A&M Perspective: With the broadened definition of “fund”, Hong Kong is shifting away from a rigid interpretation of “collective investment scheme” and adopting a more inclusive approach for the UFR. 

Given the trend for large institutional investors or high-net-worth investors to adopt bespoke structures with greater fee transparency and control over their investment portfolio, the inclusion of fund-of-one structures reduces the significant tax uncertainty for managing such structures from Hong Kong. By clarifying this, Hong Kong is poised to attract a broader range of investors seeking to establish and operate fund structures in Hong Kong.

It will be important for the Inland Revenue Department (“IRD”) to provide further guidance on the timing of the testing of the value of assets under management (“AUM”) for fund-of-one structures, especially these funds may only draw down capital as investments are identified and closed and hence, they may not necessarily deploy capital in the first year to achieve the required AUM. It should be noted that based on the Legislative Council Brief to the 2026 Amendment Bill, it is proposed that loans from participating person should not be deducted from calculation of the AUM while loans for parties other than participating persons (e.g. bank loans) should still be deducted from calculation of the AUM.

A&M Perspective: The expanded investment scope marks a notable strategic shift, moving away from a traditional asset focus towards a dynamic multi-asset strategy model. The proposed expansion represents a significant advancement for crypto and private credit funds. In the past, these funds operated under strict protocols to manage their Hong Kong tax exposure, and now they are set to benefit from improved clarity and flexibility.

In comparison with Singapore’s fund tax exemption regime, Hong Kong’s approach now also includes precious metals and physical commodities under the UFR. Additionally, the inclusion of digital assets, which is not yet covered by Singapore’s fund tax exemption regime, further positions Hong Kong as a frontrunner among its regional peers.

A&M Perspective: The removal of the 5% threshold for incidental transactions represents a noteworthy improvement, as income types that were previously challenging to categorize, such as certain fee-based income or interest from debt instruments held alongside equity, are now much more likely to be included under the broad definition of tax-exempt “qualifying transactions”. The proposed amendments bring increased clarity to the tax treatment of interest income, offering bonds funds and private credit funds greater certainty and reducing the need to navigate the complexities of the general charging provisions.

From a practical perspective, funds are no longer required to undertake a cumbersome process to painstakingly track and distinguish every dollar of revenue to ensure compliance with the 5% incidental income threshold. It also eliminates the ambiguity where the IRD could previously question whether a particular transaction was genuinely incidental or constituted a separate business activity.

An SPE is exempt from profits tax only to proportionate extent of its assessable profits correspond to the percentage of interest held by a UFR exempt fund.

Also, the definition of an SPE is limited to holding and administering Schedule 16C assets and investee private companies, which does not fully capture the typical functions performed by SPEs in private capital structures.

Full profits tax exemption is now granted to SPEs that satisfy the statutory conditions, regardless of the ownership percentage held by a UFR exempt fund, provided that the co-investor(s) does / do not have day-to-day control over the management of the property of the SPEs.

Further, the scope of permissible SPE activities has also been expanded to include acquisition, holding, administering and disposal of investee private companies and assets of a class specified in Schedule 16C, as well as carrying out an activity incidental to the above purpose.

A&M Perspective: The enhanced tax exemption framework for SPEs brings welcomed clarity and efficiency to the rules governing funds that invest along with other co-investors. By streamlining the rules, it does not only make compliance simpler but also helps minimize the risk of non-fund co-investors inadvertently triggering Hong Kong tax exposure. 

Furthermore, the proposed changes offer more certainty regarding the permissible activities SPEs can undertake within a typical investment structure, giving both funds and their co-investors greater confidence as they plan and execute the investments.

It is proposed the anti-round tripping rules to be amended to include an “excluded persons” list that removes certain resident persons from the scope of the provisions in relation to the tax exemption offered to tax-exempt fund and SPEs. These generally include natural persons, UFR-exempted funds and exempted persons (i.e., resident persons who are not otherwise chargeable to Hong Kong profits tax on the relevant profits if the assets have been held directly), or an entity of which 95% beneficial interest is directly / indirectly owned by a non-resident person and/or excluded persons mentioned above (subject to certain conditions being satisfied).

The amended rules introduced specific anti‑round‑tripping provisions that apply where financial institutions, insurance companies, money‑lenders derive profits from loans made by the fund / SPE (i.e., subject to (a)(i) a 20% ownership test or (a)(ii) de-facto control / significant influence test; or (b) an associate test).

A&M Perspective: The proposed changes mark a significant departure from a restrictive framework, introducing a more enabling environment for local capital investment while restricting the exemption on certain institutional investors. Importantly, these amendments largely remove domestic investors from the scope of the “punitive” deeming provisions, as long as they do not fall into high-risk categories.

The most notable practical change is the comprehensive exclusion of resident natural persons from the anti-round tripping provisions. For instance, high-net-worth individuals in Hong Kong are now allowed to hold a beneficial interest greater than 30% in a tax-exempt fund without being deemed to have earned assessable profits from the fund’s tax-exempt income. This change eliminates much of the tax friction that previously hindered local founders and families from making significant investments in their own Hong Kong-domiciled funds, thereby aligning the UFR more closely with the FIHV regime.

Additionally, this exclusion extends to exempted resident funds and persons, making it much easier to structure master-feeder arrangements and fund-of-one structures within the Hong Kong market. The presence of a resident fund in the investor base will no longer jeopardize the underlying fund’s tax status for that investor, simplifying compliance and encouraging participation.

While these changes offer greater flexibility for individuals and funds, they come with more targeted and stringent requirements for the financial sector. The 20% ownership test or control / significant influence test for financial institutions, insurance companies, money‑lenders is specifically designed to prevent synthetic lending, where banks or lenders might otherwise channel loans through a tax-exempt fund to convert taxable interest income into tax-exempt distributions. Nevertheless, it should be monitored as to how the IRD interpret “significant influence” in practice, e.g., whether there is a specific threshold or level of actual participation that constitutes “significant influence” or whether a person who merely holds the power to participate but does not actually exercise constitutes “significant influence” for the purpose of the test.

A new reporting mechanism (with initial notification and annual notification requirements) is proposed to be introduced for funds and SPEs that rely on the UFR exemption. A person who is responsible for the management or administration of the fund is generally regarded as the “designated person” who should file the initial notification and annual notification (unless otherwise specifically designated by the fund already), to the Commissioner within the stipulated timeframe. A transitional arrangement will be provided for the first year of implementation (i.e. 2025/26) to extend the filing deadline. The IRD will provide details of the reporting arrangements (including information required) after enactment of the Amendment Ordinance.

Additionally, a substantial activities requirement in terms of local full-time employment of not less than 2 qualified employees and annual operating expenditure incurred in Hong Kong for carrying out investment management services of not less than HK$2 million / US$255k has also been added, requiring core investment management functions of the tax-exempt fund to be carried out in Hong Kong.

A&M Perspective: The introduction of reporting and substantial activities requirements may result in additional administrative considerations for funds which rely on the UFR exemption. A streamlined reporting process, together with clear guidance on the expected level of substance and information that needs to be reported, will be important to support consistent application of the rules.

In particular, it would be important for the IRD to confirm whether the substantial activities requirements will be applied to each fund and that outsourcing of the investment management services is allowed, provided that the fund has exercised adequate monitoring and control on the carrying out of the relevant activities by the outsourced entity. Such approach should ideally be aligned with the FIHV regime, where totality of facts and circumstances is considered to determine “adequacy”.

Please refer to our separate alert on the enhancements to the
Carried Interest Tax Concession regime