đź“‹ Key Facts at a Glance
- Zero Tax on Fund Profits: Hong Kong’s Unified Fund Exemption (UFE) regime provides 0% profits tax on qualifying fund transactions, effective from April 1, 2019
- Carried Interest Tax Concession: 0% profits tax rate on eligible carried interest received on or after April 1, 2020
- Modern Fund Structures: Open-ended Fund Companies (OFCs) and Limited Partnership Funds (LPFs) offer corporate and partnership structures with full tax benefits
- Family Office Incentives: Family Investment Holding Vehicle (FIHV) regime grants 0% profits tax on qualifying transactions for family-owned investment vehicles
- Major 2024 Enhancements: Proposed expansions to include virtual assets, private credit, carbon credits, and insurance-linked securities
- Competitive Tax Rates: Standard profits tax is 8.25% on first HK$2 million, 16.5% on remainder for corporations
Imagine a financial hub where fund managers pay zero tax on investment profits, carried interest is completely tax-exempt, and family offices enjoy special tax concessions. This isn’t a tax haven—it’s Hong Kong in 2024. Over the past five years, Hong Kong has transformed into one of Asia’s most competitive fund management centers through strategic tax reforms and modern regulatory frameworks. With over 500 registered Open-ended Fund Companies and growing interest from global family offices, Hong Kong is attracting international capital like never before.
Hong Kong’s Tax Transformation: From Traditional Hub to Fund Management Powerhouse
Hong Kong’s journey from a traditional financial center to a premier fund management hub has been remarkable. The introduction of the Unified Fund Exemption (UFE) regime in 2019 marked a turning point, followed by carried interest tax concessions in 2021 and modern fund structures like OFCs and LPFs. These reforms have positioned Hong Kong to compete head-to-head with Singapore, Luxembourg, and the Cayman Islands for global fund management business.
The Unified Fund Exemption (UFE) Regime: Zero Tax on Fund Profits
What is the UFE and How Does It Work?
The Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019 established Hong Kong’s comprehensive tax exemption framework for investment funds. Effective from April 1, 2019, the UFE provides a unified 0% profits tax rate on qualifying transactions, replacing previous fragmented offshore fund exemption regimes.
Under the UFE, qualifying funds benefit from complete exemption from Hong Kong profits tax (normally 8.25% on first HK$2 million, 16.5% on remainder for corporations) on profits from specified transactions. This applies regardless of fund structure, location of management, fund size, or investor residency.
Qualifying Conditions for UFE Benefits
| Requirement | Details |
|---|---|
| Collective Investment Scheme | Must pool investor funds to invest in a diversified portfolio |
| Multiple Investors | At least two non-associate investors required |
| Limited Control | No single investor with day-to-day control (typically ≤50% voting rights) |
| Specified Transactions | Profits must arise from transactions in Schedule 16C specified assets |
| Specified Person Requirement | Transactions must involve SFC-licensed managers or qualified investment funds |
Current Specified Assets Under UFE
- Securities (stocks, bonds, debentures)
- Shares or interests in private companies (subject to short-term assets test)
- Futures contracts and leveraged foreign exchange contracts
- Foreign currencies
- Deposits outside Hong Kong banks
- Certificates of deposit issued outside Hong Kong
- Exchange-traded commodities
Major 2024 Proposed Enhancements
In November 2024, the Financial Services and Treasury Bureau released a consultation paper proposing significant expansions to the UFE regime. These changes aim to keep Hong Kong competitive and accommodate evolving investment strategies:
- Virtual Assets: Cryptocurrencies and digital tokens, positioning Hong Kong as Asia’s digital asset hub
- Overseas Real Estate: Immovable property located outside Hong Kong
- ESG Investments: Emission derivatives, carbon credits, and allowances
- Insurance-Linked Securities: Catastrophe bonds and insurance risk transfer instruments
- Private Credit: Loan and private credit investments—the fastest-growing alternative asset class
- Non-Corporate Entities: Interests in partnerships and other unincorporated structures
Carried Interest Tax Concession: 0% Tax on Performance Fees
Current Carried Interest Regime
The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 introduced a groundbreaking 0% profits tax rate on eligible carried interest, retroactive to April 1, 2020. This makes Hong Kong one of the few jurisdictions globally with such favorable tax treatment for fund managers’ performance fees.
| Beneficiary | Tax Treatment | Effective Rate |
|---|---|---|
| Corporations | Exempt from profits tax | 0% (vs. standard 8.25%/16.5%) |
| Individuals | 100% deduction against assessable income | 0% (vs. progressive 2-17%) |
2024 Proposed Simplifications
The November 2024 consultation proposes transformative changes to make the carried interest concession more accessible:
| Current Requirement | Proposed Change | Impact |
|---|---|---|
| HKMA certification with auditor’s report | Remove HKMA certification requirement | Simplified compliance, reduced costs |
| Limited to private equity transactions | Expand to all UFE specified assets | Opens to hedge funds, venture capital, private credit |
| Payment through qualifying person required | Remove payment structure restrictions | Allows flexible offshore carry vehicles |
Modern Fund Structures: OFCs vs. LPFs
Open-Ended Fund Companies (OFCs)
Effective from July 30, 2018, OFCs provide Hong Kong with a modern corporate fund structure comparable to those in Luxembourg, Ireland, and the Cayman Islands. As of early 2025, Hong Kong had over 500 registered OFCs, demonstrating strong adoption.
