Introduction: Hong Kong’s Evolution as a Global Fund Management Hub

Hong Kong has undergone a remarkable transformation in its approach to fund taxation and regulatory frameworks over the past five years. The introduction of the Unified Fund Exemption (UFE) regime in 2019, followed by the carried interest tax concession in 2021, and the establishment of modern fund structures such as OFCs and LPFs, has positioned Hong Kong as one of Asia’s most competitive fund domiciles.

As of 2025, Hong Kong continues to refine and enhance these regimes to maintain its competitive edge in the global fund management landscape. With over 500 registered OFCs and growing interest in family office structures, the city is successfully attracting international capital and fund managers seeking a transparent, tax-efficient jurisdiction with proximity to mainland China and access to Asian markets.

The Unified Fund Exemption (UFE) Regime

Overview and Scope

The Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019 came into effect on 1 April 2019, establishing the UFE regime as Hong Kong’s comprehensive tax exemption framework for investment funds. The UFE provides a unified tax treatment for all types of funds operating in or from Hong Kong, replacing the previous fragmented offshore fund exemption (OFE) regimes that were identified by the European Union as having ring-fencing features.

Under the UFE, qualifying funds benefit from complete exemption from Hong Kong profits tax (normally 16.5%) on profits derived from specified transactions, regardless of:

• Fund structure (corporate, partnership, trust, or other arrangements)
• Location of the fund’s central management and control
• Fund size or investment strategy
• Investor residency or nationality

Qualifying Conditions

To qualify for the UFE, a fund must satisfy the following key conditions:

Specified Assets Under the UFE

The current Schedule 16C specified assets include:

• Securities (stocks, bonds, debentures, and similar instruments)
• Shares or interests in private companies (subject to the short-term assets test)
• Futures contracts and leveraged foreign exchange contracts
• Foreign currencies
• Deposits other than those held with banks in Hong Kong
• Certificates of deposit issued outside Hong Kong
• Exchange-traded commodities

2024 Proposed Enhancements to the UFE

On 25 November 2024, the Financial Services and Treasury Bureau (FSTB) released a comprehensive consultation paper proposing significant enhancements to the UFE regime. These proposed changes are designed to keep Hong Kong competitive with other major fund jurisdictions and to accommodate evolving investment strategies.

Proposed Expansion of Specified Assets:

• Virtual assets – Including cryptocurrencies and digital tokens, positioning Hong Kong as Asia’s leading digital asset management hub
• Immovable property located outside Hong Kong – Expanding opportunities for real estate investment funds
• Emission derivatives, carbon credits, and allowances – Reflecting the growing importance of ESG and climate-focused investments
• Insurance-linked securities – Enabling catastrophe bonds and other insurance risk transfer instruments
• Interests in non-corporate private entities – Such as partnerships and other unincorporated structures
• Loan and private credit investments – A critical addition given the explosive growth of private credit as an asset class

Expanded Fund Definition:

The consultation proposes explicitly including pension funds and endowment funds within the scope of the UFE, removing previous uncertainty about whether these institutional vehicles qualify.

New Reporting and Substance Requirements:

The consultation also proposes introducing a tax reporting mechanism and substantial activities requirement for funds claiming the UFE. This aligns with international best practices and addresses concerns about base erosion and profit shifting (BEPS).

DIPN 61: IRD Guidance on the UFE

The Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Note No. 61 (DIPN 61) on 30 June 2020, providing detailed guidance on the application of the UFE regime. Key clarifications include:

• Participating persons refers to investors (shareholders in OFCs, limited partners in LPFs)
• Control typically means ownership interest exceeding 50%, though legal control can exist with lower percentages
• Carried interest of up to 30% of net proceeds can be paid without affecting exemption status
• Special purpose entities (SPEs) may qualify for exemption if they hold private companies meeting the short-term assets test (short-term assets must not exceed 50% of total asset value)

Carried Interest Tax Concession

Current Regime

The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 was enacted on 7 May 2021, introducing a groundbreaking 0% profits tax rate on eligible carried interest. This concession is retroactive, applying to carried interest received or accrued on or after 1 April 2020.

