Hong Kong’s Tax Treatment of Family Office Investment Funds: What You Need to Know

Hong Kong has positioned itself as Asia’s premier destination for family offices and investment funds through a comprehensive suite of tax incentives. With the introduction of the Unified Fund Exemption regime, the Family-owned Investment Holding Vehicle (FIHV) tax concession, and enhanced carried interest provisions, Hong Kong offers one of the most competitive tax environments for wealth management in the region. This article provides a detailed analysis of these regimes and the significant enhancements proposed in late 2024.

Understanding Hong Kong’s Unified Fund Exemption Regime

The Foundation of Fund Taxation in Hong Kong

The Unified Fund Exemption (UFE) regime, effective from 1 April 2019 under the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019, provides a unified tax treatment for all funds operating in Hong Kong. This landmark legislation consolidated previously fragmented exemptions into a single, comprehensive framework that applies equally to onshore and offshore funds.

Under the UFE regime, a fund can achieve complete exemption from Hong Kong profits tax on qualifying transactions, regardless of its tax residence, structure, size, or investment purpose. This represents a 0% effective tax rate on eligible investment profits—a significant advantage for fund managers and family offices seeking tax efficiency.

Qualifying Conditions for Tax Exemption

To benefit from the UFE, a fund must satisfy three core conditions throughout the year of assessment:

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: The 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: The qualifying transactions must be either: (a) carried out or arranged in Hong Kong by a “specified person” (typically an SFC-licensed corporation); or (b) the fund qualifies as a “qualified investment fund” with at least four independent investors and capital commitments exceeding 90% of aggregate commitments.

Schedule 16C assets traditionally include securities, shares, debentures, futures contracts, foreign exchange contracts, deposits, and certificated loans. These cover most conventional investment vehicles employed by hedge funds, private equity funds, and traditional asset managers.

2024 Proposed Expansions: A Game-Changer for Alternative Assets

In the 2024/25 Budget, the Financial Secretary announced ambitious plans to enhance Hong Kong’s preferential tax regimes. Following this announcement, on 25 November 2024, the Financial Services and Treasury Bureau (FSTB) released a comprehensive consultation paper detailing transformative improvements to the UFE regime. The consultation period closed on 3 January 2025, with draft legislation expected in 2025 and retrospective application upon enactment.

Key proposed enhancements include:

Expanded Qualifying Investments: The scope of qualifying transactions will be significantly broadened to encompass emerging and alternative asset classes that reflect modern investment strategies:

• Private credit investments and loan portfolios
• Virtual assets and digital currencies
• Offshore immovable property
• Carbon credits and emission allowances
• Insurance-linked securities
• Interests in non-corporate private entities such as partnerships

Enhanced SPE Flexibility: Special Purpose Entities (SPEs) are critical components of fund structuring, often used to hold and administer investee companies. The proposals expand the permitted activities of SPEs to include the acquisition, holding, administration, and disposal of investee private companies and other SPEs, as well as activities incidental to these primary functions. This change addresses practical structuring needs in complex investment arrangements.

Removal of the 5% Incidental Transaction Threshold: Under current rules, income from incidental transactions (such as interest income) can only be tax-exempt if it doesn’t exceed 5% of total receipts from qualifying assets. The proposed changes eliminate this threshold entirely, allowing all income derived from qualifying investments—whether from qualifying or incidental transactions—to be eligible for profits tax exemption.

New Substantial Activities Requirements: To align with international anti-base erosion standards and ensure genuine economic substance, the consultation proposes introducing mandatory substantial activities requirements for funds. These would mirror the FIHV requirements: at least two qualified employees in Hong Kong and minimum annual operating expenditure of HK$2 million incurred in Hong Kong.

Enhanced Reporting Obligations: A new tax reporting mechanism would require funds and SPEs benefiting from the UFE to submit specific accounting data and information demonstrating compliance with exemption conditions and substantial activities requirements. This enhances transparency and regulatory oversight.

Relaxed Anti-Abuse Rules: The current deeming provisions that attribute tax-exempt fund profits to certain Hong Kong resident investors will be relaxed, reducing unnecessary compliance burdens for legitimate domestic investors.

Family-Owned Investment Holding Vehicle (FIHV) Tax Concessions

The Single Family Office Tax Regime

Recognizing the growing importance of single family offices in wealth management, Hong Kong introduced dedicated tax concessions through the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023. The legislation was gazetted and came into operation on 19 May 2023, with retrospective application to years of assessment commencing on or after 1 April 2022.

This regime provides certainty that investment profits earned by eligible FIHVs will be exempted from profits tax at a 0% concessionary rate, subject to meeting specific conditions. Importantly, there is no pre-approval process—FIHVs can self-assess eligibility and make an irrevocable election to benefit from the regime.

