Executive summary
Hong Kong enacted the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the New Law) on 7 May 2021.1 The New Law provides a tax regime offering tax incentives for eligible carried interest of qualifying persons and qualifying employees. The New Law applies to eligible carried interest received or accrued on or after 1 April 2020.
This Alert summarizes the key provisions of the tax regime.
Detailed discussion
The New Law provides that eligible carried interest arising from in-scope transactions received by qualifying recipients for the provision of investment management services to qualifying payers is not subject to tax in Hong Kong.
Eligible carried interest
Eligible carried interest refers to a sum received by, or accrued to, a person by way of a profit-related return2 from the provision of investment management services.
In-scope transactions
As a prerequisite to the concessionary tax regime, the eligible carried interest must arise from profits on the in-scope transactions3 of private equity (PE) funds which are exempt from profits tax under the Unified Fund Exemption Regime (UFR).
Qualifying payers
A ”qualifying payer” is any of the following:
- A certified investment fund, which falls within the definition of “fund” under the Inland Revenue Ordinance (IRO) and has been certified by the Hong Kong Monetary Authority
- An associated corporation, or an associated partnership, of a certified investment fund
- The Innovation and Technology Venture Fund Corporation in Hong Kong (a specified entity)
Qualifying recipients
A ”qualifying recipient” includes the following persons providing investment management services to a certified investment fund or specified entity in Hong Kong or arranging the relevant services to be carried out in Hong Kong:
- A corporation or an authorized financial institution licensed/registered under the Securities and Futures Ordinance to carry on regulated activity.
- A person, other than 1) above, carrying out investment management services in Hong Kong, or arranging such services to be carried out in Hong Kong, for a certified investment fund which is a “qualified investment fund” under the UFR or a specified entity.
- A qualifying employee, who is an individual employed by a qualifying person in 1) or 2) above or their associated corporation, or the associated partnership (provided that the associated corporation/partnership carries on a business in Hong Kong) and carries out the duties of the employment by providing investment management services in Hong Kong for, or on behalf of, the qualifying person.
Provision of investment management services
The New Law sets out a non-exhaustive list of investment management services as follows:
- Seeking funds from external investors or potential external investors
- Researching and advising on potential investments
- Acquiring, managing or disposing of property or investments
- Assisting investee companies to raise funds
Additional requirements
In addition, the New Law requires that the qualifying person must have: (i) an adequate number of full-time qualified employees; and (ii) an adequate amount of operating expenditure incurred in Hong Kong in every relevant year of assessment (applicable period)4 as follows:
Substantial activities requirements |
Thresholds |
Average number of full-time qualified employees in Hong Kong |
Not less than two |
Annual operating expenditure incurred in Hong Kong |
Not less than HK$2 million (US$260,000) |
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 (United States), Hong Kong Tax Desk, New York
Rex Lo
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Chris Finnerty
Bee-Khun Yap
Dhara Sampat
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.