IRD practice note DIPN 61

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This article was written by Justin Cherrington and Sam Duncan.


The Hong Kong Inland Revenue Department (IRD) recently released Departmental Interpretation and Practice Note (DIPN) 61, with the aim of clarifying the scope and operation of the new unified tax treatment for investment funds in Hong Kong* which applies from 1 April 2019.[1]

The new unified tax regime replaces the earlier profits tax exemptions that applied separately to offshore funds, offshore private equity (PE) funds and open-ended fund companies (OFCs). The changes were introduced by the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019 (2019 Ordinance).

This latest guidance from the IRD is relevant for all funds operating in Hong Kong but particularly so for those funds that will embrace the Hong Kong Limited Partnership Fund regime that is to commence in Hong Kong imminently. It is also timely given and the recent announcements regarding changes to the tax treatment of a genuine carried interest for Hong Kong-based funds.

Summary of DIPN 61 and the unified fund regime

In summary, the 2019 Ordinance seeks to remove the ring-fencing features that previously benefited offshore funds by extending profits tax exemption to privately offered funds operating in Hong Kong, regardless of whether they are domiciled inside or outside of Hong Kong. From 1 April 2019, all funds (regardless of their structure, size, purpose or the location of their central management and control) will enjoy profits tax exemption, subject to meeting certain conditions.

DIPN 61 outlines the conditions for accessing the new unified funds exemption. Broadly speaking: (1) a "qualifying fund" will be exempted from profits tax on assessable profits arising from (2) "qualifying transactions" in certain classes of specified assets, incidental transactions and (if the fund is an OFC) transactions in assets of a class that is not specified, provided that (3) the transactions are carried out or arranged in Hong Kong by a "specified person", or the fund is otherwise a "qualified investment fund". These conditions are discussed below.

Further, where a fund is exempted, a "special purpose entity" (SPE) owned by the fund may be likewise exempted (to the extent of that ownership interest). DIPN 61 explains that this is intended to cater for funds with one or more tiers of SPEs to hold their investment in private companies in order to facilitate the subsequent disposal of such companies by transferring the ownership interests in SPEs.

Qualifying funds

In applying each of the criteria the IRD has adopted a holistic approach in terms of ascertaining whether a fund satisfies the requirements for the profits tax exemption.

  • The profits tax exemption applies to entities that qualify as a "fund" for the whole of the year of assessment. A fund can take many different forms, including a mutual corporation, OFC, limited partnership or other trust-like arrangement. What these arrangements have in common is that they have the characteristics of pooled investment, similar to the definition of "collective investment scheme" under the Securities and Futures Ordinance (Cap. 571) (SFO).
  • DIPN 61 provides the IRD's views on the meaning of the terms: "arrangement in respect of property" and "managed as a whole", as well as the pooling, control and purpose tests that are relevant for determining whether an entity is a qualifying fund.
  • Relevantly for many of our clients, DIPN 61 contains guidance and examples of when complex and multi-vehicle fund structures, including master-feeder structures and parallel fund, will be considered one or more "funds" for the purposes of the exemption.
  • Single investor funds may satisfy the requirements for exemption where the investor is grouped/invested with other funds, such that the fund structure is seen as managed as a whole and satisfies the pooling requirements. Other than this possible exception, the guidance provides that, only under "very special circumstances" will the IRD accept that a fund with only one investor at a particular point in the income year is a qualifying fund (e.g. during the start-up period or winding-down period).

Profits from qualifying investments

  • For qualifying funds, no profits tax is payable on profits from "qualifying transactions"[2] and incidental transactions (up to a 5% threshold). DIPN 61 contains commentary on when a transaction is likely to be incidental – for example, the IRD considers that holding a debt interest to derive interest income is not a "qualifying transaction" in securities (because there are not two parties involved) but the receipt of interest on such a security is incidental and subject to the 5% threshold.


  • Where the qualifying transactions involve interests issued by private companies, in order for the profits exemptions to apply, a fund will need to satisfy a number of additional conditions. These additional conditions are likely to be relevant to PE funds.


Carried out or arranged by a specified person or "qualified investment fund"

  • The qualifying transaction must be carried out or arranged in Hong Kong by a "specified person". This includes a corporation licensed under the SFO. DIPN 61 explains that this includes a situation where the investment manager of a fund (i.e. a specified person) arranges in Hong Kong to buy or sell stocks traded on the Tokyo Stock Exchange through an intermediary in Tokyo.
  • If this condition is not satisfied, the exemption may still apply if the fund is a "qualified investment fund". Broadly, this includes a fund with over 4 external investors who together contribute over 90% of the aggregate capital commitments of the fund, provided that not more than 30% of the net proceeds of the fund can be distributed to the originator (i.e. investment manager) or its associates.qualified


  • These requirements seek to deny tax exemption for funds that are simply a vehicle of one single investor, or where profits are siphoned to one single investor who may be the fund manager.
  • Additionally, the 30% distribution limit concerns the payment of performance fees or carried interest (in whatever form). In other words, the fund may pay a carried interest of up to 30% of net proceeds without impacting its exemption status. The IRD considers that this 30% limit is higher than the industry benchmark for performance fees or carried interests that is typically paid to investment managers (i.e. 20% of the fund's profits above a hurdle rate). This requirement may be of particular importance in respect of the future taxation of genuine carried interest for Hong Kong-based funds as the Government frames the profit tax exemption on such interests.
  • Helpfully, DIPN 61 provides guidance on when it is appropriate to look through a series of intermediaries in a fund structure (e.g. feeder funds or parallel funds) when counting the number of investors.

    Former fund regimes

    While the 2019 Ordinance introduced a unified tax exemption for investment funds, the former regimes for offshore funds, offshore PE funds and OFCs are still applicable for years of assessment ended prior to 31 March 2019.

    The IRD guidance published in DIPN 43 and 51 continues to be relevant in circumstances where the former regimes apply (i.e. pre-1 April 2019).

    Further observations

    DIPN 61 also contains guidance on:

  • the anti-round tripping provisions, which are designed to prevent abuse or roundtripping by resident persons to take advantage of the profits tax exemption;
  • the tax residence of funds and SPEs;
  • the reporting, compliance and due diligence requirements for privately offered funds under the Common Reporting Standard (CRS);
  • the Hong Kong and United States Intergovernmental Agreement (IGA) for Foreign Account Tax Compliance Act (FATCA), which applies to certain privately offered funds and passive NFFEs (broadly, a non-US entity that is not a financial institution); and
  • Hong Kong's transfer pricing regime – and in particular, areas of relevance for fund investment managers, such as ensuring that the management fee they charge is arm's length and the fund maintains adequate transfer pricing documentation, as require.
  • If you would like to know more about Hong Kong's new unified profits tax exemption for investment fund, or how the guidance in DPIN 61 applies to your business, please do not hesitate to contact us.

    *Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".

    [1] Please refer to our previous publication in December 2018 for further details.

    [2] Schedule 16 of the Inland Revenue Ordinance (Cap. 112) lists 11 classes of assets that are specified for qualifying transactions.

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