The Tax Advantages of Hong Kong’s Limited Partnership Fund (LPF) for Family Offices

Introduction: Hong Kong’s Strategic Position in Asian Wealth Management

Hong Kong has emerged as a leading destination for family offices and private capital in Asia, driven by sophisticated regulatory frameworks and compelling tax advantages. The Limited Partnership Fund (LPF) regime, introduced in August 2020, represents a pivotal development in Hong Kong’s evolution as a premier wealth management hub. Designed to compete directly with established jurisdictions such as the Cayman Islands, Singapore, and Luxembourg, the LPF offers family offices a modern, tax-efficient vehicle for structuring and managing multi-generational wealth.

The LPF framework combines contractual flexibility, limited liability protection, and preferential tax treatment under Hong Kong’s Unified Fund Exemption regime. For family offices managing significant assets across diverse strategies—from private equity and venture capital to private credit and real assets—the LPF provides a compelling alternative to offshore structures, particularly when economic substance and operational activities are concentrated in Hong Kong.

Understanding the LPF Structure

Legal Framework and Formation

The Limited Partnership Fund Ordinance (Cap. 637) establishes a purpose-built regime for investment funds operating as limited partnerships. Unlike general corporate structures, an LPF consists of at least one general partner (GP) with unlimited liability and one or more limited partners (LPs) whose liability is restricted to their committed capital contributions.

Key structural features include:

• Separate Legal Personality: The LPF is a distinct legal entity capable of holding assets, entering contracts, and conducting legal proceedings in its own name.
• Contractual Freedom: The limited partnership agreement governs the relationship between partners, investment strategy, profit distribution, and governance arrangements with minimal statutory interference.
• Mandatory Investment Manager: All LPFs must be managed by a licensed Type 9 (asset management) license holder regulated by the Securities and Futures Commission (SFC).
• Registration Requirement: LPFs must register with the Companies Registry and maintain registered office in Hong Kong, though central management and control may be exercised elsewhere.

Suitability for Family Office Structures

The LPF structure offers particular advantages for family offices seeking to consolidate diverse investment portfolios under a single vehicle. The regime accommodates both traditional closed-ended structures typical of private equity funds and modified open-ended arrangements through unitization of partnership interests, providing versatility across different investment strategies and liquidity requirements.

For single-family offices, the LPF can serve as the primary investment holding vehicle, with the family serving as limited partners and a family-controlled entity or professional manager acting as general partner. This structure preserves family control while limiting liability exposure and accessing preferential tax treatment.

Comprehensive Tax Advantages

Unified Fund Exemption (UFE) Regime

The cornerstone of the LPF’s tax efficiency is access to Hong Kong’s Unified Fund Exemption regime, introduced under the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019. The UFE provides complete exemption from Hong Kong profits tax (standard rate: 16.5% for corporations) on qualifying transactions, regardless of whether the fund is domiciled onshore or offshore, or where central management and control is exercised.

Qualifying Conditions:

To benefit from the UFE, an LPF must satisfy the following conditions:

1. Qualifying Investment Manager: The fund must be managed by a qualified investment manager who holds a Type 9 license in Hong Kong (or exempted person) and who carries out investment management activities in Hong Kong.
2. Qualifying Transactions: Profits must arise from specified transactions in qualifying assets. Under the current regime, qualifying transactions include trading in securities, futures contracts, foreign exchange contracts, deposits (other than with a person who is an associate), and certain over-the-counter derivative instruments.
3. Non-Specified Person Requirement: The fund must not be a “specified person” (broadly, entities carrying on a trade, profession or business in Hong Kong other than specified activities).
4. Incidental Transactions: The fund must not carry out non-qualifying transactions except as incidental or ancillary to its main business of making qualifying investments.

Carried Interest Tax Concession

Beyond fund-level exemptions, Hong Kong offers a 0% tax rate on eligible carried interest received by fund managers and investment professionals. Introduced in May 2021 with retrospective effect from 1 April 2020, the carried interest concession directly addresses a key competitive disadvantage vis-a-vis jurisdictions like Singapore and Luxembourg.

Eligibility Requirements:

• Qualifying Recipient: Eligible individuals include fund managers, employees providing investment management services, and certain related entities.
• Qualifying Payer: The carried interest must be paid by a fund that qualifies under the UFE regime or a fund structured as a qualifying onshore fund or offshore fund.
• Profit-Related Return: The carried interest must represent a profit-related return (historically subject to a hurdle rate requirement, proposed to be removed under November 2024 consultation).
• Investment Management Services: The carried interest must be received in consideration of investment management services provided to the fund.

