In brief
On 12 June 2026, Hong Kong published the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 ("Bill") in the Gazette. The Bill proposes enhancements to the preferential tax regimes for privately-offered funds and family-owned investment holding vehicles (FIHVs) managed by eligible single family offices, and carried interest, with a view to further supporting the development of Hong Kong's asset and wealth management industry.
Key enhancements
Unified tax regime for funds (UFR)
The Bill proposes various amendments to the UFR aimed at broadening its scope and providing greater flexibility and tax certainty.
Eligible funds and entities
The definition of "fund" will be expanded to cover (1) pension funds; (2) endowment funds; (3) funds with a governmental entity, central bank or international organisation as the sole investor; and (4) "funds-of-one" arrangements with a single investor and at least HKD 240 million1 of qualifying investments, provided that the investor does not have day-to-day control over the management of the property. These types of funds, together with sovereign wealth funds2 (collectively, the "excepted funds"), will not need to be managed by a specified person. Accordingly, excepted funds may be managed by fund managers that are not licensed entities or authorised financial institutions.
Profits eligible for tax exemption
The Bill proposes that all profits derived by funds and their special purpose entities (SPE) from qualifying investments will qualify for tax exemption, provided that the other specified conditions for exemption are met. The existing 5% limit on profits derived from incidental transactions will be removed.
The scope of qualifying investments will also be expanded to include loans, equity interests in non-corporate private entities (e.g., partnerships)3, immovable property situated outside Hong Kong, insurance-linked securities, digital assets4, precious metals5, commodities in connection with and incidental to the trading of OTC derivative products or futures contracts6, carbon credits, and emission allowance and derivatives.
At the same time, the Bill introduces an exclusion list, under which specified income (e.g., income derived from private companies engaged in trading or developing immovable property in Hong Kong) will be carved out from the tax exemption regime.
Under the existing regime, tax exemption is available to a fund's SPE only to the extent of the fund's ownership in the SPE. The Bill proposes to grant tax exemption to all profits of a fund's SPE derived from qualifying investments, even if the SPE is only partially held by the fund and irrespective of the tax status of any co‑investor, provided that the other specified conditions for exemption are met.
New economic substance and reporting requirements
To qualify for tax exemption, the Bill introduces economic substance requirements, under which a fund must have an adequate number of full-time qualified employees7 carrying out investment management activities for the fund in Hong Kong and incur an adequate amount of operating expenditure8 for such purpose.
On the administrative front, the Bill introduces a tax reporting mechanism under which a designated person, such as the fund manager, must file an initial notification and annual notifications with the Inland Revenue Department (IRD). These notifications must include prescribed information, including accounting data of the fund and any applicable SPE, demonstrating that the conditions for tax exemption have been satisfied. The IRD will provide further details of the reporting arrangements after the amendment ordinance has been enacted.
Tax concession regime for FIHVs
As the tax concession regime for FIHVs is largely modelled on the UFR, the Bill introduces similar enhancements to the FIHV tax regime, including the removal of the 5% limit for "incidental transactions", the expansion of the scope of qualifying investments, calculation of the aggregate value of qualifying investments managed by an eligible single family office (e.g., shareholder's loan needs not be deducted from the calculation of the relevant value), and treatment of family-owned SPEs.
Tax concession regime for carried interest
The Bill proposes various enhancements to the tax concession regime for carried interest, which currently provides: (i) profits tax exemption for eligible carried interest received by a qualifying person providing investment management services to a fund in Hong Kong; and (ii) salaries tax concession for eligible carried interest received by a qualifying employee providing investment management services in Hong Kong for or on behalf of a qualifying person for a fund. The proposed amendments are intended to attract more funds to establish or expand operations in Hong Kong and to promote broader investment management and related activities in Hong Kong.
Eligible carried interest
The scope of transactions giving rise to "eligible carried interest" will be expanded beyond private equity investments to cover other types of qualifying transactions of a fund falling within the UFR, which no longer needs to be certified by the Hong Kong Monetary Authority. The types of profits giving rise to eligible carried interest will also be expanded beyond profits which are exempt from tax under the UFR to include other profits of the fund, whether or not they are taxable. In addition, the requirement that a carried interest be received upon the fulfilment of a hurdle rate stipulated in the fund's constitutive documents will be removed.
However, the Bill also introduces a new condition for eligible carried interest. Specifically, the carried interest must be received by virtue of an entitlement to a share of a fund's profits (a "specified right") in accordance with the fund's constitutive documents or an investment management services agreement. Such entitlement must not be attributable to any capital contribution to the fund or discretionary. In other words, the carried interest must represent a genuine profits-based return derived from the provision of investment management services and contingent on fund performance.
Payment of eligible carried interest
As regards "qualifying persons" who may receive eligible carried interest, the Bill proposes to refine the definition to include unlicensed fund managers of excepted funds.
As for "qualifying employees", the Bill proposes to broaden the scope of this definition to cover individuals employed by a qualifying person or by an entity within the same group of the qualifying person, regardless of their legal form.
The Bill further proposes that eligible carried interest may be: (i) paid directly by a qualifying payer (e.g., a fund) to a qualifying employee, without having to be paid through a qualifying person; or (ii) received by a qualifying employee through an entity wholly or partly owned by that employee (or received through a carry vehicle).
Implementation timeline
The Bill has been introduced into the Legislative Council on 26 June 2026. Subject to legislative enactment, the enhanced tax concession regimes will take effect retrospectively from 1 April 2025 (i.e., from the year of assessment 2025/26).
Key takeaways
Taken together, the proposed amendments under the Bill represent a significant reform of Hong Kong's existing tax concession regimes for funds, FIHVs and carried interest. The refined regimes substantially expand the scope of tax concessions, provide greater operational flexibility and tax certainty, and align the rules more closely with commercial fund structures. These enhancements are expected to strengthen Hong Kong's competitiveness as a leading asset and wealth management hub.
Fund managers and family offices should consider reviewing their existing structures and investment strategies in light of the enhanced regimes. In particular, the amendments may create opportunities to streamline existing structures, broaden investment scope, and restructure remuneration arrangements. Taxpayers eligible for the proposed tax concessions for the year of assessment 2025/26 may also notify the IRD of any required revisions to their tax returns once the amendment ordinance has been enacted.
For further information, please reach out to our lawyers set out under "Contact Us" or your usual Baker & McKenzie contact.
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1 Loans from participating persons will not be deducted when calculating the value of qualifying investments. Loans from other parties, such as bank loans, will continue to be deducted.
2 These funds are already covered under the existing UFR.
3 The four tests applicable to investments in private companies under the existing regime (i.e., the immovable property test, holding period test, control test and short-term asset test) will be revised to cover equity interests in non-corporate private entities.
4 These include any virtual asset as defined under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), subject to certain exclusions.
5 These are subject to a cap of 20% of the total investment portfolio. The cap does not apply to gold or silver traded on the Hong Kong Gold Exchange.
6 The trade volume must not exceed 15% of the total trade volume of the relevant commodities and OTC derivative products or futures contracts traded during the basis period of a year of assessment.
7 The number must not be less than two.
8 The amount must not be less than HKD 2 million during the relevant basis period.