Eligibility Requirements for FIHVs

Structure and Definition: An FIHV can be any entity established or created in or outside Hong Kong, including trusts, companies, partnerships, or foundations. The key requirement is that it cannot be a business undertaking for general commercial or industrial purposes—it must be primarily an investment holding vehicle.

Ownership Thresholds: The single family must directly or indirectly hold at least 95% of the beneficial interest in the FIHV. This percentage can be reduced to 75% if at least 20% of the remaining interest is held by a tax-exempt charitable institution under section 88 of the Inland Revenue Ordinance. This accommodation recognizes the philanthropic objectives many family offices integrate into their wealth management strategies.

Management and Control: The FIHV must be normally managed or controlled in Hong Kong and managed by an eligible Single Family Office (SFO). An eligible SFO is one where the single family (through one or more members) directly or indirectly holds at least 95% of the beneficial interest in the family office entity itself.

Asset Threshold: FIHVs must meet a minimum asset threshold of HK$240 million (approximately US$30.7 million). This threshold ensures the regime targets substantial family wealth structures while remaining accessible to a broad range of family offices.

Substantial Activities Requirements: To demonstrate genuine economic substance in Hong Kong, FIHVs must satisfy two requirements:

• Employment: At least two full-time qualified employees in Hong Kong who carry out investment activities and possess necessary qualifications
• Operating Expenditure: At least HK$2 million in annual operating expenditure incurred in Hong Kong for carrying out investment activities

Critically, outsourcing of Core Income Generating Activities (CIGAs) to the eligible SFO is permitted, provided such outsourcing is not for circumventing the substantial activities requirement. This flexibility allows families to leverage professional family office services while maintaining compliance.

Qualifying Transactions and Tax Treatment

Investment profits from qualified assets are eligible for 0% profits tax. Qualified assets align with Schedule 16C assets under the UFE regime, encompassing securities, shares, debentures, futures contracts, foreign exchange contracts, and other financial instruments.

Income arising incidental to holding qualified assets—such as interest income from cash holdings or bond investments—is also tax-exempt, provided it does not exceed 5% of total receipts from qualified assets. This incidental income threshold provides flexibility for treasury management activities.

Additionally, Hong Kong’s territorial tax system offers further advantages:

• No Capital Gains Tax: Hong Kong does not impose capital gains tax, meaning profits from asset disposals that are capital in nature remain untaxed
• Offshore Profits: Profits sourced outside Hong Kong are generally not subject to Hong Kong profits tax
• Dividend Income: Dividend income is generally not taxable in Hong Kong

Family-Owned Special Purpose Entities (FSPEs)

Recognizing that FIHVs commonly establish intermediate holding entities for structuring purposes, the regime extends tax concessions to Family-owned Special Purpose Entities (FSPEs). Profits tax concessions apply at both the FIHV level and the FSPE level, proportionate to the percentage of beneficial interest the FIHV holds in the FSPE.

This cascade mechanism ensures that multi-tier structures—often necessary for geographic diversification, risk management, or regulatory compliance—do not create additional tax leakage.

Operational Flexibility and Global Investment Freedom

The FIHV regime imposes no local investment requirement—Single Family Offices are free to invest globally without restriction. There are no requirements that employees be Hong Kong citizens or permanent residents, and non-residents can fulfill substantial activities requirements. Furthermore, SFOs are not required to obtain SFC licenses as long as they provide services exclusively to family members. If services extend to external parties, licensing requirements under the Securities and Futures Ordinance may apply.

Fund Structures: OFCs and LPFs

Open-Ended Fund Companies (OFCs)

The Open-Ended Fund Company regime, introduced under the Securities and Futures Ordinance, provides a dedicated corporate vehicle for investment funds. OFCs must be registered with the Securities and Futures Commission (SFC) and incorporated with the Registrar of Companies.

Despite the “open-ended” nomenclature, OFCs can accommodate both open-ended and closed-ended fund strategies, providing structural flexibility. As corporate entities with clear Hong Kong tax residency, OFCs can readily access Hong Kong’s extensive network of double taxation agreements, including the crucial Arrangement with Mainland China under the Closer Economic Partnership Arrangement (CEPA).

OFCs are fully eligible for the UFE regime’s profits tax exemption on qualifying transactions. The clear domicile and tax residency status of OFCs facilitates treaty relief and cross-border tax planning. Since the regime’s introduction, OFC registrations have grown substantially, from just 3 in 2020 to 69 by 2023, demonstrating increasing market adoption.