For family offices employing investment professionals or structuring internal incentive arrangements, the carried interest concession provides significant value retention compared to ordinary income taxation at 16.5%.

Stamp Duty Exemption

Hong Kong’s stamp duty regime ordinarily imposes tax on transfers of Hong Kong stock (0.2% on each of buyer and seller) and immovable property (up to 8.5% for non-residential property). However, LPFs benefit from specific exemptions:

• Partnership Interest Transfers: Contributions, transfers, and withdrawals of interests in LPFs are exempt from stamp duty.
• Underlying Asset Transactions: Qualifying transactions in securities undertaken by funds eligible under the UFE are exempt from stamp duty.

These exemptions facilitate capital deployment, portfolio rebalancing, and investor transitions without friction costs, enhancing overall fund economics.

Additional Tax Advantages

Beyond the specific LPF and fund-related concessions, family offices benefit from Hong Kong’s broader tax framework:

• Territorial Tax System: Hong Kong operates a territorial tax system. Offshore-sourced profits and income not derived from a Hong Kong trade or business are not subject to Hong Kong profits tax.
• No Capital Gains Tax: Hong Kong does not impose capital gains tax. Profits from disposal of capital assets are non-taxable unless the taxpayer is carrying on a trade of dealing in such assets.
• Dividend Exemption: Dividends received from both domestic and foreign sources are generally exempt from profits tax under the participation exemption regime (subject to conditions) or as capital receipts.
• No Withholding Tax: Hong Kong does not impose withholding tax on dividend, interest, or royalty payments to non-residents (except for royalties paid for use of intellectual property in Hong Kong).
• No Estate Duty or Inheritance Tax: Hong Kong abolished estate duty in 2006, facilitating efficient inter-generational wealth transfer.

Integration with Family-Owned Investment Holding Vehicle (FIHV) Regime

In March 2023, Hong Kong introduced a dedicated tax concession regime for Family-Owned Investment Holding Vehicles (FIHVs), complementing the LPF framework and providing an alternative structuring option for family offices.

Key Features of the FIHV Regime

• Profits Tax Exemption: FIHVs enjoy profits tax exemption on qualifying transactions similar to the UFE, providing certainty that investment profits will not be taxed where conditions are met.
• Asset Threshold: Minimum asset threshold of HKD 240 million under management.
• Family Ownership: At least 95% of beneficial interests must be held by family members (reducible to 75% under specified conditions).
• Substantial Activities Requirement: The FIHV must employ at least two full-time qualified employees and incur minimum annual operating expenditure of HKD 2 million in Hong Kong (these requirements can be satisfied through outsourcing to a single-family office service provider).
• No Pre-Approval Required: Unlike some jurisdictions, there is no advance ruling or certification requirement. The FIHV self-assesses compliance and claims exemption in tax returns.

LPF vs FIHV: Selecting the Optimal Structure

Family offices should consider several factors when choosing between an LPF structure and an FIHV corporate entity:

Many sophisticated family offices utilize hybrid structures, combining an FIHV for liquid portfolio investments with one or more LPFs for alternative strategies such as private equity, venture capital, or real estate—thereby optimizing tax efficiency across the entire wealth platform.

November 2024 Proposed Enhancements: Expanding Competitiveness

On 25 November 2024, Hong Kong’s Financial Services and Treasury Bureau issued a comprehensive consultation paper proposing significant enhancements to the UFE, FIHV, and carried interest regimes. The consultation closed on 3 January 2025, with legislative amendments expected in 2025 and retrospective application anticipated.

Expanded Qualifying Investments

Currently, the UFE regime excludes certain asset classes that are increasingly important to modern family office portfolios. The consultation proposes expanding qualifying investments to include:

• Immovable Property Outside Hong Kong: Addressing a significant gap for real estate-focused funds and family offices with global property holdings.
• Direct Lending and Private Credit: Recognizing the rapid growth of private credit as an alternative asset class.
• Interests in Non-Corporate Private Entities: Including partnerships, enabling investment in other LPFs and private partnership structures.
• Virtual Assets: Encompassing cryptocurrencies, digital tokens, and other blockchain-based assets, positioning Hong Kong as a regulated hub for digital asset investment.
• Environmental, Social and Governance (ESG) Assets: Including emission derivatives, carbon credits, and allowances, facilitating sustainable investment strategies.
• Insurance-Linked Securities: Expanding access to alternative risk premia and catastrophe bonds.

