Hong Kong’s 0% Tax Concession for Carried Interest

February 10, 2021

Hong Kong has historically not been an attractive jurisdiction-of-choice for fund sponsors when it comes to choosing the domicile of their private equity funds and establishing its funds management business. However, coupled with various other reforms in the recent years, this is about to change. The latest measure introduced by the Bill revolve around the tax treatment of carried interest, in an effort to compete with other low-tax jurisdictions. Once passed by the legislature, Hong Kong will effectively introduce a 0% profits tax rate for eligible carried interest and eligible funds – a proposal designed to not only make Hong Kong an attractive proposition to domicile private equity funds but also a tax efficient jurisdiction for fund sponsors to carry out its fund management business.

After six months of consultation, the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 ("Bill") providing for a tax concession for a 0% profits tax rate on eligible carried interest ("Tax Concession") was introduced to the Legislative Council on 3 February 2021.1 If passed in the current form, the concessionary tax treatment will take retrospective effect and apply to “eligible carried interest” (discussed in detail below) received by or accrued to qualified carried interest recipients on or after 1 April 2020.

The Tax Concession is viewed as the second step in the Hong Kong Government's “three-step process” to turn Hong Kong into the private equity fund jurisdiction-of-choice in Asia. The first step was the introduction of a limited partnership fund regime, tailored for the operational needs of private equity funds, which came into operation on 31 August 20202 – this was well received by the industry which since saw 70 limited partnership funds registered as of 5 January 2021. The second step, initially referenced in the 2020-21 Budget Speech,3 is the current proposed Tax Concession. The third step will be to introduce measures to promote the re-domiciliation of existing private equity funds from overseas to Hong Kong.

Existing Tax Treatment of Carried Interest

Under the existing tax regime, both management fee and carried interest, if derived from investment management services rendered in Hong Kong, will be:

  • chargeable service income for profits tax (for corporations, at the rate of 8.25% with respect to the first HK$2 million and 16.5% thereafter, and for unincorporated business, at the rate of 7.5% with respect to the first HK$2 million and 15% thereafter);4 or
  • chargeable employment income for salaries tax (at marginal tax rates ranging from 2% to 17% with a cap at the standard rate of 15% on assessable income).5

For a long time, carried interest has used as an incentive reward and is one of the key drivers of the growth of private equity fund business. In response to industry demand, it is proposed that eligible carried interest would be charged at profits rate of 0%, and 100% of eligible carried interest would be excluded from the employment income for the calculation of salaries tax.

Key Features of the Tax Concession

1. Eligible Carried Interest

“Eligible carried interest” is defined as a sum received by or accrued to a person by way of profit-related return subject to a hurdle rate. Carried interest of funds that do not have a hurdle rate, such as some emerging venture capital funds, will not be eligible for concessionary tax treatment.

To differentiate from management fees or other remuneration received by investment managers, carried interest must meet three conditions:

(1) the carried interest must arise only if there are profits for a period on the investments, or on particular investments, made for the purposes of the certified investment fund, or there are profits arising from a disposal of investment of the fund;

(2) the carried interest is determined by reference to the profits described in (1) above; and

(3) the returns to investors are also determined by reference to the same profits.

With respect to (2) above, the legislative brief accompanying the Bill specifies that if there is no significant risk that a sum of at least a certain amount would not be received by, or accrued to, the person concerned, the said amount is not regarded as “carried interest”. For instance, a management fee (even if disguised as carried interest) will not be eligible for the Tax Concession.

2. Requirements on the Fund

To be eligible for the Tax Concession, the carried interest must be distributed by a fund which falls within the meaning of “fund” under section 20AM of the Inland Revenue Ordinance.6

The fund must be certified by the Hong Kong Monetary Authority (“HKMA”). Upon receipt of a certification application, the HKMA will assess whether the fund makes private equity investments and whether the local employment and local spending requirements (discussed below) are likely to be met. If it is satisfied that the relevant criteria are met, the HKMA will issue a letter of certification to the fund.

Carried interest must arise from ‘qualifying transactions’, namely transactions in shares, stock, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company or in shares or comparable interests of a special purpose entity solely holding and administering one or more investee private companies, or incidental to the carrying out of such transactions. Based on these requirements on qualifying transactions, the types of funds that may be eligible for the concessionary tax treatment will likely to include buyout funds, venture capital and growth funds and real estate funds. As hedge funds primarily invest in public companies, carried interest arising from such investments would not qualify for the proposed Tax Concession. The legislative council brief accompanying the Bill specifies that carried interest derived from a hedging transaction may only be eligible for the Tax Concession if the hedging transaction forms part and parcel of the private equity transaction and the profits on the hedging transaction are embedded in the profits or loss on such transaction for the calculation of carried interest.

