Hong Kong Proposes Zero Tax on Performance Based Compensation for Fund Manager Employees

For hedge fund managers and family offices, the decision to move their fund management operations to Hong Kong just got a lot easier. In a direct challenge to the individual tax burdens in major fund management centres like New York and London, the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (“Preferential Tax Bill”) not only expands the range of assets in which fund managers may invest whilst qualifying for tax exemption but expands the zero tax rate carried interest concession now available for private equity fund managers to performance fees and other performance based compensation paid to fund managers as well as employees who share in those fees and compensation.

Even without the latest tax proposals, Hong Kong is already a preeminent international asset and wealth management centre, the world’s largest cross-border wealth management centre and Asia’s largest hedge fund hub. Assets under management in Hong Kong exceeded HK$35 trillion at the end of 2024 and the city ranked first globally in the “investment management” sector in the Global Financial Centres Index.

Not content with its position, the Preferential Tax Bill represents Hong Kong’s boldest move yet to attract global fund managers and family offices and become the world’s premier asset management.

“Hong Kong has the ambition to become the pre-eminent centre for fund issuance, not just in Asia but worldwide. Recently enacted and proposed policies have the potential to make Hong Kong the world’s top destination for asset managers,” says Gavin Cumming, Partner and Head of London at Hong Kong law firm, Timothy Loh.

Once passed into law, the Preferential Tax Bill will take retrospective effect from April 1, 2025.

How Hong Kong Built Its Fund Framework

The Preferential Tax Bill is designed to enhance and expand the preferential tax regime already in place in Hong Kong. Under this regime, private equity funds and hedge funds as well as family office investment holding vehicles already enjoy full exemption from tax on profits earned from transactions in eligible investments. Not content with offering tax neutrality to the asset holding vehicles, in 2021, the Hong Kong Government introduced a tax concession on eligible carried interest so that private equity fund managers would pay zero tax on such carried interest and their employees would pay zero tax on their share of such carried interest.

Performance Fee Exemption Under New Preferential Tax Bill

Amongst other things, the Preferential Tax Bill expands the tax concession on carried interest to profit related returns arising from a qualifying fund, such as performance fees earned by hedge funds as well as performance related entitlements earned by managers of hedge funds and family offices. With this expansion, fund managers across the private and public investment spectrum locating their fund management operations in Hong Kong may enjoy zero tax on performance fees and their employees in Hong Kong may enjoy zero tax on their share of these fees.

The new tax concession applies to the entity that is legally entitled to receive the profit related return under the fund documentation, whether the relevant fund is established onshore or offshore. However, most importantly from an individual perspective, employees with a contractual entitlement to participate in those returns, whether directly or through vehicles designated to earn those returns or profit-sharing arrangements, may qualify for the concession where they are employed in Hong Kong and involved in providing “investment management services”.

“Investment management services” is defined to include fundraising, research and advisory activities, and acquiring, managing or disposing of investments for the fund. As a result, the scope of qualifying employees under the expanded concession extends beyond investment professionals to a broader range of personnel involved in the investment management function of a fund.

As is the case under the existing concession, an employee will only qualify for the salaries tax concession if they are employed by a qualifying fund manager, or by an associated corporation or associated partnership of such fund manager, which itself carries on a business in Hong Kong and they, as an employee, provide investment management services in Hong Kong for or on behalf of the qualifying fund manager.

New Asset Classes Eligible for Tax Exemption

In addition to new exemptive relief for performance based compensation, as alluded to in a November, 2024 consultation paper, the Preferential Tax Bill expands the asset classes in which funds themselves may invest to be eligible for profits tax exemption. These new asset classes include equity interests in non-corporate entities, loans, digital assets, real estate situated outside Hong Kong, insurance linked securities, and subject to limits, precious metals, as well as other non-taxable income (such as dividends and offshore income) and even taxable income. Thus, for example, once the Preferential Tax Bill passes into law, fund vehicles and family office investment holding vehicles may be eligible for profits tax exemption on gains trading digital assets.

“Hong Kong's asset and wealth management sector already manages trillions of Hong Kong dollars and anchors a wide ecosystem of legal, fund administration, banking and professional services jobs. Broadening the preferential tax regime to cover a fuller range of modern investment strategies is intended to deepen that ecosystem further,” says Managing Partner Timothy Loh.

The Preferential Tax Bill will strengthen Hong Kong’s position as the preferred location for fund managers and their funds and provides a compelling incentive for fund managers weighing where to base or relocate their operations in the world.

The proposed changes reinforce Hong Kong’s ambition to remain a leading centre for asset management and a major gateway for capital flows.