What’s Changing?
In August 2026, the Financial Services and the Treasury Bureau (FSTB) issued a response to media enquiries regarding the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026.(ird.gov.hk) The Bill expands the preferred tax treatment for carried interest, formerly limited largely to private equity investments, to a wider range of eligible funds and qualifies returns that are tied to investment performance under specific circumstances. Qualification requires:
- Returns must be non-discretionary and linked to fund performance under the fund agreement;
- The employee or fund manager must provide investment management services in Hong Kong (e.g. research, advisory, acquiring/managing/disposal) to qualify;
- The “fund” must meet the legal definition in the Inland Revenue Ordinance, including that participating persons do not have day-to-day control over its management; proprietary trading businesses do not qualify.(ird.gov.hk)
These expansion measures will take effect for the year of assessment 2025/26, subject to passage by the Legislative Council.(ird.gov.hk)
Why It Matters – Practical Implications
| Person | Opportunity | Watch-outs |
|---|---|---|
| Fund manager receiving carried interest | If performance-based compensation qualifies, may enjoy profits tax or salaries tax concessions rather than full rate. | Must ensure carried interest is structured properly in fund agreement and administration in Hong Kong. Discretionary or unclear agreements may be rejected. |
| Employees of fund-management companies | Expansion allows “qualifying employees” to benefit, not just originating investors or founders. | Must conduct substantial investment management services in Hong Kong; remote or ancillary roles likely excluded. |
| Investors or funds planning Hong Kong structure | Hong Kong becomes more competitive as location for funds and single family offices, especially those aiming to receive carried interest benefits. | Must verify whether the “fund” meets the criteria in IRO: non-day-to-day control, substantial activities in HK, etc. |
Actionable Steps if You’re Affected
- Review fund agreements immediately. Ensure that carried interest obligations are performance-based, clearly documented, and include necessary conditions (non-discretionary, tied to fund performance).
- Confirm whether employees’ roles qualify as investment management services under the law: research, advisory, acquisition, disposal or acting for the fund with funding-raising or advising.
- Engage legal or tax counsel to assess whether your fund qualifies under the IRO’s definition of “fund” (particularly the non-day-to-day control test).
- Track progress at LegCo: the Bill is being scrutinised and subject to amendment. Implementation starts for YA 2025/26, so timing matters.
Example Scenario
| Situation | Old Treatment | With Proposed Bill |
|---|---|---|
| Employee at a local private equity fund earns 10% carried interest under fund’s governing agreement | Carried interest taxed at full salaries tax or profits tax depending on individual/company circumstances. | Eligible under new regime: may receive concession if agreement and services in HK meet conditions; tax savings depend on rate differences. |
| Family office with a fund-of-one investing in insurance-linked securities, seeking to distribute carried interest to founding family members | Fund-of-one may have been excluded under prior “fund” definition; certain investment types not always eligible. | Expanded definition may bring fund-of-one and broader investment classes within scope. |
Key Takeaways
- This reform signals Hong Kong’s intent to better compete globally for private equity and family offices.
- If you manage funds, now is the time to structure carried interest and performance fees to take advantage.
- Legal definitions and active substance in Hong Kong will be critically important – weak connections risk exclusion.