The Tax Concession applies to funds that are domiciled in any jurisdiction, regardless of whether they are domiciled in Hong Kong. In the case of a non-Hong Kong domiciled fund, an authorised representative in Hong Kong must be appointed to provide the necessary information (such as application documents) to the Inland Revenue Department (“IRD”) and the HKMA on behalf of the fund.

3. Requirements on the Carried Interest Recipients

To benefit from the proposed Tax Concession, recipients of carried interest must satisfy the following requirements.

First, recipients of carried interest must fall under one of the following categories:

(a) corporations licensed under Part V of the Securities and Futures Ordinance7 (“SFO”) or authorised financial institutions registered under that Part for carrying on a business in any regulated activity;8

(b) natural persons, corporations, partnerships, trustees or bodies of persons providing investment management services in Hong Kong to a certified investment fund which is a “qualified investment fund,”9 or arranging such services to be carried out in Hong Kong; or 

(c) employees of (a) or (b) above or their associated corporations or partnerships that carry on a business in Hong Kong.

Second, in line with the policy objective of attracting more private equity funds to operate in Hong Kong, recipients of carried interest must provide investment management services to a certified investment fund in Hong Kong. Such services include seeking funds from existing and potential external investors, researching and advising on potential investments to be made, acquiring, managing or disposing of property and investments, and assisting an entity in which the fund has made an investment to raise funds.

Lastly, recipients of carried interest who satisfy the requirements of (a) or (b) above must undertake core income generating activities in Hong Kong by meeting the following criteria for each year of tax assessment for the period from the date when the qualifying carry recipient begins to perform investment management services to the fund to the date when the carry is received or accrued to the recipient:

  • Local employment: There must be on average at least two full-time employees in Hong Kong who carry out the investment management services.
  • Local spending: At least HK$2 million of operating expenditure must be incurred in Hong Kong for the provision of the investment management services. 

4. Ongoing Monitoring Mechanism

To avoid tax abuse, a certified investment fund is subject to ongoing monitoring. The IRD may seek advice from the HKMA to determine a number of issues, such as whether an activity constitutes an investment management service, whether a sum may be eligible carried interest and whether an entity is a certified investment fund. The fund and investment managers are required to provide information to the IRD in respect of distribution of eligible carried interest and maintain sufficient records.

Where eligible carried interest is distributed in a particular year of assessment, an external auditor should be engaged to verify that the relevant substantial activities requirements imposed on the recipients of carried interest are met, and that the distribution fulfils the requisite conditions. The auditor’s report should be kept at the fund’s Hong Kong office or with the local authorised representative of a non-resident fund for inspection.

Going Forward

The proposed Tax Concession has come at an opportune time as fund managers across the globe are considering shifting away from offshore structures towards onshore ones. A number of competitor jurisdictions are offering tax incentives including zero or low tax rates on carried interest. In particular, Singapore has been outperforming Hong Kong in terms of private equity fund growth in recent years, which can be attributed to Singapore’s continued innovation and development such as the Enhanced-Tier Tax Scheme and the Variable Capital Company structure.10 Following the successful launch of the Hong Kong limited partnership fund regime and the unified fund tax exemption regime (step one in the Hong Kong Government's “three step” process), the proposed Tax Concession and other upcoming measures will enhance Hong Kong’s competitiveness as a private equity fund hub and ensure Hong Kong is well positioned to ride the growing trend of acceptance of funds operating locally and demand for private equity funds in Asia.



1) Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021.

2) For further information, please refer to Dechert OnPoint, The Next Generation of Private Equity Funds in Asia: Hong Kong’s Proposed Limited Partnership Fund.

3) Paragraph 62 of the Budget Speech.

4)  Schedules 8A and 8B of the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong).

5) Section 13 and Schedule 2 of the IRO.

6) Chapter 112 of the Laws of Hong Kong.

7) Chapter 571 of the Laws of Hong Kong.

8) A “qualified investment fund” is a fund with at least five investors and meeting certain requirements over capital commitments and distribution of the net proceeds. See definition in section 20AN(6) of the IRO.

9) See definition in Part 1 of Schedule 5 to the SFO.

10) For further information, please refer to Dechert OnPoint, A New Fund Vehicle for Singapore.



This briefing was written by Michael Wong and Mack Wan. For more information and guidance on these issues, please contact anyone within the Dechert financial services and investment management group across our network of offices, including the following members of our Hong Kong team.

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