Under the current regime:

• Eligible carried interest paid to corporations is exempt from profits tax (effective rate: 0% vs. standard 16.5%)
• Individuals receiving carried interest benefit from a 100% deduction against assessable income under salaries tax
• The fund must be certified by the Hong Kong Monetary Authority (HKMA) as a “certified investment fund”
• Carried interest must arise from profits on private equity transactions exempt under the UFE regime
• An auditor’s report must be submitted as part of the HKMA certification process

2024 Proposed Enhancements

The November 2024 FSTB consultation paper proposes transformative changes to the carried interest regime:

These proposed changes will dramatically expand the availability of the carried interest concession, making it accessible to fund managers across all investment strategies rather than only private equity managers.

Open-Ended Fund Companies (OFCs)

The OFC Framework

The OFC regime came into effect on 30 July 2018, providing Hong Kong with a modern corporate fund structure comparable to those available in Luxembourg, Ireland, and the Cayman Islands. An OFC is a corporate vehicle with the following characteristics:

• Limited liability for investors
• Variable share capital that can increase or decrease based on subscriptions and redemptions
• Sole purpose of operating as a collective investment scheme
• Can be structured as a standalone OFC (single pool of assets) or umbrella OFC (multiple sub-funds with segregated liabilities)

Public vs. Private OFCs

Tax Benefits for OFCs

OFCs benefit from Hong Kong’s full suite of fund tax concessions:

• Profits tax exemption under the UFE for qualifying transactions
• No withholding tax on distributions to investors
• No capital gains tax (Hong Kong does not impose capital gains tax)
• No value-added tax (VAT)
• Eligible for carried interest concessions when properly structured

Re-domiciliation Framework

Since 1 November 2021, funds established in corporate form outside Hong Kong can re-domicile to Hong Kong as OFCs without having to wind up their existing structure. This re-domiciliation regime has made Hong Kong an attractive destination for funds seeking to relocate from jurisdictions with less favorable regulatory or tax environments.

Growth and Grant Scheme Updates

As of February 2025, Hong Kong had 502 registered OFCs, demonstrating strong adoption of the structure. The Government offers a grant scheme to subsidize OFC formation costs, extended through May 2027. However, significant changes took effect on 11 April 2025:

• Only one OFC per investment manager is now eligible for grants
• Investment managers who have already received a grant are not entitled to additional grants
• Previous caps of HK$1 million per public OFC, HK$500,000 per private OFC, and HK$8 million per REIT continue to apply to applications submitted before 11 April 2025

Limited Partnership Funds (LPFs)

The LPF Structure

The Limited Partnership Fund Ordinance came into force on 31 August 2020, introducing a purpose-built limited partnership structure designed specifically for investment funds. The LPF regime provides a partnership alternative to the corporate OFC structure, appealing to fund managers familiar with partnership structures common in the United States and Cayman Islands.

Key Features of LPFs

Structure Requirements:

• Must have at least one general partner (GP) and one limited partner (LP)
• Governed by a written limited partnership agreement (LPA)
• Registered office must be in Hong Kong
• Opt-in registration scheme (does not preclude other limited partnerships from operating)

Party Roles:

Tax Treatment of LPFs

LPFs benefit from the same tax advantages as OFCs:

• Profits tax exemption under the UFE for qualifying transactions
• Eligible carried interest exempt from profits tax (0% effective rate from 1 April 2020)
• No Hong Kong withholding tax on distributions
• Flow-through tax treatment for certain purposes

Suitable Investment Strategies

LPFs are particularly well-suited for:

• Private equity and venture capital funds
• Buy-out and growth capital funds
• Real estate and infrastructure funds
• Special situations and distressed asset funds
• Private credit and hybrid strategy funds

Registration Process

LPF registration requires:

• Application for Registration of Limited Partnership Fund (Form LPF1)
• Registration fee of HK$2,555
• Lodgement fee of HK$479 (non-refundable)
• Notice to Business Registration Office (IRBR4)
• Prescribed business registration fee and levy

Family Office Tax Concessions

The Family Office Tax Regime

Enacted through the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2022, Hong Kong’s family office tax regime provides comprehensive tax relief for ultra-high-net-worth families establishing single family offices (SFOs) in Hong Kong.