These expansions align Hong Kong’s regime more closely with international standards and respond to evolving investor demand for diversified, alternative investment exposures.

Enhanced Carried Interest Concession

The consultation proposes several improvements to the carried interest regime:

• Removal of Hurdle Rate Requirement: The current definition requires carried interest to exceed a preferred return threshold. Eliminating this requirement accommodates venture capital and growth equity structures where hurdle rates are often absent.
• Expanded Profit Sources: Eligible carried interest would encompass profits from all UFE-qualifying transactions (not just private equity), plus non-taxable offshore income, dividend income, and other taxable income—dramatically broadening applicability.
• Flexible Payment Flows: Removing the requirement for distributions to flow through a “qualifying person” enables more efficient structuring for offshore master-feeder arrangements and multi-tier fund structures.
• Simplified Certification: Eliminating the current Hong Kong Monetary Authority certification requirement reduces administrative burden and accelerates access to the concession while maintaining Inland Revenue Department oversight.

Substantial Activities Requirements

To align with international standards and OECD guidance on harmful tax practices, the consultation proposes introducing substantial activities requirements for funds benefiting from the UFE:

• Employment Requirement: At least two qualified full-time employees in Hong Kong.
• Expenditure Threshold: Minimum annual operating expenditure of HKD 2 million incurred in Hong Kong.
• Holistic Assessment: The Inland Revenue Department will examine all facts and circumstances, including activities of the fund manager, to determine compliance.

These requirements mirror those already applicable to FIHVs and are generally achievable for family offices with genuine Hong Kong operations, particularly where investment management functions are performed locally.

Re-Domiciliation: Bringing Offshore Structures Home

Since the LPF re-domiciliation regime was introduced in 2021, Hong Kong has seen increasing interest from family offices and fund managers seeking to relocate foreign funds to Hong Kong while preserving legal continuity and historical track records.

Key Re-Domiciliation Features

• Continuity of Legal Personality: Re-domiciliation preserves the fund’s existence, contracts, assets, liabilities, and legal proceedings without dissolution or transfer.
• Eligible Jurisdictions: Hong Kong permits re-domiciliation from any jurisdiction that recognizes outward re-domiciliation.
• Track Record Preservation: Historical performance data and vintage year classification are maintained, critical for fundraising and investor reporting.
• Tax Efficiency: Re-domiciled funds immediately access the UFE and other Hong Kong tax advantages without triggering exit taxes in most cases (subject to home jurisdiction rules).

Strategic Drivers for Re-Domiciliation

Family offices are increasingly motivated to re-domicile to Hong Kong for several strategic reasons:

• Economic Substance Alignment: Where investment management and operational activities are concentrated in Hong Kong, re-domiciliation aligns legal structure with economic reality, reducing substance-related risks.
• Regulatory Confidence: Hong Kong’s robust regulatory framework and SFC oversight provide institutional credibility increasingly valued by investors and counterparties.
• China Access: While not providing automatic market access, Hong Kong domicile can facilitate participation in schemes such as the Wealth Management Connect and other Greater Bay Area initiatives.
• Capital Investment Entrant Scheme: LPF interests are recognized as permissible investments under Hong Kong’s Capital Investment Entrant Scheme (relaunched in 2024), providing immigration benefits for UHNW families.

Operational Considerations and Compliance

Regulatory Oversight

While LPFs enjoy significant tax advantages, they operate within a comprehensive regulatory framework:

• Investment Manager Licensing: All LPFs must appoint a Type 9 licensed manager or equivalent, subject to SFC conduct requirements, capital adequacy standards, and ongoing supervision.
• Anti-Money Laundering (AML): LPFs and their managers are subject to Hong Kong’s AML/CTF regime, requiring customer due diligence, ongoing monitoring, and suspicious transaction reporting.
• Tax Compliance: While exempt from profits tax, LPFs must file annual tax returns and maintain documentation supporting exemption claims. The Inland Revenue Department conducts periodic reviews and audits.
• Annual Returns: LPFs must file annual returns with the Companies Registry disclosing prescribed information about partners, capital contributions, and investment manager details.

Documentation and Governance

Successful LPF operation requires robust documentation and governance practices:

• Limited Partnership Agreement: The core governing document should address capital commitments, profit distribution (including carried interest), management fees, governance rights, transfer restrictions, and dissolution procedures.
• Investment Management Agreement: Clearly defines the scope of services, compensation, liability limitations, and termination provisions between the LPF and its licensed manager.
• Compliance Manuals: Comprehensive policies covering investment restrictions, conflicts of interest, valuation, risk management, and regulatory reporting.
• Board and Advisory Committee Structure: Many family office LPFs establish advisory committees or governance boards to oversee strategy, approve significant transactions, and monitor manager performance.