Limited Partnership Funds (LPFs)

The Limited Partnership Fund Ordinance (Cap. 637), which took effect on 31 August 2020, introduced a dedicated limited partnership structure tailored for investment funds, particularly private equity and venture capital strategies.

An LPF is structured as a limited partnership without separate legal personality. The general partner (GP) manages the fund and bears unlimited liability, while limited partners (LPs)—typically investors—enjoy limited liability up to their agreed capital contributions. This structure mirrors international private fund conventions, particularly those prevalent in the United States and Europe, making Hong Kong LPFs immediately familiar to global institutional investors.

LPFs benefit from the UFE regime on the same terms as other fund structures, provided they meet qualifying conditions. The transparent partnership structure allows for flow-through taxation treatment where the fund itself is not the taxable entity, but rather the partners are taxed on their distributive shares—subject to available exemptions.

Stamp Duty Advantages: LPFs enjoy significant stamp duty benefits. No Hong Kong stamp duty is imposed on capital contributions, withdrawals, or transfers of partnership interests. An interest in an LPF is not classified as “Hong Kong stock” under the Stamp Duty Ordinance, ensuring that issuances, transfers, and redemptions of LPF interests remain stamp duty-free. This creates substantial cost savings compared to corporate fund vehicles, where share transfers may trigger stamp duty.

Regulatory Efficiency: Unlike OFCs, LPFs do not require SFC approval for establishment, streamlining the formation process. However, the investment manager may require SFC licensing if conducting regulated activities. GPs can be Hong Kong resident individuals or companies without mandatory SFC licensing, provided they do not engage in regulated activities under the Securities and Futures Ordinance.

Comparative Considerations

Choosing between OFC and LPF structures depends on specific fund strategies, investor preferences, and regulatory considerations:

Carried Interest Tax Concessions

Current Regime Framework

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 Carried Interest Tax Concession Regime offers a 0% tax rate on eligible carried interest, providing significant tax efficiency for fund managers operating in Hong Kong.

Under the current framework, the 0% concessionary tax rate applies only to eligible carried interest arising from profits on private equity transactions that are exempt from profits tax under the UFE regime. To benefit, carried interest must be distributed through a “qualifying person,” and the fund must meet a hurdle rate requirement (a preferred return threshold).

Additionally, fund managers historically required certification from the Hong Kong Monetary Authority (HKMA) to confirm eligibility, creating administrative complexity and compliance costs.

2024 Proposed Transformative Changes

The November 2024 FSTB consultation proposed sweeping reforms to the carried interest regime, addressing practical challenges that limited adoption and expanding eligibility to reflect diverse investment strategies. These changes aim to position Hong Kong competitively against Singapore and other regional wealth management hubs.

Expanded Scope to All Qualifying Assets: The most significant proposed change extends the carried interest concession from private equity transactions exclusively to cover carried interest arising from all types of qualifying assets under the UFE regime. This includes traditional securities, private credit investments, virtual assets, carbon credits, and other emerging asset classes. Fund managers pursuing hedge fund, credit, or multi-strategy approaches would newly qualify for the 0% rate on performance fees.

Removal of HKMA Certification: The burdensome HKMA certification requirement—including preparation of auditor’s reports—would be eliminated entirely. This simplification dramatically reduces administrative overhead and accelerates the ability of fund managers to claim the concession. Industry feedback indicated that certification complexity deterred many eligible managers from utilizing the regime.

Greater Payment Flow Flexibility: The current requirement for carried interest to be distributed through a “qualifying person” has created structural challenges for funds utilizing offshore holding companies or complex multi-tier arrangements. The consultation proposes removing this requirement, allowing carried interest distributions through more flexible arrangements that reflect commercial fund structuring realities.

Elimination of Hurdle Rate Requirement: The mandatory hurdle rate requirement—a preferred return threshold investors must achieve before carried interest accrues—will be removed. Many venture capital and early-stage startup funds do not employ hurdle rates, instead using straightforward profit-sharing arrangements. Eliminating this requirement makes the tax concession accessible to a broader spectrum of fund strategies and aligns with international carried interest norms.

Retrospective Application: Consistent with the other proposed enhancements, the carried interest reforms are expected to apply retrospectively once enacted into law in 2025, providing immediate benefits to fund managers upon passage.

Impact on Fund Manager Attractiveness

These proposed reforms address the primary reasons the current carried interest regime has seen limited adoption. The combination of expanded asset class coverage, administrative simplification, and structural flexibility positions Hong Kong as a highly competitive jurisdiction for fund manager relocation and establishment. Fund managers previously deterred by compliance complexity or ineligibility due to investment strategy can now access meaningful tax benefits on their performance-based compensation.

