The Tax Situation Is Getting Even Better For Fund Managers in Hong Kong
Hong Kong is in the process of substantially upgrading its tax regime for investment funds.
The proposed changes are important because they operate at two different levels.
First, they broaden the Unified Fund Exemption, which can exempt qualifying investment profits at the fund level.
Second, they substantially expand and simplify Hong Kong's existing carried interest concession, under which qualifying carry can already be taxed at 0% for the manager and excluded entirely from salaries tax for qualifying employees.
That second concession is not new. Hong Kong has offered it since 2021. What is changing is that considerably more fund structures, investment strategies and employee carry arrangements should be capable of using it.
A Broader Fund Exemption
Hong Kong's Unified Fund Exemption already allows qualifying funds, whether established in Hong Kong or offshore, to earn qualifying investment profits without Hong Kong profits tax.
The 2026 Bill broadens that regime in several important ways.
The definition of “fund” is being expanded. The range of qualifying investments is also being widened, including in areas such as private credit, digital assets, precious metals and commodities.
The existing 5% threshold for incidental transactions is being removed, while the rules for special purpose entities used to hold investments are also being relaxed.
For traditional private equity managers, some of this may simply make an already workable regime more flexible. For credit, hedge and other alternative strategies, the changes may be more significant.
There is a trade-off. The enhanced regime also introduces new economic substance and reporting requirements.
Carry Gets Much More Interesting
Hong Kong already provides very favourable tax treatment for qualifying carried interest.
Eligible carry received by a qualifying manager can benefit from a 0% profits tax rate, while qualifying employees can exclude 100% of eligible carried interest from salaries tax. The employee concession has applied to qualifying carry received or accrued since 1 April 2020.
Historically, however, the regime was relatively narrow and heavily geared toward traditional private equity.
The 2026 changes are designed to broaden and simplify it.
Among other things, the reforms expand the categories of fund profits that can generate qualifying carry, remove the traditional hurdle-rate requirement, remove the HKMA certification requirement and allow greater flexibility in how carry is allocated and paid.
That potentially makes the concession relevant not only to classic PE carry, but also to
performance-linked compensation used by hedge funds, private credit managers and other alternative investment managers.
What Does That Mean For Employees?
This is where the changes may become particularly interesting.
An investment professional who receives an ordinary discretionary bonus pays salaries tax on it.
But where that employee instead has a genuine contractual right to participate in qualifying fund carry or a performance fee, the resulting payment may potentially qualify for the 100% salaries tax exclusion.
The distinction is important.
You cannot simply rename a bonus as “carry”.
The employee needs a genuine, non-discretionary participation right linked to fund performance, must actually perform qualifying investment-management services in Hong Kong, and the broader statutory requirements relating to the fund, manager and payment structure must be satisfied.
That does, however, create interesting possibilities for compensation structures.
A fund manager might, for example, separate remuneration into:
fixed salary, which remains taxable;
a discretionary bonus, which remains taxable; and
a contractual participation in qualifying fund performance, which may potentially be tax exempt.
Normal commercial protections such as vesting, leaver provisions and clawback mechanisms may still be capable of being built around a properly structured carry participation right.
Do Offshore Funds Need to Move to Hong Kong?
Not necessarily.
The Unified Fund Exemption is broadly domicile neutral, so an offshore fund can continue to qualify.
But the broader Hong Kong regime does make it worth asking whether maintaining an offshore fund, GP and related structure still provides enough benefit where the investment team, management activity and substance are already in Hong Kong.
For future funds, or potentially through re-domiciliation, Hong Kong LPFs and OFCs may therefore deserve another look.
What Should Managers Be Doing Now?
Managers should be reviewing both their fund structures and their compensation arrangements.
In particular:
does the existing fund structure fully benefit from the expanded UFE;
are there unnecessary offshore entities or SPVs;
does the manager satisfy the new substance requirements;
how is carry currently allocated among the investment team; and
are employees receiving discretionary bonuses where a genuine contractual carry participation structure may be more appropriate?
The Bill remains before the Legislative Council and is subject to enactment. The Government nevertheless intends the changes to apply from the 2025/26 year of assessment, and the IRD is already allowing taxpayers to file on the basis of the proposed carried-interest changes as a transitional measure.
For Hong Kong fund managers, the direction of travel is clear: a broader fund exemption, a more practical carried-interest regime and potentially much more flexibility in how investment professionals participate in fund performance.