Comparison with Alternative Jurisdictions

Family offices evaluating Hong Kong’s LPF regime typically compare it against established alternatives in the Cayman Islands, Singapore, and Luxembourg.

Cayman Islands

Advantages: Zero taxation, highly developed service provider ecosystem, judicial precedents, regulatory efficiency.

Hong Kong LPF Edge: Economic substance requirements increasingly challenging for Cayman structures; Hong Kong offers proximity to Asian investments, easier access to regional banking and custodial services, and strengthened regulatory credibility with Asian investors.

Singapore

Advantages: Variable Capital Company (VCC) regime, extensive tax treaty network, political stability, family office grant schemes.

Hong Kong LPF Edge: No minimum asset requirements for UFE (Singapore fund tax incentive schemes often require higher thresholds); broader investment mandate flexibility; stronger China market connectivity; proposed virtual asset inclusion provides digital-native advantage.

Luxembourg

Advantages: Specialized Investment Fund (SIF) and Reserved Alternative Investment Fund (RAIF) structures, EU market access, extensive treaty network.

Hong Kong LPF Edge: Asian time zone and geographic proximity for families focused on regional investments; simpler regulatory approval processes; potentially lower operational costs; English common law system familiar to many Asian families.

Practical Implementation Roadmap

Family offices considering an LPF structure should follow a systematic implementation approach:

Phase 1: Strategic Assessment (4-6 weeks)

• Evaluate investment strategy alignment with UFE qualifying transactions
• Model tax efficiency versus current structure
• Assess operational readiness and Hong Kong presence requirements
• Engage tax advisors to confirm eligibility and optimize structure

Phase 2: Structure Design (6-8 weeks)

• Design partnership structure (GP/LP allocation, capital commitments)
• Select or establish investment manager entity
• Draft Limited Partnership Agreement and ancillary documentation
• Determine governance, decision rights, and succession planning

Phase 3: Regulatory and Operational Setup (8-12 weeks)

• Register LPF with Companies Registry
• Obtain or confirm Type 9 license for investment manager
• Establish Hong Kong bank accounts and custodial arrangements
• Implement compliance infrastructure (AML, recordkeeping, reporting)
• Appoint service providers (administrator, auditor, legal counsel)

Phase 4: Launch and Ongoing Management

• Execute capital contributions and fund initial investments
• Establish regular compliance calendar (tax filings, annual returns, audits)
• Monitor regulatory developments and optimize for proposed enhancements
• Conduct periodic structure reviews to ensure continued alignment with family objectives

Future Outlook: Hong Kong’s Evolving Position

Hong Kong’s LPF regime is positioned for continued growth and refinement. The November 2024 consultation signals the government’s commitment to maintaining competitive parity with leading fund jurisdictions while addressing evolving investor needs.

Key trends shaping the future landscape include:

• Digital Asset Integration: The proposed inclusion of virtual assets as qualifying investments positions Hong Kong to capture family office interest in blockchain technology, tokenized securities, and cryptocurrency exposure within a regulated framework.
• Greater Bay Area Integration: As cross-border investment schemes develop between Hong Kong, Macau, and Guangdong Province, LPFs may serve as vehicles for family offices seeking systematic exposure to Chinese markets while maintaining offshore legal protections.
• Sustainable Investment Focus: The inclusion of ESG-related assets such as carbon credits reflects growing family office interest in impact investing and climate-focused strategies.
• Re-Domiciliation Wave: As international tax transparency initiatives and economic substance requirements intensify globally, Hong Kong is well-positioned to attract re-domiciliation of funds currently in pure tax haven jurisdictions lacking meaningful operational infrastructure.

The government’s willingness to engage in ongoing consultation and refinement—evidenced by the recent proposals—demonstrates responsiveness to market feedback and commitment to regulatory excellence. For family offices with Asian investment focus, significant Hong Kong operational presence, or desire for a regulated yet tax-efficient platform, the LPF regime offers a compelling long-term solution.

Disclaimer: This article provides general information only and does not constitute tax, legal, or investment advice. Family offices should consult qualified professional advisors to assess their specific circumstances and structuring requirements. Tax laws and regulations are subject to change, and the proposed enhancements discussed herein are not yet enacted. This content is current as of December 2024.

Last Updated: December 2024 | Article ID: 18195