Structure of the Concession

The regime centers on two key components:

1. Eligible Single Family Office (ESFO) – The family office entity that provides investment management services
2. Family-owned Investment Holding Vehicle (FIHV) – The investment vehicle(s) holding the family’s assets

Tax Benefits

Qualifying Requirements

To qualify for the family office tax concessions, FIHVs must meet substance requirements:

• Employ at least two full-time qualified employees in Hong Kong (can be outsourced to the ESFO)
• Incur at least HK$2 million in operating expenditure in Hong Kong annually (can be outsourced)
• Be managed by an eligible single family office
• Conduct qualifying transactions in specified assets

No Pre-Approval Required

Unlike some jurisdictions, Hong Kong’s family office regime operates on a self-assessment basis:

• No separate application or pre-approval from tax authorities
• Family offices that qualify can claim the concession directly in annual tax returns
• No local investment requirement (can invest globally)
• No specific licensing regime for family offices

Retroactive Application

The tax concessions apply retroactively to the 2022/2023 tax year, allowing both newly established and existing family offices to benefit immediately upon meeting the qualifying criteria.

2025 Proposed Enhancements

The 2025-26 Hong Kong Budget announced plans to further enhance the family office regime by expanding qualifying transactions to include:

• Emission derivatives and carbon allowances
• Insurance-linked securities
• Loans and private credit investments
• Virtual assets (digital assets and cryptocurrencies)

Growth of the Family Office Sector

Hong Kong’s family office sector has experienced remarkable growth:

• The dedicated FamilyOfficeHK team of InvestHK assisted 50 family offices to set up or expand in Hong Kong in the first five months of 2025 alone
• This represents a 19% increase compared to the same period in 2024
• Lower entry thresholds for residency announced in early 2025 are expected to attract over 200 additional family offices during 2025
• Hong Kong offers proximity to mainland China and the Greater Bay Area, providing unique access to Asian investment opportunities

Comparative Tax Advantages

Hong Kong vs. Standard Corporate Tax

Strategic Implications for Fund Managers

Choosing Between OFC and LPF Structures

OFC Advantages:

• Corporate form familiar to Asian investors and retail distributors
• Variable capital structure allows for flexible redemptions
• Well-established framework for UCITS-equivalent funds
• Re-domiciliation option for existing offshore corporate funds
• Preferred for real estate investment trusts (REITs) and liquid strategies

LPF Advantages:

• Partnership structure familiar to US and institutional investors
• More flexible governance arrangements through LPA customization
• Traditional structure for private equity and venture capital
• Clear separation between GP (management) and LP (investor) roles
• Preferred for closed-end private funds with long lock-up periods

Compliance and Substance Considerations

While Hong Kong’s tax regimes are generous, fund managers must maintain appropriate substance:

• Board meetings should be held in Hong Kong with independent directors resident in Hong Kong
• Investment decisions should be made in Hong Kong by qualified personnel
• Fund administration and custody services should involve Hong Kong service providers
• Adequate resources including office space, staff, and operating expenses should be maintained
• Economic substance requirements may be introduced following the 2024 consultation

Impact of OECD Pillar Two

Hong Kong has implemented the OECD’s global minimum tax (Pillar Two) for fiscal years starting from 1 January 2025. Key points:

• Applies to multinational groups with annual consolidated revenue of at least EUR 750 million
• Ensures a minimum effective tax rate of 15%
• Investment funds are generally excluded from Pillar Two under the “excluded entity” provisions
• Smaller funds and local investment managers retain full benefits of Hong Kong’s preferential tax regimes

Future Outlook and Anticipated Reforms

Timeline for Implementation of Proposed Changes

The November 2024 consultation on enhancements to the UFE, carried interest, and family office regimes represents a critical milestone. The anticipated timeline is:

• Late 2025: Release of draft legislative amendments based on consultation feedback
• Early 2026: Legislative Council consideration and enactment
• Retroactive application: Many changes are expected to apply retrospectively once enacted

Expected Impact on Hong Kong’s Competitive Position

The proposed reforms will significantly enhance Hong Kong’s competitiveness:

Virtual Assets: Including digital assets and cryptocurrencies in the UFE positions Hong Kong to compete with Switzerland and Dubai for crypto hedge funds and digital asset managers.

Private Credit: The expansion to cover loan and private credit investments ensures Hong Kong can accommodate the fastest-growing alternative asset class, currently dominated by US managers.

