institutional allocators to retain their preferred internal or unlicensed advisory networks without stripping the underlying structure of its 0% tax relief status.

Furthermore, performance fees and carry linked to any Schedule 16C assets—which now formally includes digital assets, private credit, and insurance-linked securities—can now qualify for the effective 0% corporate and individual tax relief. Tax relief also covers carry distributed through customized carry vehicles or personal investment entities.

Key Takeaways

To qualify for tax benefits under the updated framework, funds must maintain at least two full-time employees in Hong Kong and incur at least HK$2 million in annual local operating expenses, which aligns with existing family office rules. 

The Inland Revenue Department (IRD) permits eligible fund managers to file their 2025-26 tax returns directly on the basis of the new concessions under immediate transitional administrative measures. The retroactive application eliminates the need for asset managers to delay portfolio structuring or wait for final legislative enactment. Tax benefits apply to all qualifying transactions and income earned from April 1, 2025, even if those activities occurred before the law is formally passed.

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