Grounded Ingenuity | Refined Results

February 10, 2021
Gavin Cumming, Timothy Loh
The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (“Carried Interest Tax Rate Bill”) proposes to set the carried interest tax rate at zero both for profits tax and salaries tax purposes. The Carried Interest Tax Rate Bill is the implementing legislation for the proposal to introduce concessions in the taxation of carried interest originally announced in April, 2020 and which was the subject of a consultation in August, 2020 and a discussion paper issued by the Legislative Council Panel on Financial Affairs on January 4, 2021. In this article, we take a closer look at the provisions of the Carried Interest Tax Rate Bill with a focus on the conditions required to qualify for the concessionary tax rate. Our private equity taxation lawyers can provide specific advice on how the legislation may affect you.

On January 29, 2021, the Carried Interest Tax Rate Bill was published in the Hong Kong Government Gazette and on February 3, 2021 it was introduced into the Legislative Council for its first reading.

The main object of the Carried Interest Tax Rate Bill is to create a tax concession by amending the Inland Revenue Ordinance:

  • to set the profits tax rate at zero on income earned by qualifying persons, and

  • to exclude from salaries tax income earned by qualifying employees

if the income is carried interest from the provision of investment management services to qualifying private equity funds and their associated entities.

Retrospective Effect

Subject to the Carried Interest Tax Rate Bill passing successfully through the Legislative Council, the concession will have retrospective effect and will apply to eligible carried interest received by or accrued to qualifying persons on or after April 1, 2020. To avoid any confusion, the Carried Interest Tax Rate Bill makes it clear that the concession will not apply to carried interest received after April 1, 2020 if that carried interest was accrued before April 1, 2020.

Form of Concession

In respect of profits tax, the concession will be implemented in the form of a 0% profits tax rate on the net eligible carried interest received or accrued. In respect of salaries tax, the remuneration paid by a qualifying fund manager to its employees for work performed in generating the eligible carried interest received will be 100% excluded from their salaries tax calculation.

Carried Interest Tax Rate Concession Requires Risk

Under the Carried Interest Tax Rate Bill, to qualify as eligible carried interest, the carried interest must be profit-linked and must only be payable subject to fulfilment of the hurdle rate specified in the agreement governing the operation of the private equity fund.

To the extent there is no significant risk that at least a certain amount of the amount payable as carry would not be received or accrued, then the amount is not to be regarded as eligible carried interest. In other words, for carry to be eligible for the concession, there must be a risk that the proposed recipient of carry will be unable for investment performance reasons to earn that carry.

There are various provisions as to how such risk is to be assessed and it is expressly provided that, for these purposes, any risk that the amount would be prevented from being received or accrued by reason of insolvency or otherwise will be ignored.

As a result, if the terms for receiving the carried interest are defined so that the amount is expected to be received or accrued in the ordinary course of business, then such amount received or accrued would likely not qualify for the concession. Thus, it is possible that an unusually low hurdle rate could result in carried interest that does not qualify for the concession.

Qualifying Fund Managers

The Carried Interest Tax Rate Bill provides that a fund manager may only qualify for the concession if it carries out investment management services, or arranges for such services to be carried out, in Hong Kong. The concession will only apply to carried interest earned during the period from the day the fund manager starts providing such services to the fund to the day when the fund manager receives the carried interest (the “Carried Interest Tax Rate Period”).

In addition, for the whole of the Carried Interest Tax Rate Period, the investment management services concerned must not be carried out outside of Hong Kong by a permanent establishment, which includes a branch, management or other place of business. However, this does not preclude a fund manager from delegating to an agent, unless the agent has and habitually exercises a general authority to negotiate and conclude contracts on behalf of the fund manager.

Qualifying Employees

An employee will only qualify for the concession if:

  • they are employed by a qualifying fund manager, or by an associated corporation or associated partnership of such fund manager, which itself carries on a business in Hong Kong, and

  • they, as an employee, also provide investment management services in Hong Kong for or on behalf of the qualifying fund manager.

The salaries tax concession will only apply to the extent that the amount received by the employee is paid out of eligible carried interest that is exempt from profits tax under the concession.

Substantial activities

It was previously set out in the discussion paper that a fund manager must have, for each year of assessment for which the concession is claimed, an average of two full-time employees in Hong Kong who carry out investment management services and expenditures of HK$2 million in Hong Kong in providing the investment management services.

The Carried Interest Tax Rate Bill clarifies that those conditions must be satisfied during the whole Carried Interest Tax Rate Period and that the reference to two full-time employees and expenditures of HK$2 million are the minimum required and that the concession is actually conditional upon the average number of full-time employees and the total amount of expenditure incurred in each year of assessment being adequate in the opinion of IRD.

Record retention requirements

The Carried Interest Tax Rate Bill sets out detailed record retention and information requirements.

A fund manager is required to provide to the IRD information relating to any eligible carried interest which it receives, and details regarding employees who receive eligible carried interest. A fund manager must also keep sufficient records to enable the accuracy and completeness of accruals or payments of carried interest to be ascertained for a seven-year period.

Qualifying payers of carried interest are also subject to record keeping requirements and failure to keep such records may result in any carried interest which they pay being ineligible for the tax concession.

HKMA Advice

Under the Carried Interest Tax Rate Bill, the IRD is empowered to seek advice from the Hong Kong Monetary Authority in respect of any matter relevant to a person’s entitlement to the carried interest tax concession.


The Carried Interest Tax Rate Bill includes a specific anti-avoidance provision which applies to any arrangements that have as one of their main purposes the obtaining of a tax benefit under the carried interest tax concession, whether for the person or for any other person. It is specifically provided that an arrangement to disguise as eligible carried interest a management fee that a person receives, or that accrues, from a qualifying payer, is an arrangement to obtain a tax benefit.

We use cookies to enhance your experience of our websites and to enable you to register when necessary. By continuing to use this website, you agree to the use of these cookies. For more information and to learn how you can change your cookie settings, please see our Cookie Policy and our Privacy Notice.