The Government published the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the Bill) in the Gazette on January 29, 2021 to provide tax concessions for carried interest distributed by eligible private equity (PE) funds operating in Hong Kong. Eligible carried interest would be charged at profits tax rate of 0%, while 100% of eligible carried interest would be excluded from employment income for the calculation of salaries tax.
Eligible Carried Interests
Broadly speaking, carried interest refers to a return linked to the performance of an investment of a PE fund, typically upon the disposal of the investment after it has been held for a period of time.
Eligible carried interest refers to a sum received by, or accrued to, a person by way of a profit-related return subject to a hurdle rate which is a preferred rate of return on investments in the fund which is stipulated in the agreement governing the operation of the fund.
Qualifying carried interest payers
The Bill elucidates the definition of a qualifying payer as:
Qualifying carried interest recipients
The following persons providing investment management services or arranging such services to be carried out in Hong Kong, should be eligible for the concessionary tax treatment:
Provision of Investment Management Services
To be eligible for the concessionary tax treatment, the eligible carried interest must be derived from the provision of investment management services in Hong Kong. Such services include:
Qualifying carried interest recipients have to provide investment management services in Hong Kong and fulfil substantial activities requirements. For tax concessions to apply, carried interest must arise from eligible transactions in private companies and be distributed by a fund certified by HKMA or the Innovation and Technology Venture Fund Corporation set up by the Government.
Substantial Activities Requirements
In order for concessionary tax treatment to apply, qualifying carried interest recipients must have, in the opinion of the Commissioner of Inland Revenue, adequate number of qualified full-time employees and operating expenditure incurred in Hong Kong for the relevant years of assessment, including:
For more information, please contact Ms. Amie Cheung at firstname.lastname@example.org