The 2026 Funds, FIHV and Carried Interest Bill: What It Gives and What It Takes Away

Hong Kong is rewriting three of its most important preferential tax regimes at once. The Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 was gazetted on 12 June 2026 and read for the first time in the Legislative Council on 24 June 2026. It takes effect retrospectively from the year of assessment 2025/26, and the Inland Revenue Department has already said that eligible taxpayers may file on that basis before it becomes law.

Most commentary on the Bill has led with the good news, and there is a lot of it: funds-of-one brought inside the definition of a fund, the 5% incidental transaction cap abolished, ten new items added to the list of qualifying assets, and the HKMA certification and hurdle rate requirements removed from the carried interest concession.

Less has been written about what the Bill takes away. It introduces, for the first time, an economic substance requirement on funds themselves, a mandatory tax reporting mechanism backed by new criminal offences, and a specific anti-round-tripping rule aimed at loans. All of it applies retrospectively to a year of assessment that is already over for many managers.

This note covers both halves.

Where the Bill actually stands

Two points of precision, because the timeline is widely misdescribed.

First, the Bill has already been gazetted. What has not yet happened is enactment. When commentary refers to the legislation being "gazetted in Q4 2026", what is meant is gazettal of the amendment ordinance once passed, which is a different event from the gazettal of the Bill on 12 June.

Second, no date has been fixed, but there is now a stated target. The Second Reading debate was adjourned after the first reading on 24 June 2026 and the Bill went to a Bills Committee. On 12 August 2026 the Financial Services and the Treasury Bureau confirmed that the Bills Committee has completed its clause-by-clause examination and that the Government "targets to resume second reading debate on the Bill within the second half of this year". That is a target rather than a scheduled date, and the LegCo record still shows the resumption, committee stage and Third Reading as to be notified.

For planning purposes: enactment during 2026 is the working assumption, committee stage amendments remain possible, and the retrospective start date does not move whenever passage occurs.

Retrospective effect, and the trap inside it

The Bill applies to years of assessment beginning on or after 1 April 2025, so year of assessment 2025/26 onwards. All three regimes share that start point.

On 12 June 2026 the IRD published a transitional administrative measure confirming that taxpayers eligible for the proposed exemption or concession may submit their 2025/26 returns on that basis. The measure comes with a condition that is easy to overlook: taxpayers must watch the Bill's progress and, if necessary, notify the Department in writing of any revision required to a return already filed. Filing early on the enhanced basis is sensible, but it creates a follow-up obligation rather than closing the matter.

Carried interest carries an additional test, and this is a genuine trap. The amended Schedule 16D applies to eligible carried interest received by or accrued to a qualifying person or qualifying employee on or after 1 April 2025. It expressly does not apply to carry received by or accrued to a qualifying person before 1 April 2025 that nonetheless falls within the basis period for a year of assessment commencing on or after that date, nor to carry accrued to a qualifying employee before 1 April 2025 but received afterwards.

A manager with a non-March year end can therefore have carried interest sitting inside the 2025/26 basis period which is outside the new rules entirely. That needs checking before a return goes in on the enhanced basis.

The Unified Fund Exemption

A wider definition of "fund", including funds-of-one

Section 20AM(4) currently covers sovereign wealth funds only. The Bill replaces it with five limbs. Each of the following is now a fund:

• a sovereign wealth fund, as before;
• a pension fund, established and operated in a jurisdiction exclusively or almost exclusively to administer or provide retirement benefits, and regulated as such there;
• an endowment fund established and funded by a charitable entity exempt under section 88;
• an arrangement whose sole participating person is a governmental entity, a central bank, or a qualifying international organisation; and
• an arrangement funded by only one participating person who does not have day-to-day control over the management of the property, where the value of assets under management falling within a class specified in Schedule 16C is not less than HK$240 million.

The last limb is the general funds-of-one gateway, and the HK$240 million floor attached to it is the point to note. It is a separate test in a separate regime that happens to share a figure with the FIHV threshold, and conflating the two is an easy mistake. Funds-of-one funded by a sovereign, central bank or international organisation face no size floor at all.

Proprietary trading is outside this, and the Government has now said so expressly. Responding to media enquiries on 12 August 2026, the Financial Services and the Treasury Bureau confirmed that a business trading or holding assets with its own capital for its own account does not fall within the definition of a fund, because the participating person has day-to-day control over the management of the property. It follows that such a business cannot be a qualifying payer of eligible carried interest, and sums paid to its staff out of trading profits are remuneration rather than carry. Firms that have read the widened fund definition as an opening for a proprietary book should read that statement carefully. The day-to-day control test is doing the work in both the fourth and fifth limbs above.

Two further relaxations sit alongside. Offshore money lending and offshore property holding will no longer taint an arrangement as a general commercial or industrial business undertaking, because section 20AM(7)(c) is narrowed to money lending in Hong Kong and property holding in Hong Kong. And these excepted funds will no longer need to be managed by a specified person: satisfying one of the five limbs throughout the basis period is an alternative route to the exemption condition, so such funds may appoint managers who are neither licensed corporations nor authorized financial institutions.

The 5% incidental transaction cap goes, and the architecture inverts

The existing rule denies the exemption to profits from incidental transactions where those receipts exceed 5% of combined qualifying and incidental receipts. The Bill repeals it.

What replaces it is more generous than "the cap has been removed" suggests. The exemption is being re-based from transactions to assets. Section 20AN(2) will exempt profits derived from any assets of a class specified in Schedule 16C, or in the case of an open-ended fund company from any assets at all, regardless of whether they fall within Schedule 16C. The words "earned" become "derived", and "at all times" is deleted.

In place of a positive list capped at 5%, there is now an asset-based exemption limited by a short negative list. New Schedule 16L contains exactly one item: income derived from shares or stock of a private company that is attributable to property trading or property development in respect of immovable property in Hong Kong.

The practical effect is that passive and interest income from qualifying assets falls squarely inside the exemption. The same change is made for special purpose entities and for FIHVs.

One caution. The Commissioner may amend Schedule 16L by notice in the Gazette, so the exclusion list can grow without further primary legislation.

New classes of qualifying asset: ten items, eight categories

You will see this expansion described as eight new classes in some notes and as ten in others. Both are defensible and the difference is only a matter of counting. The LegCo Brief describes eight categories in its narrative; clause 24 inserts ten separately numbered items into Part 1 of Schedule 16C, because the emissions category is drafted as three of them. The items are:

• Item 1A, insurance-linked securities.
• Item 2A, direct or indirect equity interests in an entity that is not a corporation. This is a significant addition covering business trusts, private trusts, partnerships, limited liability companies and Japanese Tokumei Kumiai structures. Note that other provisions of the Bill carve item 2A out of certain cross-references, so it does not automatically travel everywhere item 1 goes.
• Item 8A, precious metals, meaning gold, silver, platinum, iridium, osmium, palladium, rhodium or ruthenium in a manufactured or unmanufactured state, except any exchange-traded commodity.
• Item 10A, commodities, in connection with and incidental to the trading of over-the-counter derivative products or futures contracts.
• Item 12, loans.
• Item 13, immovable property situated outside Hong Kong.
• Item 14, digital assets.
• Items 15, 16 and 17: emission allowance, emission derivatives and carbon credits, drafted as three separate items rather than one.

Three definitional points matter more than the headline list.

"Commodity" is an exhaustive named list. It runs from aluminium through to zinc and includes coal, cobalt, copper, crude oil, iron ore, lithium, natural gas, nickel, rice, rubber, soybean, steel, sugar, timber, wheat and around forty others. If a commodity is not on the list, it does not qualify. Gold and silver bullion are not on it, and the only gold entry is "gold ore and concentrates", so the 15% trade-volume cap does not bite on bullion. Bullion runs through item 8 or item 8A instead.

"Digital asset" is built on the AMLO definition of a virtual asset, but with a carve-out. It does not include a cryptographically secured digital representation of value giving its holder an interest in an underlying asset other than the Hong Kong dollar or a Schedule 16C asset. Tokenised exposure to a non-qualifying underlying therefore does not qualify.

Carbon credits and emission allowances depend on an administrative step that has not yet been taken, and they are not on the same footing. A carbon credit qualifies if it is traded either on a climate-related products platform operated by an affiliate of a recognized exchange controller, which covers HKEX's Core Climate, or on a platform recognized by the Secretary for Financial Services and the Treasury. An emission allowance qualifies only on the second route. The Secretary's recognition power is prospective and has not been exercised, so item 15 is not self-executing. Do not assume emission allowances qualify yet.

The caps: get these the right way round

Several published notes describe a single 20% cap applying to digital assets and precious metals. That is wrong, and it is the error most likely to find its way into a client memorandum.

• Precious metals: capped at 20%, measured by value, of the investment portfolio during the basis period. The manner of valuation is to be specified by the Commissioner and has not been published.
• Commodities: capped at 15%, measured by trade volume, of the total trade volume of the commodities and the related derivative products or futures contracts traded during the basis period. This is a different cap, on a different metric, and note that the denominator is the combined figure rather than the commodities alone.
• Digital assets: no cap at all.

There is a carve-out from the precious metals cap, and it is narrower than it first looks. It operates through the definition rather than through a proviso: "precious metal" excludes any exchange-traded commodity, which Schedule 16C already defines as gold or silver traded on a Hong Kong commodity exchange exempted under section 3(d) of the Commodity Exchanges (Prohibition) Ordinance, meaning the Hong Kong Gold Exchange. Exchange-traded commodities remain a qualifying asset in their own right under item 8, uncapped. Two consequences follow. The carve-out covers gold and silver only, so platinum, palladium, rhodium, iridium, osmium and ruthenium are inside the 20% however they are traded. And it covers that Hong Kong exchange only, so gold on the LBMA, COMEX, the LME or the Shanghai Gold Exchange counts toward the cap. A note that says the cap excludes exchange-traded gold generally is overstating it.

Note also that the FSTB has said it will further review the 20% precious metals cap, particularly how it should apply to gold traded and settled under the central clearing system the Government is developing. The figure should not be treated as settled.

A third and unrelated 20% appears in the new loans anti-round-tripping rule described below. Three different percentages, three different purposes.

Special purpose entities

At present the exemption for an SPE is limited to the percentage of the fund's ownership of it. The Bill repeals that limitation, so an SPE will be fully exempt regardless of the fund's ownership percentage.

A new condition takes its place, and it is a control test rather than a tax status test. Where the beneficial interests in the SPE are not wholly held by the fund, any person making a capital contribution to the SPE must not have day-to-day control over the management of its property. A right to be consulted, or to give directions, does not by itself defeat the test.

The SPE definition is also widened to cover disposal as well as acquisition, holding and administration, and to permit activities incidental to that purpose such as financing in relation to investments to be acquired. Chains of two or more interposed SPEs are now recognised.

Carried interest

Two requirements removed

HKMA certification goes. A fund no longer needs to be certified by the Monetary Authority in order to be a qualifying payer. The concept of a "certified investment fund" is repealed from Schedule 16D entirely.

The hurdle rate requirement goes. Here it is worth being accurate about what the old requirement actually was, because it is frequently misdescribed. There was never a statutory percentage. The repealed definition described the hurdle rate as a preferred rate of return stipulated in the agreement governing the operation of the fund. The problem it created was for start-up, angel and venture funds whose documents specify no hurdle at all, leaving their eligibility uncertain. If a note tells you the previous hurdle was 8%, that is market convention rather than law.

A quieter relaxation sits in the same clause: the test now refers to the payment or accrual of a return on investments, so actual payment is no longer required.

The extension to employees, and its limit

Eligible carried interest will now include sums received directly by a qualifying employee of a qualifying person, or of a closely related entity of one, by virtue of a specified right held directly or indirectly. Carry received through an employee's own vehicle or personal investment company is treated as received by the employee.

