Newsflash: IRD Publishes DIPN 61 on Profits Tax Exemption for Funds

July 21, 2020

On 30 June 2020, the Hong Kong Inland Revenue Department (IRD) published Departmental Interpretation and Practice Note No. 61 (DIPN 61) on the Profits Tax Exemption for Funds. DIPN 61 clarifies the IRD’s interpretation and application of the profits tax exemption for funds that became effective on 1 April 20191 (Unified Funds Exemption). Prior to the introduction of the Unified Funds Exemption, an exemption from profits tax was only available to offshore private funds. Following the introduction of the Unified Funds Exemption, all funds, regardless of domicile, structure or location of management, benefit from the tax exemption for profits arising in or derived from business carried out in Hong Kong, provided that certain conditions are met.

Definition of a "fund"

To benefit from the Unified Funds Exemption, a vehicle must meet the specific definition of "fund". The definition of a "fund" mirrors that of "collective investment scheme" set out in the Securities and Futures Ordinance (SFO), with some necessary modifications. DIPN 61 provides the following clarifications:

  • A "fund of one" may not satisfy the requirement in the definition for a pooling of capital, meaning that these structures may not benefit from the Unified Fund Exemption.
  • It is sufficient for just one investor to not have day-to-day control over the management of the fund.
  • Where a vehicle comprises separate pools of assets (for example, an umbrella fund or protected cell company), each asset pool will be considered separately when considering if it constitutes a fund. If an asset pool has different classes of shares, each class of shares will also be considered separately. However, in the DIPN 61 the IRD confirms that it is prepared to treat different interests as a single fund, provided there is no segregation of assets and liabilities between classes of shares. Whether a vehicle is considered a single fund or multiple funds is important for determining whether a vehicle constitutes a "qualified investment fund" (as explained below).
  • Master-feeder structures and parallel funds, which are set up purely to address the needs of investors from different jurisdictions, are likely to be considered a single fund for the purposes of the definition of "fund".

Specified Persons and Qualified Investment Funds

A "fund", per the definition in the Unified Funds Exemption, will be exempt from profits tax if it:

  • Has engaged a "specified person"to arrange or carry out in Hong Kong its transaction; or
  • Is a "qualified investment fund".

Amongst other requirements, a "qualified investment fund" must have more than four investors, other than the fund sponsor and its associates. DIPN 61 notes that in multi-fund vehicle structures, the "fund" must be correctly identified according to the definition before the number of investors is counted (see 'Definition of a "fund"' above) – meaning that if vehicles within the structure are considered separate "funds", the number of investors should not be aggregated for the purposes of determining whether the vehicle is a "qualified investment fund". Whether a multi-fund vehicle structure is counted as one fund is a question of fact, and the IRD may examine constitutive documents, the investment mandate and the management agreement when making a determination. Investors such as a pension fund, insurance company or sovereign wealth fund would be considered as one single investor even though they have a large number of beneficiaries.

Scope of the Exemption

The Unified Funds Exemption exempts profits tax payable on income arising from "qualifying transactions" (i.e. typical transactions carried out by funds) and "incidental transactions" up to 5 percent of the fund’s total trading receipts. DIPN 61 clarifies that:

  • Although "Incidental Transaction" is not defined in the Inland Revenue Ordinance, the IRD considers that typical incidental transactions would include the receipt of interest or dividend on securities acquired through qualifying transactions.
  • Whether a transaction is "incidental" to a fund must be determined by reference to the "mode of operation" of the fund, which could mean the investment strategy of the fund.
  • Interest income derived from debt securities is not a "qualifying transaction" and should be regarded as "incidental transaction".
  • If the 5 percent threshold is exceeded, all of the fund’s trading receipts from incidental transactions will be subject to profits tax.
    Exceeding the 5 percent threshold does not impact the treatment of qualifying transactions.
  • The policy intent behind the 5 percent threshold is to "provide operational convenience only" and should otherwise have been chargeable profits.

The exclusion of interest income and dividends from the Unified Funds Exemption could be problematic for funds that rely more heavily on such distributions to generate returns as it could lead to a higher tax burden for funds with these strategies. DIPN 61 does not shed further light on the policy intentions behind the distinction.

Exemption for Special Purpose Entities

Where a fund benefiting from the Unified Funds Exemptions establishes a special purpose entity (SPE), the SPE will also be able to rely on the tax exemption when it disposes of another SPE or an investee private company (the SPE Exemption). To benefit from the SPE Exemption, the fund or SPE must satisfy the following tests3:

(a) Immovable property test: Immovable property in Hong Kong (only) (including an interest in land but excluding infrastructure) may not exceed 10 percent of the aggregate value of the assets of the investee private company that is being sold.

(b) (1) Holding period test: The fund or SPE must have held an interest in the investee private company for at least two years prior to the disposal; or

     (2) Short-term assets test: Either (i) the fund or SPE does not have a controlling stake in the investee private company, or (ii) the investee private company does not hold more than 50 percent of the value of its
assets in "short-term assets" (i.e. held for less than three consecutive years before the date of disposal).

DIPN 61 clarifies that:

  • "Value of assets" means the market value of the investee private company’s assets at the time of the disposal.
  • The "three consecutive years before the date of disposal" requirement starts from the date when securities of the relevant company are being disposed by the fund or SPE.
  • If a fund or SPE sells its investment in the investee private company through an IPO or a reasonable period of time after an IPO, it may still benefit from the exemption. No indication is given on what would constitute a "reasonable period".


The implementation of the Unified Funds Exemption means that the IRD now treats profits tax for funds consistently regardless of whether the funds are domiciled offshore or in Hong Kong. The Unified Funds Exemption, together with the passage of the Limited Partnership Fund Bill on 9 July 2020, are important steps towards making Hong Kong an attractive jurisdiction for fund domiciles. DIPN 61 provides insight as to how the IRD will interpret the Unified Funds Exemption, including the more controversial aspects such as the exclusion of incidental transactions above a 5 percent threshold. While the DIPN does not have the force of law, it provides industry participants with an indication of how the law will be applied and assurances on when they can benefit from the Unified Funds Exemption.




  1. Inland Revenue (Profits Tax Exemption for funds) (Amendment) Ordinance 2019. For further information, please refer to Dechert OnPoint: New Hong Kong Profits Tax Exemption Regime Currently Effective
  2. "Specified person" means a corporation licensed or an authorized financial institution registered for carrying out any regulated activity under the SFO.
  3. The fund or SPE must satisfy either (a) and (b)(1), or (a) and (b)(2).

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