Hong Kong's Tax Concession for Carried Interest: Getting Funds Certified with the HKMA

July 29, 2021

Earlier this year, the Hong Kong government introduced the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 20211 which drew much attention from the global private equity market. On 7 May 2021, the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021 (the "Amendment Ordinance") was enacted into law. Applying retrospectively to tax years commencing on or after 1 April 2020, the Amendment Ordinance has essentially transformed Hong Kong into one of the most tax efficient jurisdictions for fund sponsors with respect to carried interest payments.

Under the Amendment Ordinance, carried interest earned by or accrued to qualifying persons2 and qualifying employees3 (together, the "Eligible Persons"), in connection with the investment management services4 provided by them to certified funds, will be taxed at 0% in Hong Kong. In this regard, on 16 July 2021, the Hong Kong Monetary Authority ("HKMA") issued a guideline on the certification of funds in relation to carried interest tax concession ("Guideline").5 The HKMA's certification is an assessment as to whether the fund makes private investments and whether local substance requirements have been met. This assessment serves as the first step in the new tax concession application process.

In this OnPoint, we look at the criteria and procedures for obtaining HKMA certification of the fund.

Criteria for Certification

In order for a fund to be certified by the HKMA, two requirements must be satisfied:

1.     Private Investments: for the relevant year of assessment, the fund has invested in the following assets:

  • shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company (which includes both private companies incorporated in and outside of Hong Kong)6 or an investee private company;7 or
  • shares of, or comparable interests in, a special purpose entity or an interposed special purpose entity8 that holds (directly or indirectly) the shares of and administers one or more investee private companies and does not hold or administer any other assets listed in Schedule 16C to the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) ("IRO").

2.     Local Substance: the qualifying person must satisfy the following requirements throughout the period beginning on the day when the qualifying person commences providing investment management services for a fund and ending on the day when the eligible carried interest is received by, or accrued to, that qualifying person (the "Applicable Period"):

  • the average number of full-time employees in Hong Kong who carry out the investment management services concerned and have the qualifications necessary for doing so during the basis period9 for each year of assessment10 falling within the Applicable Period is two or more; and
  • the total amount of operating expenditure incurred in Hong Kong for the provision of the investment management services concerned during the basis period for each year of assessment falling within the Applicable Period is HK$2 million or more.

Application for Certification

A fund is required to apply for certification from the HKMA for each year of assessment in which the Eligible Person wishes to claim for the carried interest tax concession – this means the HKMA certification will be an annual exercise for most funds. To apply, the fund must submit a completed application form together with the required supporting documents (including an auditor’s report) to the HKMA. Depending on the accounting year-end date for the fund, the HKMA has set three deadlines for applications each year: 2 May, 15 August and 15 November.11

The HKMA has indicated that within two months of receipt of the completed application form and all supporting documents, it will endeavour to (i) issue the official certification to the fund and inform the Inland Revenue Department ("IRD") of the issuance if the applicant satisfies the two ‘Criteria for Certification’ set out above, or (ii) in the case of an unsuccessful application, notify the fund and the IRD of such result.

If at any time there is a change to the information provided to the HKMA as part of the certification application, the fund must inform the HKMA within 90 calendar days of such change.  The HKMA has the right to revoke the certification of the fund at any time if it receives information indicating that the fund has failed to meet the ‘Criteria for Certification’.

After HKMA Certification

Once the fund has been certified by the HKMA, the IRD will conduct its own assessment of whether the certified fund is a "fund" within the meaning section 20AM of the IRO, together with certain other requirements under the IRO, which are explained in more detail in our OnPoint “Hong Kong’s 0% Tax Concession for Carried Interest” published in February 2021.  The IRO will assess whether the carried interest that the tax concession is being claimed for is "eligible carried interest". To qualify as “eligible carried interest”, the carried interest must be a sum received by or accrued to an Eligible Person by way of profit-related return subject to a "hurdle rate".  There are no statutory benchmarks for this "hurdle rate", so it will be the preferred rate of return on investments as stipulated in the agreement governing the operation of the fund.

Going Forward

While the two aforementioned 'Criteria for Certification' requirements were expected as they were announced earlier in the year, it is important to note that meeting the certification requirements does not automatically mean that the Eligible Persons will be entitled to the carried interest tax concession. Under the Amendment Ordinance, the Commissioner of the IRD is entitled to conduct an "adequacy test" on the Local Substance requirements (i.e. the second limb of the 'Criteria for Certification') in addition to the HKMA's certification. This gives the IRD a discretionary power to dis-apply the carried interest tax concession.  At present, no guidance has been issued by IRD on the "adequacy test" but it is expected that the IRD will consider the facts of each case and, where necessary, request Eligible Persons to supply further information and documents.  As we approach upcoming tax-year ends and the Amendment Ordinance is put into play, we may expect to see examples of the IRD exercising its discretionary power and/or the IRD issuing further directives on the details and parameters that it will consider when assessing an applicant's eligibility to claim the carried interest tax concessions.



1) For further information, please refer to Dechert OnPoint, Hong Kong’s 0% Tax Concession for Carried Interest. 

2) "qualifying persons" is defined in section 4(3) of Schedule 16D to the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong)("IRO"), and includes corporations licensed by the Securities and Futures Commission to conduct regulated activities in Hong Kong.

3) "qualifying employees" is defined in section 8(4) of Schedule 16D to the IRO and includes the employees of "qualifying persons".

4) "investment management services" is defined in Schedule 16D to the IRO.

5) The Guideline is available here

6) As defined in Schedule 16C to the IRO.

7) As defined in section 20AO(4) of the IRO.

8) As defined in section 20AO(4) of the IRO.

9) As defined in section 2 of the IRO.

10) As defined in section 2 of the IRO.

11) The HKMA also offers an optional pre-application screening to funds which are unsure of whether they are able to meet the criteria for certification. Applicants can apply for pre-application screening before carried interest is received, but the results of any pre-application screening will not serve as a certification.

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