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In brief

A tax concession is proposed for carried interest issued by private entity (PE) funds operating in Hong Kong. Following the government’s consultation paper issued in August 2020 and the industry consultation on the initial proposals, the Legislative Council (“LegCo“) Panel on Financial Affairs released a discussion paper on 4 January 2021 on the proposed tax concession regime, with a view to introducing the amendment bill into LegCo in late January 2021. Subject to the passage of the amendment bill, the concessionary tax treatment will take retrospective effect in respect of eligible carried interest received or accrued on or after 1 April 2020. Under the latest proposal, eligible carried interest will be charged at a concessionary profits tax rate of 0%, and 100% of eligible carried interest will be excluded from employment income for salaries tax purposes.

Further to our earlier Client Alerts issued in August 2020 and January 2021, we provide an overview of the key features of the proposed tax concession for carried interest under the latest proposal.

Proposed tax concession

A highly competitive tax concession rate is introduced in the latest proposal. It includes a 0% profits tax rate on eligible carried interest and excludes 100% of eligible carried interest from employment income for salaries tax purposes.

Conditions for tax concession

In order for carried interest to qualify for the concessionary tax treatment, the following conditions have to be satisfied:

  1. The fund must be certified by the Hong Kong Monetary Authority (HKMA) as a “certified investment fund.”

Only carried interest distributed by “certified investment funds” (or the Innovation and Technology Venture Fund (ITVF) Corporation established by the Hong Kong government under the ITVF scheme) will be eligible for the tax concession.

The HKMA will certify a fund if it is satisfied as to the following:

  1. The fund is focused on PE investment strategies.
  2. The fund manager fulfils the following substantial activity requirements:
    1. The average number of full-time employees of the fund manager in Hong Kong who carry out “investment management services” (including fund raising, research and advising on potential investments, asset acquisition and disposal, asset management) must be two or more.
    2. The fund manager must incur operating expenditures in Hong Kong of not less than HKD 2 million in providing investment management services.

In assessing whether these two conditions are likely to be satisfied, the HKMA will look at various factors, including the fund’s formation documents, whether the fund makes PE investments, the historical local expenditure and/or budget of the fund structure, and the historical and estimated local hire of the fund manager.

To apply for certification, a fund or the local authorized representative of a non-resident fund should submit an application to the HKMA, together with the relevant documents and information required by the HKMA. The HKMA will assess whether the fund applicant is a genuine PE fund with sufficient substance. A letter of certification will be issued by the HKMA if it is satisfied that the relevant criteria are met.

  1. The carried interest must be profit-linked.

The carried interest must be remuneration that is linked to the profits generated by the fund and subject to a hurdle rate (i.e., the preferred rate of return on investments in the fund, which is stipulated in the agreement governing the fund’s operation). The value of the carried interest must be ascertained by reference to the same profits used by external investors in ascertaining their returns.

The tax concession would not apply to base advisory or management fees that a fund manager is entitled to receive regardless of the performance of the fund. This exclusion applies to remuneration of employees of the fund manager as well.

  1. The carried interest must arise from tax-exempted qualifying transactions.

The tax concession is limited to carried interest distributed in respect of transactions that meet the following criteria:

  1. transactions in the shares, stocks, debentures, loan stocks, bonds or notes of, or issued by a private company (as well as transactions incidental to the carrying out of such transactions, provided that they do not exceed 5% of total trading receipts); and
  2. transactions that are tax-exempt for privately offered funds under the Inland Revenue Ordinance (IRO)

As such, the tax concession is restricted to carried interest distributed in respect of PE transactions that are exempt from tax under the fund tax exemption provisions. Certain conditions may need to be satisfied for the funds exemption to apply to such transactions, including conditions as to the number of investors in the fund if the fund manager is not an entity licensed with the Hong Kong Securities and Futures Commission, the period for which the investment must be held, etc.

Ongoing requirements

In the year eligible carried interest distributions are made, the following ongoing requirements will need to be satisfied in order for the payment to qualify for the tax concession:

  1. An external auditor will need to certify that the carried interest qualifies for the tax concession by satisfying the conditions mentioned above.
  2. The fund will need to report all particulars of its carried interest payments, including the names, identification numbers and addresses of carried interest recipients, and the amounts distributed to such persons, to the Inland Revenue Department (IRD).

In addition, the IRD may seek advice from the HKMA in order to ascertain whether an activity constitutes an investment management service, a sum may be eligible carried interest, and an entity is a certified investment fund.


The IRD could deny the concessionary tax treatment if the main purpose or one of the main purposes of the arrangement is to obtain a tax benefit. Specific provisions are also expected to be introduced in which management fees (including management fees disguised as carried interest payments) would not be eligible for the tax concession.

Other matters

In addition to the proposed tax concession regime for carried interest, certain enhancements to the existing fund tax exemption provisions are also proposed.

Currently, it is common for funds to hold financial assets other than private companies using special purpose entities (SPE) established by the fund. However, under the current fund tax exemption provisions, an SPE is only allowed to hold and administer investee private companies, but not other financial assets.

It is proposed that an SPE be allowed to hold and administer assets of a class specified in Schedule 16C of the IRO and carry out transactions in such assets on behalf of the fund for the purpose of the fund tax exemption provisions.

Way forward

Subject to the passage of the amendment bill, the proposed tax concession will take retrospective effect in respect of eligible carried interest recipients from 1 April 2020. As such, relevant funds and fund managers should be prepared for the new tax concession regime with an understanding of the scope, eligibility requirements and application procedures.

Notably, for the proposed tax concession to apply, taxpayers could be subject to the scrutiny of both the IRD and HKMA for the initial HKMA certification and for compliance with the ongoing requirements discussed above. It is unclear whether the HKMA is well equipped for its new role to certify applicants for tax concession purposes as this may require technical interpretation of tax legislation. There is also uncertainty on the appeal/review mechanism for taxpayers to challenge the HKMA’s positions or decisions that affect the application of the tax concession.


Pierre Chan is a partner in Baker McKenzie's Hong Kong office. He advises multinational companies, financial institutions, insurance companies as well as investment funds on income tax and stamp duty issues. He also advises wealthy families in relation to their succession planning. Over the years, Pierre has advised and represented taxpayers in relation to various major tax disputes in Hong Kong.


Jason Ng is co-Chair of Baker McKenzie's Global Investment Funds Group. Jason is also the Head of the Financial Services practice for the Firm's Hong Kong, China and Singapore offices. Jason graduated from the National University of Singapore with an LL.B., and is admitted as a solicitor in Hong Kong, England and Wales, and Singapore.


Steven Sieker practices exclusively in the area of tax law, and is recognized as a leading individual in tax as well as private client and wealth management by Chambers Asia Pacific, Citywealth Leaders List and Guide to the World’s leading Tax Advisers. He has authored a wide range of key articles and publications, including the Hong Kong volume of the CCH series Tax Planning and Compliance in Asia. He is a member of the Society of Trust and Estate Practitioners (STEP), and was an executive director of STEP and the Canadian Chamber of Commerce in Hong Kong. Steven is admitted as a solicitor in Hong Kong, England and Wales (non-practising), and is qualified as a barrister and solicitor in Alberta, Canada.


Carrie Lui is a special counsel in Baker McKenzie Hong Kong office. She is experienced across a broad range of sectors and industries. Carrie's tax knowledge is complimented by her experience working as a tax lawyer in New Zealand prior to joining Baker McKenzie.
Carrie is also a regular speaker and panelists in major client conferences of the Firm.


Edwin Wong is a partner in Baker McKenzie’s Funds group and specialises in advising clients on the formation of a broad spectrum of private investment funds, including private equity, real estate, infrastructure, venture capital, debt and clean energy funds.