Hong Kong is proposing to reform its Unified Fund Exemption regime ("UFE") and enhance its tax concession for carried interest through the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (the "Bill"). The Bill was gazetted on 12 June 2026 and is currently progressing through the Legislative Council. Subject to enactment, the enhanced measures are intended to apply retrospectively from 1 April 2025 (i.e. from the year of assessment 2025/26).
Key enhancements to the UFE
The Bill proposes to expand both the scope of funds and investments that may benefit from the UFE. In particular:
- the definition of "fund" would be expanded to include certain fund-of-one and single-investor arrangements, subject to specified conditions; and
- the scope of Schedule 16C assets would be expanded to include equity interests in non-corporate entities (such as partnerships), loans, immovable property situated outside Hong Kong, digital assets and certain other asset classes.
The Bill also proposes to remove the distinction between "qualifying transactions" and "incidental transactions", remove the 5% threshold for incidental transactions, expand the range of permissible activities for special purpose entities ("SPEs"), and relax certain anti-round tripping provisions currently applicable to Hong Kong investors.
Tax exemption for carried interest
The Bill proposes to enhance Hong Kong's existing tax concession for carried interest received by eligible investment managers and qualifying employees. Eligible carried interest is defined as a profit-related return derived from the provision of investment management services to a fund ("Carried Interest").
Who or what is in scope:
- Scope of income: The exemption would apply to a broader range of fund profits, including profits arising from all asset classes specified in Schedule 16C of the IRO that fall within the UFE, as well as other non-taxable income (such as dividends and offshore income) and taxable income. The exemption would therefore no longer be confined to profits arising from private equity transactions.
- Eligible investment managers: The concession would apply to the entity that is legally entitled to receive Carried Interest under the fund documentation, whether the relevant fund is established onshore or offshore. The Bill also expands the scope of eligible managers and removes certain requirements under the current regime.
- Qualifying employees: Employees with a contractual entitlement to participate in carried interest arrangements, whether directly or through carried interest vehicles or profit-sharing arrangements, may qualify where they are employed in Hong Kong and involved in providing investment management services. Investment management services include fundraising, research and advisory activities, and acquiring, managing or disposing of investments for the fund. The scope of qualifying employees may therefore extend beyond investment professionals to a broader range of personnel involved in the investment management function
Next steps and considerations
The Bill brings welcomed change to the asset management and private capital industry in Hong Kong, by enhancing certainty to the industry in various aspects of tax exemption. It would enhance Hong Kong’s status as a global asset management hub. We look forward to further practical guidance issued by the IRD as the law goes into implementation. In the meantime, hedge fund and private fund managers should prepare for the following:
- Fund structures – Given the enhanced UFE regime, managers may wish to review existing private equity, growth equity, private credit, co-investment and continuation fund structures to assess whether they can benefit from the broader range of qualifying assets and eligible fund arrangements. The reforms may also create opportunities to simplify existing structures, including reducing reliance on certain offshore holding or management entities.
- Fund documentation – LPAs, carried interest arrangements, co-investment documentation and investment management agreements should be reviewed to ensure that carried interest entitlements satisfy the conditions of the enhanced concession. In particular, the return should be clearly profit-linked and determined in accordance with the relevant fund documentation rather than being discretionary.
- For employees – Employers should ensure that references made in the employment contract fall within the definition of Carried Interest to be eligible. Carried Interest must be separate from other employment compensation and must be tied to the carried interest / performance fee paid by the fund.
- Substance, reporting and record keeping – Managers should assess whether existing Hong Kong operations satisfy the proposed economic substance requirements and ensure that appropriate systems are in place to maintain records supporting UFE eligibility and any tax-exempt carried interest received
It is worth noting that the Monetary Authority of Singapore (MAS) announced on 19 August 2026 a proposal to introduce measures aimed at supporting the growth of Singapore’s asset management industry. These measures include a proposed tax exemption for profit-related returns derived from the provision of fund management services to qualifying funds. Further details of the proposed measures are expected to be set out in the Government's Budget Statement for 2027, which is expected to be delivered in February 2027.
Disclaimer: We do not advise on tax matters. Please note that this update summary is not intended to be nor should it be construed as tax advice. We work with tax advisers to advise on structuring, fund documentation and employment arrangements.