The limit on this is important and is missing from much of the commentary. The employee limb applies only for Parts 3 to 6 of Schedule 16D. Part 2, which contains the 0% profits tax rate, is excluded. So the extension is a salaries tax measure: it gives the employee the 100% exclusion from assessable employment income. It does not confer the 0% profits tax rate on the employee. An article that says employees now pay no tax on carry overstates the position.

The "specified right" test is where documentation work will be needed. The entitlement must be determined under the fund's constitutive documents or another agreement for the provision of investment management services, must not be attributable to the holder's capital contribution, and must not be discretionary, although a degree of flexibility as to amount, timing or manner of payment is permitted. Discretionary, bonus-style carry will not qualify.

Managers also pick up a new positive duty: a qualifying person must take reasonable steps to ascertain whether eligible carried interest is or will be received by its qualifying employees, or those of a closely related entity, as a result of investment management services in Hong Kong.

What is not changing

The 0% profits tax rate and the 100% salaries tax exclusion are untouched. So are the substantial activities requirements: an average of at least two full-time employees in Hong Kong carrying out the services with the necessary qualifications, and an adequate amount of operating expenditure, with the services carried out in Hong Kong and not through an overseas permanent establishment. The Innovation and Technology Venture Fund Corporation remains a specified entity.

Two eligibility gates do widen. "Closely related entity" replaces "associated corporation or partnership", so group entities qualify regardless of legal form. And a qualifying person may now provide services to any fund falling within the new section 20AM(4) limbs, which means unlicensed managers of excepted funds can qualify.

Family-owned investment holding vehicles

The thresholds, precisely

The requirement for at least two qualified full-time employees and the HK$2 million minimum Hong Kong operating expenditure are unchanged. Commentary suggesting these were about to be relaxed has not been borne out.

The HK$240 million figure is also unchanged, but the way it is measured is not, and describing the threshold as simply unchanged understates a real benefit. The Bill replaces "net asset value" with "assets value" throughout, and repeals the definition of NAV. Under the current net asset value calculation, loans from holders of a direct beneficial interest are treated as financial liabilities and deducted. Under the new measure they need not be. Loans from non-participating persons, such as bank borrowings, will still be deducted.

For a family structure sitting just below HK$240 million because of shareholder loans, that is the difference between qualifying and not qualifying.

Everything else

The same Schedule 16C expansion applies, because that Schedule serves both regimes. The same asset-based re-basing and Schedule 16L exclusion apply. Family-owned special purpose entities get the same treatment as SPEs: full concession regardless of the FIHV's ownership percentage, subject to the day-to-day control condition, with chains of interposed FSPEs recognised. The requirement that Schedule 16C assets be managed in Hong Kong softens to "primarily managed" in Hong Kong.

The definition of an eligible single family office is not changing, and neither are the 95% beneficial interest tests. Where a new 95% figure appears in the Bill it relates to the anti-round-tripping exclusions in the fund regime, not to the family office definition.

What the Bill takes away

This is the half that most notes skip, and it is where the compliance work sits.

1. An economic substance requirement on funds

This is new, and it is the most significant tightening in the Bill. New section 20AMA makes the section 20AN exemption conditional on the fund having, during the basis period:

• an average number of qualified employees that is adequate in the Commissioner's opinion and in any event not less than two; and
• operating expenditure incurred in Hong Kong for carrying out investment management activities that is adequate in the Commissioner's opinion and in any event not less than HK$2 million.

A qualified employee must be a full-time employee in Hong Kong who carries out an investment management activity for the fund in Hong Kong and has the necessary qualifications. Investment management activity includes seeking funds, researching and advising on potential investments, acquiring, managing or disposing of investments, and assisting an investee entity to raise funds.

Three observations. The drafting does not require the qualified employee to be employed by the fund, so employees of the manager carrying out the activity in Hong Kong appear to count. The numbers are floors, not safe harbours, because of the overlay that the level must also be adequate in the Commissioner's opinion. And as drafted there is no carve-out for open-ended fund companies or for excepted funds.

The Unified Fund Exemption has never imposed a substance requirement on the fund itself. Managers of offshore funds with no Hong Kong headcount need to understand that this is now a gating condition, retrospective to 1 April 2025.

