Hong Kong has strategically positioned itself as Asia’s premier destination for family offices and investment funds through a sophisticated suite of tax incentives. With the Unified Fund Exemption regime, dedicated Family-owned Investment Holding Vehicle concessions, and enhanced carried interest provisions, Hong Kong offers one of the most competitive tax environments for wealth management in the region. This comprehensive guide explores these regimes and the transformative enhancements proposed in late 2024 that could reshape Hong Kong’s appeal to global family offices.

Hong Kong’s Unified Fund Exemption (UFE) Regime: The Foundation

Effective from April 1, 2019, the Unified Fund Exemption regime provides a comprehensive tax framework for all funds operating in Hong Kong. This landmark legislation consolidated previously fragmented exemptions into a single, unified system that applies equally to onshore and offshore funds, offering a 0% effective tax rate on qualifying transactions.

Qualifying Conditions for Tax Exemption

To benefit from the UFE regime’s 0% profits tax rate, a fund must satisfy three core conditions throughout the assessment year:

1. Fund Definition: The entity must meet the statutory definition of a “fund” under the Inland Revenue Ordinance, which includes collective investment schemes pooling investor capital for investment purposes.
2. Qualifying Transactions: Assessable profits must arise from qualifying transactions in specified assets (Schedule 16C assets), with incidental transactions subject to a 5% threshold of total receipts.
3. Hong Kong Nexus: Qualifying transactions must be either carried out or arranged in Hong Kong by a “specified person” (typically an SFC-licensed corporation), or the fund qualifies as a “qualified investment fund” with specific investor and capital commitment requirements.

2024 Proposed Enhancements: Expanding the Investment Universe

In November 2024, the Financial Services and Treasury Bureau released a comprehensive consultation paper detailing transformative improvements to the UFE regime. These proposed changes aim to modernize Hong Kong’s tax framework and enhance its competitiveness against regional rivals like Singapore.

Key proposed enhancements include:

• Expanded Qualifying Investments: Broadening scope to include private credit investments, virtual assets, offshore immovable property, carbon credits, insurance-linked securities, and interests in non-corporate private entities
• Enhanced SPE Flexibility: Expanding permitted activities of Special Purpose Entities to include acquisition, holding, administration, and disposal of investee private companies and other SPEs
• Removal of 5% Threshold: Eliminating the incidental transaction threshold, allowing all income from qualifying investments to be tax-exempt
• New Substantial Activities Requirements: Introducing mandatory requirements mirroring the FIHV regime: at least two qualified employees in Hong Kong and minimum annual operating expenditure of HK$2 million
• Enhanced Reporting: New tax reporting mechanisms requiring funds and SPEs to submit specific accounting data demonstrating compliance

Family-Owned Investment Holding Vehicle (FIHV) Tax Concessions

Recognizing the growing importance of single family offices in wealth management, Hong Kong introduced dedicated tax concessions through legislation that came into operation on May 19, 2023, with retrospective application to years of assessment commencing on or after April 1, 2022.

Eligibility Requirements for FIHVs

The FIHV regime provides certainty that investment profits earned by eligible family-owned vehicles will be exempted from profits tax at a 0% concessionary rate, with no pre-approval process required.

Operational Flexibility and Global Investment Freedom

The FIHV regime offers significant operational flexibility:

• No Local Investment Requirements: Single Family Offices can invest globally without restrictions
• Flexible Employment: No requirement for employees to be Hong Kong citizens or permanent residents
• Outsourcing Permitted: Core Income Generating Activities can be outsourced to eligible SFOs
• No SFC License Required: For SFOs providing services exclusively to family members

Fund Structures: OFCs vs. LPFs

Hong Kong offers two primary fund structures that qualify for tax exemptions: Open-Ended Fund Companies (OFCs) and Limited Partnership Funds (LPFs). Each offers distinct advantages depending on investment strategy and operational requirements.

Carried Interest Tax Concessions: Proposed Reforms

Carried interest—the performance-based compensation that fund managers receive as a share of investment profits—represents a critical component of private equity and alternative asset manager compensation. Hong Kong’s proposed reforms aim to make the 0% tax rate on eligible carried interest more accessible and practical.

Key Proposed Changes

• Expanded Scope: Extending from private equity transactions only to cover all types of qualifying assets under the UFE regime
• Removal of HKMA Certification: Eliminating the burdensome HKMA certification requirement and auditor’s reports
• Greater Payment Flexibility: Removing the requirement for carried interest to be distributed through a “qualifying person”
• Elimination of Hurdle Rate: Removing the mandatory preferred return threshold that investors must achieve
• Retrospective Application: Expected to apply retrospectively once enacted into law in 2025

Compliance and Practical Considerations

Foreign-Sourced Income Exemption (FSIE) Regime

Effective from January 1, 2023 (with expanded scope from January 1, 2024), Hong Kong’s FSIE regime requires careful analysis of cross-border income flows. The regime covers dividends, interest, disposal gains from equity interests, and intellectual property income. Fund structures benefiting from the UFE or FIHV regimes generally qualify for exemptions, but professional advice is essential.

Multi-Family Office Considerations

Multi-family offices (MFOs) that manage assets for multiple unrelated family groups follow different pathways to tax efficiency. While MFOs cannot access the FIHV regime (designed for single family structures), they can utilize the UFE regime’s profits tax exemption when qualifying transactions are carried out or arranged in Hong Kong by an SFC-licensed corporation.

Re-domiciliation Opportunities

Both OFC and LPF regimes permit re-domiciliation of foreign investment funds to Hong Kong. For tax purposes, re-domiciliation does not constitute a transfer of assets or change in beneficial ownership, avoiding Hong Kong stamp duty implications. This creates attractive opportunities for existing offshore funds seeking to establish Hong Kong tax residency.

Hong Kong’s comprehensive tax treatment of family office investment funds represents a sophisticated, internationally competitive framework designed to attract and retain global wealth management activities. The combination of the Unified Fund Exemption regime, dedicated FIHV concessions, carried interest provisions, and proposed 2024 enhancements creates one of the most favorable tax environments for family offices and investment funds worldwide. As legislative reforms progress through 2025, Hong Kong is poised to solidify its position as Asia’s leading destination for family wealth management and alternative asset investment.