Hong Kong has transformed into one of Asia’s most competitive jurisdictions for private equity fund structuring, offering a sophisticated regulatory framework combined with compelling tax incentives. With the introduction of the Limited Partnership Fund regime in 2020, coupled with the Unified Fund Exemption and zero-rate carried interest concession, Hong Kong now positions itself as a viable alternative to traditional offshore fund domiciles like the Cayman Islands and Delaware. This comprehensive guide examines the tax structuring considerations for private equity transactions in Hong Kong, analyzing the interplay between the LPF regime, UFE exemptions, carried interest concessions, and recent 2024 regulatory enhancements.

The Limited Partnership Fund (LPF) Regime

The Limited Partnership Fund Ordinance (Cap. 637) came into operation on August 31, 2020, establishing Hong Kong’s first bespoke limited partnership regime specifically designed for private investment funds. This regime was introduced to enhance Hong Kong’s position as an international asset and wealth management center by providing a familiar and tax-efficient fund vehicle for private equity, venture capital, and alternative asset managers.

Structural Requirements and Commercial Flexibility

An LPF must satisfy specific structural requirements to qualify for registration, including at least one General Partner with unlimited liability, at least one Limited Partner, an appointed Investment Manager, a Responsible Person, an Independent Auditor, and a Registered Office in Hong Kong. The regime provides substantial commercial flexibility, allowing fund managers to tailor the Limited Partnership Agreement to accommodate:

• Flexible capital call structures customized to investment timelines
• Customizable management fee arrangements according to market practice
• Customizable waterfall structures including European-style and American-style distributions
• Ability to establish advisory committees and investor consent requirements
• No statutory investment restrictions, allowing diverse strategies

Unified Fund Exemption (UFE) Regime

The Unified Fund Exemption regime, introduced by the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019 and effective from April 1, 2019, provides comprehensive tax exemption for qualifying funds on gains from transactions in specified assets. This regime replaced and consolidated previous offshore fund and onshore fund exemption schemes, creating a unified approach applicable to all fund structures regardless of domicile.

Current Qualifying Assets and 2024 Proposed Expansion

Schedule 16C currently encompasses traditional investment assets including securities, derivatives, foreign exchange contracts, exchange-traded commodities, and shares in authorized collective investment schemes. However, the November 2024 consultation proposes significant expansions to include contemporary asset classes critical to modern private equity strategies:

Carried Interest Tax Concession

The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021, enacted on May 7, 2021, introduced a groundbreaking 0% tax rate on qualifying carried interest. This concession applies to eligible carried interest received or accrued on or after April 1, 2020, and comprises both profits tax and salaries tax benefits.

2024 Proposed Reforms: Removing Barriers to Adoption

Despite the attractive 0% rate, the carried interest concession has experienced limited adoption due to complex qualifying conditions. The November 2024 consultation proposes transformative reforms to enhance accessibility:

1. Elimination of HKMA Certification: Removes the requirement for HKMA certification, significantly reducing compliance costs and accelerating access to the concession.
2. Expansion Beyond Private Equity: Extends the carried interest concession to cover carried interest arising from all types of qualifying assets under the expanded Schedule 16C.
3. Removal of Hurdle Rate Requirement: Eliminates the requirement for a hurdle rate, making the concession accessible to venture capital and early-stage investment funds.
4. Flexible Distribution Structures: Allows distributions through more flexible arrangements including offshore general partners and multi-tier holding structures.

SPV Structuring Considerations

Special Purpose Vehicles (SPVs) are fundamental to private equity deal structuring, serving as investment-holding entities that facilitate leveraged buyouts, co-investment arrangements, and cross-border acquisitions. The November 2024 consultation proposes expanding the range of permissible SPV activities to cover typical functions related to the acquisition, holding, administering, and disposal of investee private companies.

Co-Investment Structures and Offshore SPV Considerations

The consultation proposes a new de minimis rule whereby the SPV will be fully exempt if it is at least 95% owned by the fund. This rule provides certainty for common co-investment structures where founders, management, or co-investment vehicles hold minority stakes alongside the primary fund vehicle.

Exit Taxation Planning

Hong Kong does not impose capital gains tax, a fundamental advantage that positions the jurisdiction favorably for private equity exit planning. Gains from the disposal of capital assets—including equity interests in portfolio companies—are generally not subject to Hong Kong taxation.

Tax Certainty Enhancement Scheme (Effective January 1, 2024)

To provide upfront certainty on onshore equity disposal gains, Hong Kong introduced the Tax Certainty Enhancement Scheme effective January 1, 2024. This safe harbor mechanism allows gains on disposal of equity interests to be deemed non-taxable capital gains if specific objective criteria are met:

• Ownership Threshold: At least 15% of the total equity interest in the investee entity was held continuously
• Holding Period: The equity interest was held for a continuous period of at least 24 months prior to disposal
• Disposal Timing: Applies to disposals occurring on or after January 1, 2024

Foreign-Sourced Income Exemption (FSIE) Regime Considerations

Effective from January 1, 2023, and expanded from January 1, 2024, the refined Foreign-Sourced Income Exemption regime addresses certain types of offshore income received in Hong Kong by multinational enterprise entities. Under the FSIE regime, four types of offshore income are deemed to be sourced from Hong Kong and potentially chargeable to profits tax if received in Hong Kong: interest income, dividend income, disposal gains from equity interests, and intellectual property income.

Comparative Advantages: Hong Kong vs. Traditional Fund Domiciles

Practical Implementation Considerations

Structuring Checklist for Hong Kong PE Funds

1. Entity Selection and Registration: Register as a Limited Partnership Fund with the Companies Registry and ensure LPF structure includes all required components.
2. UFE Qualification: Confirm investment strategy focuses on specified assets under Schedule 16C and establish substance in Hong Kong meeting proposed minimum requirements.
3. Carried Interest Optimization: Structure carried interest allocations to qualify under proposed expanded regime and ensure investment management services are performed in Hong Kong.
4. SPV Structuring: Determine whether Hong Kong or offshore SPVs are optimal given financing, regulatory, and tax considerations.
5. Exit Planning: Maintain minimum 15% equity interests and track holding periods to ensure 24-month threshold is satisfied prior to contemplated exits.

Recent Regulatory Developments and Future Outlook

The Financial Services and Treasury Bureau’s November 2024 consultation represents the most significant proposed enhancement to Hong Kong’s private equity tax framework since the introduction of the LPF regime. Following the conclusion of the consultation period, the Hong Kong government is expected to introduce legislative amendments in 2025. The proposed changes are likely to be enacted through amendments to the Inland Revenue Ordinance.

Hong Kong has established a comprehensive and increasingly competitive tax framework for private equity fund structuring. The Limited Partnership Fund regime provides a familiar and flexible fund vehicle, while the Unified Fund Exemption delivers broad tax exemption on investment gains. The 0% carried interest concession, particularly if enhanced as proposed in the November 2024 consultation, positions Hong Kong among the world’s most attractive jurisdictions for fund manager compensation. For private equity managers evaluating fund domicile options, Hong Kong offers a compelling combination of tax efficiency, regulatory credibility, geographic proximity to Asian investment opportunities, and access to deep capital markets.