Compliance, Structuring, and Practical Considerations

Foreign-Sourced Income Exemption (FSIE) Regime

Effective 1 January 2023, Hong Kong implemented a refined Foreign-Sourced Income Exemption regime in response to European Union concerns about potential base erosion. Under this regime, four types of offshore income—interest, dividends, disposal gains from equity interests, and intellectual property income—are deemed to be sourced from Hong Kong and chargeable to profits tax if:

• The income is received in Hong Kong by a multinational enterprise (MNE) entity
• The entity carries on a trade, profession, or business in Hong Kong
• The recipient fails to meet a relevant exception (such as the economic substance requirement or participation exemption)

From 1 January 2024, the scope of “specified foreign-sourced income” expanded to include disposal gains on asset types beyond equity interests. Fund structures benefiting from the UFE or FIHV regimes generally qualify for exemptions, but careful analysis of cross-border income flows remains essential.

Tax Certainty Enhancement Scheme for Onshore Disposals

Effective for disposals occurring on or after 1 January 2024, Hong Kong introduced a Tax Certainty Enhancement Scheme providing safe harbor treatment for onshore equity disposal gains. Gains satisfying prescribed conditions—including a minimum 15% equity holding maintained continuously for at least 24 months prior to disposal—are regarded as capital in nature and not chargeable to profits tax.

This scheme provides valuable certainty for strategic investments and reduces disputes over the capital versus revenue nature of disposal profits, complementing the tax exemptions available under the UFE and FIHV regimes.

Multi-Family Office Considerations

Multi-family offices (MFOs) that manage assets for multiple unrelated family groups follow different pathways to tax efficiency. Where an investment vehicle meets the definition of “fund” under the Inland Revenue Ordinance and qualifying transactions are carried out or arranged in Hong Kong by an SFC-licensed corporation (which MFOs typically are), the UFE regime provides profits tax exemption.

MFOs cannot access the FIHV regime, which is specifically designed for single family structures with the 95% ownership threshold. However, the UFE regime’s broad applicability ensures that professionally managed multi-family investment vehicles can achieve similar 0% tax outcomes on qualifying transactions.

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 and access regional treaty networks without triggering exit taxes or transfer costs.

Strategic Implications and Future Outlook

Positioning Against Regional Competitors

Hong Kong’s comprehensive tax incentive framework positions it competitively against Singapore, which has long dominated Asian wealth management. The proposed 2024 enhancements—particularly the expansion to private credit and virtual assets—directly respond to Singapore’s recent initiatives in these areas and ensure Hong Kong remains attractive for cutting-edge investment strategies.

The combination of 0% tax rates, no capital gains tax, extensive treaty access, robust legal infrastructure based on common law, proximity to Mainland China, and the absence of foreign exchange controls creates a compelling value proposition for family offices and fund managers.

Legislative Timeline and Implementation

Following the conclusion of the consultation period on 3 January 2025, the Hong Kong government is expected to release draft legislative amendments later in 2025. The industry consensus anticipates passage in the 2025/26 legislative session, with retrospective application to the commencement of the relevant regime provisions.

Prospective family offices and fund managers should monitor legislative developments closely and consider provisional structuring decisions that position them to benefit from enhanced regimes upon enactment.

Substance Requirements and International Tax Standards

The proposed introduction of substantial activities requirements for funds under the UFE regime aligns Hong Kong with OECD guidelines on base erosion and profit shifting (BEPS). These requirements—matching the FIHV regime’s two-employee and HK$2 million expenditure thresholds—ensure that tax benefits are linked to genuine economic activity in Hong Kong.

While adding compliance obligations, these requirements provide defensibility against international scrutiny and enhance the credibility of Hong Kong’s tax regime in bilateral discussions with treaty partners. Family offices and funds should budget appropriately for the employment and operational expenditure necessary to meet substance requirements.

Virtual Assets and Digital Asset Integration

The proposed inclusion of virtual assets as qualifying investments represents a forward-looking acknowledgment of digital asset integration into mainstream investment portfolios. As institutional adoption of cryptocurrencies, tokenized securities, and blockchain-based investment vehicles accelerates, Hong Kong’s tax regime will accommodate these innovations without requiring piecemeal legislative updates.

This positions Hong Kong as a natural hub for digital asset fund management in Asia, complementing the Securities and Futures Commission’s regulatory framework for virtual asset trading platforms and the Hong Kong Monetary Authority’s supervision of stablecoin issuers.

Hong Kong’s 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 the proposed 2024 enhancements creates one of the most favorable tax environments for family offices and investment funds in the world. 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.

This article provides general information and should not be relied upon as tax or legal advice. Family offices and fund managers should consult qualified Hong Kong tax advisors and legal counsel to assess eligibility for tax concessions and optimal structuring for their specific circumstances.