| Feature | Public OFC | Private OFC |
|---|---|---|
| Authorization | SFC authorization required | No SFC authorization needed |
| Investor Type | Retail and professional investors | Professional investors only |
| Investment Scope | SFC investment restrictions apply | Flexible investment scope |
| Disclosure Requirements | Stricter disclosure obligations | More flexible framework |
Limited Partnership Funds (LPFs)
The Limited Partnership Fund Ordinance came into force on August 31, 2020, introducing a purpose-built partnership structure appealing to fund managers familiar with US and Cayman Islands structures.
| Party | Responsibilities | Liability |
|---|---|---|
| General Partner (GP) | Fund management and control; asset custody | Unlimited liability |
| Limited Partner (LP) | Passive investor with distribution rights | Limited to agreed contribution |
| Investment Manager | Day-to-day investment management | As specified in agreements |
Tax Benefits for Both Structures
- Profits tax exemption under UFE for qualifying transactions
- No withholding tax on distributions to investors
- No capital gains tax (Hong Kong doesn’t impose CGT)
- No VAT or sales tax
- Eligible for carried interest concessions
Family Investment Holding Vehicle (FIHV) Regime
Enacted through the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2022, Hong Kong’s FIHV regime provides comprehensive tax relief for ultra-high-net-worth families establishing single family offices in Hong Kong.
Key Tax Benefits
| Benefit Type | Details |
|---|---|
| Qualifying Transactions | 0% profits tax on assessable profits from Schedule 16C assets |
| Incidental Transactions | 0% tax on incidental transactions (subject to 5% threshold) |
| No Capital Gains Tax | Hong Kong doesn’t impose capital gains tax |
| No Inheritance Tax | No estate duty or inheritance tax (abolished 2006) |
| Territorial System | Only Hong Kong-sourced income taxable; offshore income tax-free |
Substance Requirements
To qualify for FIHV concessions, family offices must meet specific substance requirements:
- Employ at least two full-time qualified employees in Hong Kong (can be outsourced)
- Incur at least HK$2 million in operating expenditure annually in Hong Kong (can be outsourced)
- Be managed by an eligible single family office
- Conduct qualifying transactions in specified assets
Comparative Tax Advantages: Hong Kong vs. Standard Rates
| Tax Type | Standard Rate | Fund/Family Office Rate | Savings |
|---|---|---|---|
| Profits Tax | 8.25% on first HK$2M, 16.5% remainder | 0% (UFE/FIHV) | Up to 16.5 percentage points |
| Carried Interest | 8.25%/16.5% (corporate) or 2-17% (individual) | 0% (with concession) | Up to 17 percentage points |
| Capital Gains Tax | 0% | 0% | N/A – no CGT in Hong Kong |
| Withholding Tax | 0% | 0% | N/A – no WHT on dividends/interest |
| Inheritance/Estate Tax | 0% | 0% | N/A – abolished in 2006 |
Strategic Implications and Compliance Considerations
Choosing Between OFC and LPF Structures
OFC Advantages: Corporate form familiar to Asian investors, variable capital structure for flexible redemptions, well-established UCITS-equivalent framework, re-domiciliation option for existing funds.
LPF Advantages: Partnership structure familiar to US investors, flexible governance through LPA customization, traditional private equity/venture capital structure, clear GP/LP role separation.
Substance and Compliance Requirements
- Board meetings should be held in Hong Kong with independent directors
- Investment decisions should be made in Hong Kong by qualified personnel
- Fund administration and custody should involve Hong Kong service providers
- Adequate resources including office space, staff, and operating expenses
- Economic substance requirements may be introduced following 2024 consultations
Impact of OECD Pillar Two (Global Minimum Tax)
Hong Kong implemented the OECD’s global minimum tax (Pillar Two) effective January 1, 2025. Key points for fund managers:
- Applies to multinational groups with annual revenue ≥ EUR 750 million
- Ensures minimum effective tax rate of 15%
- Investment funds are generally excluded under “excluded entity” provisions
- Smaller funds and local managers retain full benefits of Hong Kong’s preferential regimes
Future Outlook: Hong Kong’s Competitive Positioning
The proposed 2024 enhancements position Hong Kong to compete effectively in key growth areas:
- Virtual Assets: Competing with Switzerland and Dubai for crypto hedge funds
- Private Credit: Accommodating the fastest-growing alternative asset class
- Carbon Markets: Recognizing climate finance and ESG-focused strategies
- Simplified Carried Interest: Making concessions accessible to hedge funds and multi-strategy platforms
âś… Key Takeaways
- Hong Kong’s Unified Fund Exemption (UFE) provides 0% profits tax on qualifying transactions, with proposed expansions to include virtual assets, private credit, and carbon credits
- Carried interest tax concessions offer 0% effective tax rate, with proposed simplifications removing HKMA certification requirements
- OFCs and LPFs provide modern corporate and partnership structures with full tax benefits and re-domiciliation options
- Family Investment Holding Vehicle (FIHV) regime grants 0% profits tax with retroactive application from 2022/2023 and no pre-approval required
- Hong Kong combines zero capital gains tax, no withholding tax, territorial tax system, and strategic China access
- Proposed 2024-2026 reforms will enhance Hong Kong’s position in alternative assets, digital assets, and private credit management
Hong Kong has strategically positioned itself as Asia’s premier fund management center through comprehensive tax reforms and modern regulatory frameworks. With zero tax on fund profits, tax-exempt carried interest, and family office concessions, Hong Kong offers a compelling combination of tax efficiency, regulatory sophistication, and strategic access to Chinese markets. As the proposed 2024 enhancements
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