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:

• a certified investment fund, that is a fund which falls within the definition of “fund” under section 20AM of the Inland Revenue Ordinance (IRO) and certified by Hong Kong Monetary Authority (HKMA);
• an associated corporation, or an associated partnership, of a certified investment fund; or
• The Innovation and Technology Venture Fund Corporation in Hong Kong.

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:

• a corporation licensed or an authorised financial institution registered under the Securities and Futures Ordinance to carry on a business in any regulated activity; or
• a person, other than (1) above, providing investment management services in Hong Kong to a certified investment fund, or arranging such services to be carried out in Hong Kong; and
• an individual employed by a qualifying person (see above) or the associated corporation, or the associated partnership, of a qualifying person (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

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:

• seeking funds from external investors or potential external investors;
• researching and advising on potential investments to be made;
• acquiring, managing or disposing of property or investments; and
• acting for the certified investment fund with a view to assisting an entity in which the fund has made an investment to raise funds.

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:

• the average number of full-time employees in Hong Kong during each year of assessment concerned shall be two or more; and
• the total amount of operating expenditure incurred in Hong Kong during each year of assessment concerned shall be HK$2 million or more.

For more information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk