Hong Kong’s proposed overhaul of its unified fund exemption regime is more than a technical amendment. It redesigns how the tax regime accommodates modern investment structures—particularly private credit, digital-asset, institutional and single-investor strategies—while introducing reporting and economic-substance requirements. For fund managers, investors and advisers, the message is clear: the proposed framework is broader, but it is not lighter-touch in every respect.
The Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 was gazetted on 12 June 2026 and received its First Reading in the Legislative Council on 24 June 2026. The changes must still be described as proposed. As at 27 August 2026, the Government had said the Bills Committee had completed clause-by-clause examination and it aimed to resume the Second Reading debate in the second half of 2026; the Bill had not yet been passed or gazetted as an ordinance.
The essential trade-off is straightforward: the Bill seeks to make Hong Kong’s fund regime workable for more structures and asset classes, while requiring beneficiaries to support the exemption with transparency and genuine Hong Kong substance.
Hong Kong’s unified fund regime, introduced in 2019, provides profits-tax exemption for privately offered funds on profits from transactions in prescribed Schedule 16C assets, subject to the statutory conditions. The 2026 Bill builds on that regime and proposes aligned changes for family-owned investment holding vehicles (FIHVs) and carried interest.1
The market has moved beyond the asset and holding structures contemplated when the regime was introduced. The Bill responds by expanding who may qualify as a fund, what counts as a qualifying investment, and the treatment of special-purpose entities (SPEs) and resident investors.
A headline change is an expanded statutory definition of “fund.” The proposal covers pension funds, endowment funds of section 88 charitable institutions, single-investor funds owned by a government entity, central bank or international organisation, and qualifying funds-of-one with at least HK$240 million in qualifying investments under management where the investor has no day-to-day control over property management.1
These structures, together with sovereign wealth funds, would be treated as excepted funds and would not need to be managed by a specified person. The Bill also clarifies that transacting in, or earning profits from, qualifying investments does not by itself make an entity a general commercial or industrial business and thus ineligible for fund status.1
This is a material response to the use of bespoke investment arrangements by institutions and ultra-high-net-worth investors. The route is not automatic: detailed control, asset-value and anti-avoidance conditions still apply. But it would reduce a significant source of uncertainty for genuine fund-of-one structures.
The Bill proposes a wider list of qualifying investments, including loans and private credit, equity interests in non-corporate private entities, immovable property outside Hong Kong, digital assets, insurance-linked securities, emissions instruments and carbon credits. It would also include precious metals and specified commodities in defined circumstances. The legislative brief specifies safeguards: relevant precious-metal investments would be capped at 20% of portfolio value, while commodity activity connected with derivatives is subject to a 15% trade-volume cap.
For private-credit managers, the proposed treatment of loans is particularly important. Interest income has historically been difficult because of the distinction between qualifying and incidental transactions. The Bill would instead extend exemption to profits derived from qualifying investments and remove the 5% incidental-transaction threshold. However, it is not an unrestricted exemption: income from a private company engaged in Hong Kong property trading or property development is a stated example of income that would fall within the new exclusion list.
The Bill would grant a qualifying SPE full tax exemption rather than limiting the exemption to the exempt fund’s ownership percentage. It would also broaden permitted SPE activities to acquiring, holding, administering and disposing of investee private companies and other SPEs, plus related incidental activities.
The general anti-round-tripping rules would be relaxed for specified excluded persons, including resident natural persons, exempt funds and certain persons that would not be chargeable had they invested directly. At the same time, the Bill adds specific loan-related rules for financial institutions, insurance companies, money lenders and intra-group financing businesses where relevant ownership, control, influence or association tests are met.1 The policy direction is to lower unnecessary friction for resident investment while preventing the conversion of taxable lending income into exempt fund returns.
The broader regime is accompanied by a new compliance layer. Funds and SPEs benefiting from the enhanced UFR would be subject to reporting of relevant accounting data and evidence that exemption and substance conditions are met. The brief envisages aggregate reporting for key financial and substance information across funds and SPEs managed by the same fund manager, as well as a first-year filing extension.
The proposed substance thresholds deserve early attention: at least two qualified full-time employees in Hong Kong and at least HK$2 million in annual Hong Kong operating expenditure, subject also to the Commissioner’s adequacy test. The question for a group is therefore operational as well as technical: can it evidence meaningful investment-management activity, people and spend in Hong Kong?
If enacted, the Government’s stated intention is for the relevant UFR and carried-interest enhancements to take effect from the year of assessment 2025/26. Managers should map affected vehicles, investments, co-investors and service providers; assess local substance; and monitor the final text and Inland Revenue Department guidance. The proposed reform offers greater flexibility, but the winning operating model will pair that flexibility with disciplined data, governance and evidence.
*This article is general information only and is not tax or legal advice. The Bill was still under legislative scrutiny as at 27 August 2026; readers should confirm the final enacted law and administrative guidance before relying on any position.