Carbon Markets: Adding emission derivatives and carbon credits recognizes the growing importance of climate finance and ESG-focused strategies.

Simplified Carried Interest: Removing HKMA certification requirements and expanding eligible strategies will make the carried interest concession accessible to a much broader range of fund managers, including hedge funds and multi-strategy platforms.

Regional Competition

Hong Kong’s reforms should be viewed in the context of regional competition:

China and Greater Bay Area Integration

Hong Kong’s unique position as a gateway to mainland China provides additional strategic value:

• Wealth Management Connect allows cross-border investment between Hong Kong and the Greater Bay Area
• Stock Connect and Bond Connect programs provide direct access to mainland securities markets
• QDLP/QDIE programs enable Hong Kong fund managers to raise capital from mainland investors
• Greater Bay Area initiatives promote financial integration and talent mobility
• One Country, Two Systems provides familiar common law framework with unique China access

Practical Considerations for Fund Formation

Structuring Checklist

Fund managers considering Hong Kong structures should evaluate:

1. Target investor base – Retail vs. professional; Asian vs. global
2. Investment strategy – Ensure assets fall within specified assets or wait for proposed expansions
3. Fund structure – OFC for corporate preference; LPF for partnership preference
4. Management arrangements – SFC licensing requirements; delegation structures
5. Substance requirements – Board composition; staffing; operating expenses
6. Service providers – Fund administrator; custodian; legal advisors; tax advisors
7. Distribution strategy – Retail authorization requirements; private placement documentation
8. Carried interest eligibility – Current vs. proposed regime; certification vs. self-assessment

Estimated Formation Costs and Timeline

Note: Grant scheme subsidies may be available to offset some formation costs, subject to revised eligibility criteria effective 11 April 2025.

Ongoing Compliance Obligations

Hong Kong fund structures require ongoing compliance:

• Annual audit – Audited financial statements prepared in accordance with HKFRS or IFRS
• Tax return filing – Annual profits tax return even if claiming exemption under UFE
• Annual return – Filed with Companies Registry (OFC) or Limited Partnership Fund Registry (LPF)
• AML/CFT compliance – Know-your-customer procedures; suspicious transaction reporting
• FATCA/CRS reporting – Compliance with automatic exchange of information regimes
• SFC reporting – For licensed managers and authorized funds; periodic financial and operational reports
• Proposed reporting – Tax reporting mechanism may be introduced under UFE enhancements

Conclusion

Hong Kong has emerged as one of the most competitive jurisdictions for fund management in Asia, underpinned by a comprehensive suite of tax incentives and modern fund structures. The Unified Fund Exemption regime provides certainty and simplicity, while the OFC and LPF structures offer flexibility to accommodate diverse investment strategies and investor preferences.

The proposed enhancements announced in November 2024 demonstrate the Hong Kong Government’s commitment to maintaining the city’s competitive edge. By expanding the scope of qualifying assets to include virtual assets, private credit, carbon credits, and other emerging asset classes, and by simplifying the carried interest concession regime, Hong Kong is positioning itself to capture the next wave of alternative asset management growth.

The family office sector’s rapid expansion, with over 50 new offices in the first five months of 2025 alone, highlights Hong Kong’s appeal to ultra-high-net-worth families seeking a stable, tax-efficient jurisdiction with access to Asian investment opportunities.

For fund managers evaluating domicile options, Hong Kong offers a compelling combination of:

• Zero or very low effective tax rates on fund profits and carried interest
• Modern corporate (OFC) and partnership (LPF) fund structures
• Proximity to mainland China and the Greater Bay Area
• Robust regulatory framework with international recognition
• No capital gains tax, withholding tax, or inheritance tax
• Established service provider ecosystem and capital markets infrastructure
• Common law legal system and independent judiciary

As these reforms progress through the legislative process in 2025 and 2026, Hong Kong is well-positioned to strengthen its role as Asia’s premier fund management center, competing effectively with Singapore, Luxembourg, Cayman Islands, and other established fund domiciles.

Fund managers, family offices, and institutional investors should monitor the finalization of these proposed reforms and consider how Hong Kong’s enhanced tax regime can support their investment strategies and operational objectives in the years ahead.