Consultation has just closed on proposals to improve Hong Kong''s preferential tax regimes for privately offered funds, family-owned investment holding vehicles and carried interest.
The measures are intended to attract more funds and family offices to the jurisdiction by expanding and clarifying the scope of some key tax concessionary regimes.
One of these is the unified fund exemption (UFE), which provides tax exemption for profits earned on certain transactions by privately offered funds and special purpose entities (SPEs) owned by tax-exempted funds. The new proposals extend this relief to cover pension funds and endowment funds, as well as many other improvements such as expanding the scope of qualifying investments; introducing a less stringent definition of "private company"; expanding the scope of tax-exempt income; and relaxing the deeming provisions for Hong Kong residents.
However, they also propose a new tax reporting mechanism under which funds and SPEs benefiting from the exemption will need to provide accounting data and information to show that tax exemption conditions have been met. This may generate additional administrative burdens for funds managed in Hong Kong, said law firm Baker McKenzie.
The consultation paper also suggests introducing substantial activity requirements for funds, mandating at least two qualified employees and an annual operating expenditure of no less than HKD2 million incurred in Hong Kong. Investment services can be outsourced to third parties or associates.
The second concession is the family-owned investment holding vehicle (FIHV) exemption, which provides tax relief for assessable profits arising from certain transactions by FIHVs managed by single family offices and family-owned SPEs in the past three years. Here the government proposals will expand the scope of qualifying investments and tax-exempt income, and amend the test for eligible transactions in private companies.
A third concession is available for carried interest distributed by private equity funds to qualifying persons and their employees in relation to profits, tax and salaries that would otherwise be chargeable to tax. The government"s plan here is to expand the scope of "qualifying payers", removing the requirement for certification by the Hong Kong Monetary Authority, and redefining "associate" to include the associated corporation or partnership of the certified investment fund. It will also expand the scope of "qualifying employee", and the scope of transactions giving rise to eligible carried interest.
Baker McKenzie welcomed the "much-needed" enhancements as addressing some of the long-standing issues embedded in these concessionary regimes since their introduction. "They represent a strategic move by the government to attract a diverse class of key investors to establish and operate in Hong Kong", said the firm.
Sources：【2025/01/09 Baker McKenzie】