Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

March 7, 2019

Hong Kong passes new legislation to grant profits tax exemption to all privately-offered funds

Executive summary

Hong Kong’s Legislative Council passed, on 20 February 2019, the bill (the Bill) for new legislation (the New Law) to grant the profits tax exemption to all privately-offered funds. The New Law will be effective for transactions occurring on or after 1 April 2019.

The Bill retains the original form without any amendment.1

In addition, the Hong Kong Government clarified certain provisions of the New Law during the legislative process.

Detailed discussion


Under the New Law, regardless of residence, all privately-offered funds in the form of collective investment funds will be exempt from profits tax in Hong Kong on their usual investment and securities trading income, provided that the transactions are carried out by a specified person, or the fund itself is a qualifying fund.

A fund or a special purpose entity (SPE) will be exempt from tax on its profits arising from sale of private company shares (irrespective of the country of its incorporation) subject to satisfying certain additional conditions.

The New Law does not include any tainting provisions; accordingly, disqualifying transactions do not make nontaxable profits of a fund or an SPE subject to tax.

The current tax exemption regime for the non-fund entities will remain unchanged.

Clarification by the Government

A bona fide fund may only have one investor at a certain point of time

Under the New Law, one of the necessary conditions for qualifying as a “fund” is that the arrangement involved must pool the contributions of persons (participating persons) participating in the arrangement.

However, the Government has clarified that the term “participating persons” would not necessarily prevent a bona fide fund from enjoying the tax exemption, even though it only has one investor at a certain point in time (e.g., at the initial stage of launching a fund).

No relaxation of what an SPE can perform

The New Law limits the scope of activities of an SPE to holding and administering investee private companies, which prompted requests that the Government relax the scope of activities.

However, the Government rejected the requests and maintained its view that an SPE should be established solely for the purpose of holding and administering investee private companies.

The term “met in good faith”

The New Law taxes profits derived from the disposal of private companies unless specified conditions are met by a fund or an SPE “in good faith.” However, the term “in good faith” is not defined in the New Law.

The Government expressed that the Inland Revenue Department will take into consideration all relevant factors in determining whether a fund or an SPE is acting in good faith.

“Holding of debt securities to earn interest” is not a qualifying transaction

Under the New Law, qualifying transactions do not include “the holding of debentures, loan stocks, bonds or notes to earn interest income.”

Requests were made that the Government include these activities as qualifying transactions; however, the requests were not accepted.


1. See EY Global Tax Alert, Hong Kong proposes to remove ring-fencing features of current exemption regime for privately-offered funds, dated 18 December 2018.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong
  • David Chan |
  • Paul Ho, Financial Services |
Ernst & Young LLP, Hong Kong Tax Desk, New York
  • Rex Lo |
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty |
  • Kaz Parsch |
  • Bee-Khun Yap |



The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2023, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct