Hong Kong's government introduced legislation to expand tax exemptions for private funds, family-owned investment vehicles and carried interest. The Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 was gazetted on 12 June and introduced into the Legislative Council for first reading on 24 June. The government is targeting resumption of the second reading debate in the second half of 2026. If enacted, the measures would take effect retrospectively from the year of assessment 2025/26.
The bill would broaden the definition of a fund to include certain pension funds, endowment funds and single-investor arrangements. Under the existing regime, a fund generally requires pooled management or pooled contributions and no day-to-day control by participating persons. The proposed changes would bring bespoke fund-of-one structures within scope, provided the vehicle is structured as a fund rather than a proprietary trading business or general commercial undertaking.
The legislation would expand the list of assets that qualify for exemption under the unified tax regime for funds and the family-owned investment holding vehicles regime. Proposed additional categories include loans, direct or indirect equity interests in non-corporate private entities, immovable property situated outside Hong Kong, insurance-linked securities, certain digital assets, precious metals, certain commodities connected with over-the-counter derivative products or futures contracts, and carbon credits and emission allowances.
The bill would remove the distinction between qualifying transactions and incidental transactions and eliminate the associated 5% trading receipts threshold. Under the current regime, the fund exemption covers profits from qualifying transactions in Schedule 16C assets and certain incidental transactions, but the exemption for incidental transactions is subject to the 5% threshold. The practical effect is that income such as interest or dividends connected with qualifying investments would be less likely to fall outside the exemption solely because it is treated as incidental income.
The legislation would also expand the permissible activities of special purpose entities. Under the current regime, a special purpose entity is limited to holding and administering certain assets and related activities. The bill would give more flexibility for typical acquisition, holding, administration and disposal activities. It would extend the exemption to all profits of a qualifying special purpose entity derived from Schedule 16C assets, subject to anti-round-tripping rules.
The bill would enhance the carried interest tax concession so that it may apply to a wide range of eligible fund strategies, including hedge funds and private credit funds, subject to statutory conditions. It would also introduce reporting and economic substance requirements for funds claiming exemption under the unified tax regime, bringing the funds regime closer to obligations already familiar under the family-owned investment holding vehicles regime.