2. A mandatory tax reporting mechanism

New sections 20AZ to 20AZE create a reporting regime. A specified person, meaning a person responsible for the management or administration of a fund or part of one, must file a written notice with the Commissioner within six months of beginning to manage or administer the fund. A fund may designate a single specified person in Hong Kong, which starts a fresh six-month clock.

For funds with a specified person for the years of assessment beginning 1 April 2025 or 1 April 2026, there is a transitional deadline of twelve months from commencement of the relevant clause.

An assessor may also require an annual notification. Filings must be made electronically through a system designated by the Commissioner, containing information specified by the Board of Inland Revenue, and records must be kept for not less than seven years after the end of the year of assessment in which the notification is filed.

3. New criminal offences

• Failure without reasonable excuse to comply with the notification requirements: a fine at level 3.
• Engaging a service provider does not in itself constitute a reasonable excuse. The risk cannot be outsourced.
• Failure to comply with a court order to file: a fine at level 4.
• A service provider who fails to cause a notice to be filed commits an offence in its own right, at level 3.

4. A specific anti-round-tripping rule for loans

Where a financial institution, insurance company, money lender or intragroup financing business holds 20% or more of the beneficial interest in a fund, or any percentage where the fund is an associate, or has control or significant influence over the fund, that institution will be deemed to have derived assessable profits in respect of the fund's loan profits. The rule extends to SPEs and to FIHVs.

Set against this, the general anti-round-tripping rules are relaxed for resident individuals, exempted funds, exempted persons and qualifying interposed resident entities that are at least 95% owned by such persons.

5. Caps, closed lists and pending recognitions

The 20% precious metals cap, the 15% commodities trade-volume cap measured against a combined denominator, the exhaustive commodity list, the narrowness of the gold and silver carve-out from the precious metals cap, the digital asset carve-out for tokenised non-qualifying underlyings, and the dependence of emission allowances on a platform recognition that has not yet been made. The new asset classes are narrower in practice than the headline list suggests.

6. A negative list that can grow

Schedule 16L is short today. The Commissioner may add to it by notice in the Gazette.

What to do before enactment

• Decide whether to file 2025/26 on the enhanced basis. The IRD has invited it, but build in a process to revisit the return and notify the Department in writing if the Bill changes in committee.
• Check the carried interest timing test. Carry received or accrued before 1 April 2025 sitting inside a 2025/26 basis period is outside the new rules.
• Model the economic substance requirement now. Two qualified Hong Kong employees and HK$2 million of Hong Kong operating expenditure, both retrospective to 1 April 2025, and both floors rather than safe harbours. This is the item most likely to catch a manager by surprise.
• Diarise the reporting obligation. Six months from appointment, twelve months transitionally, electronic filing, seven-year retention, criminal liability for default.
• Re-test fund-of-one structures against the new section 20AM(4) limbs, and note the HK$240 million floor on the general limb.
• Review carry documentation. The "not discretionary" requirement in the specified right test, and the salaries-tax-only scope of the employee limb, both need to be reflected in how the arrangements are papered.
• Re-measure FIHV eligibility on the assets value basis. Shareholder loans no longer reduce the figure.
• Wait for IRD guidance on valuation. The precious metals cap and the assets value measure both defer to a manner to be specified by the Commissioner, and neither has been published.

How we can help

Alan Wong LLP advises asset managers, fund sponsors and family offices on the Hong Kong preferential tax regimes. Our work on this Bill includes eligibility testing against the new fund and fund-of-one definitions, modelling the economic substance requirement and the reporting obligations that come with it, reviewing carried interest documentation against the specified right test, re-measuring FIHV thresholds on the new assets value basis, and restructuring where the changes open something that was previously closed. To discuss what the Bill means for your structure, please get in touch.

This article is general information current as at August 2026 and reflects the Bill as gazetted on 12 June 2026. The Bill remains before the Legislative Council and its detail may change before enactment. It is not legal or tax advice and should not be relied on as such.