Proposal on Hong Kong’s carried interest tax concession regime

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This article is written by Jingjing Jiang, Cindy Shek and Florence Lau.

In December 2020, the Financial Services and the Treasury Bureau (FSTB) of the Government of the Hong Kong SAR issued a proposal to provide tax concession for carried interest distributed by eligible private equity funds operating in Hong Kong[1] (Proposal). The Proposal summarises and addresses the comments and feedback from the industry and the Hong Kong government's response in relation to its proposal paper issued in August 2020 (Consultation Paper)[2]. King & Wood Mallesons submitted a detailed submission on the Consultation Paper to the FSTB during the four-week industry consultation period, and have been actively engaged in discussions and feedback sessions to help promote and develop the private equity fund industry.

This client alert outlines the key requirements under the Proposal and its major differences from the Consultation Paper, followed by our take on the proposed carried interest tax concession regime.

1. Overview

  • "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 which is a preferred rate of return on investments in the fund.
  • It is proposed that "eligible carried interest" will be taxed at a 0% profits tax rate.
  • In order to benefit from the tax concession regime, the following conditions should be fulfilled:
Subject Key requirements
Qualified fund/carried interest payer
  • The eligible carried interest should be distributed by a fund which falls within the meaning of "fund" under section 20AM of the Inland Revenue Ordinance (Cap. 112 of the Laws of Hong Kong), regardless of its place of domicile;
  • The fund must be certified by the Hong Kong Monetary Authority ("HKMA"); and
  • Non-Hong Kong resident funds must appoint an authorised local representative.
Qualifying carried interest recipients
  • Only persons providing investment management service to a HKMA certified investment fund in Hong Kong or arranging such services to be carried out in Hong Kong are considered qualifying carry recipients.
  • This includes SFC licensed corporations, unlicensed entities that provide investment management services to a "qualified investment fund" defined under the unified tax exemption for funds regime or the ITVF Corporation, and persons employed by the foregoing entities or their associated corporation or partnership who are providing investment management services in Hong Kong.
Qualifying transactions
  • The eligible carried interest must arise from transactions in private equity only, and must meet the relevant requirements under the unified tax exemption for funds regime.
  • Most hedge funds that primarily invest in public securities may not fulfill this requirement, unless the carried interest are derived from hedging transaction that form part and parcel of the private equity transaction.
Substantial activities in Hong Kong
  • The qualifying carried interest recipients must demonstrate they are undertaking core income generating activities in Hong Kong, including:
    • having two or more full-time employees in Hong Kong who carry out the investment management services; and
    • the operating expenditure incurred in Hong Kong for the provision of the investment management services for each year of tax assessment shall be HK$2 million or more.

2. Comparison between the Proposal and the Consultation Paper

We note that the proposals under the Proposal are substantially similar to those under the Consultation Paper, with the only differences as follows:

  • Tax concession rate – The Proposal provides that eligible carried interest would be charged at a 0% profits tax rate (such rate was kept silent under the Consultation Paper). Furthermore, the Proposal clarifies that 100% of eligible carried interest would also be excluded from the employment income for the calculation of the investment professional's salaries tax. The proposed tax concession rate is aimed to beat other competitive financial markets. 
  • Hurdle rate – It was proposed under the Consultation Paper that eligible funds should provide external investors with a preferred return at an annual rate of 6% compound interest. This 6% hurdle rate has been removed from the Proposal, and simply requiring the fund to be subject to "a hurdle rate". However, certain funds (such as venture capital funds) typically do not have a preferred return distribution mechanism, accordingly, it is unclear what would constitute an appropriate benchmark in order for the profits generated by a qualified fund to be categorised as eligible carried interest.
  • Qualifying transactions – The Proposal expands the definition of "qualifying transactions in PE transactions", to include shares or comparable interests of a special purpose entity which is solely holding and administering one or more investee private companies of the fund, or securities issued by an investee private company.
  • Hedging transactions – Further to the Consultation Paper, the Proposal provides that carried interest derived from hedging transaction may also be eligible for tax concession if the hedging transaction would form part and parcel of the PE transaction and the profits of hedging transactions are embedded in the profits or loss on the PE transaction for the calculation of carried interest.
  • Qualifying Carried Interest recipients – Further to the Consultation Paper, it is proposed that persons providing investment management services to the ITVF Corporation in Hong Kong would also be considered as qualifying carried interest recipients.
  • Loss not available to set off – The Proposal clarifies that any loss sustained is not available for set off against any of the assessable profits for the year or any subsequent year of assessment if the concessionary tax rate is zero.
  • Substantial activities requirements – The Proposal amends the substantial activities requirements by requiring the average number of full-time employees in Hong Kong who carry out the investment management services for each year of assessment to be two or more (as opposed to requiring not less than two investment professionals (or 1 investment professional and 1 related professional in legal, compliance or finance) under the Consultation Paper). The Proposal also lowers the monetary threshold in local expenditure from HK$3 million to HK$2 million.
  • Anti-avoidance provision – It is also stressed under the Proposal that legislative amendments will be introduced to clarify that management fee (even if disguised as eligible carried interest) would not be eligible for tax concessions.

3. Remaining issues to be ironed out

The legislative amendments effecting the Proposal will be introduced to the Legislative Council for passage in late January 2021. It is proposed that the tax concession will have a retrospective effect for any eligible carried interest received by or accrued to qualifying carried interest recipients on or after 1 April 2020. Existing private equity funds managed in Hong Kong would be able to benefit from the tax concession regime.

We expect the legislative amendments will provide further details in relation to:

  • HKMA's validation procedures – It is clear that the HKMA will be the gatekeeper of the carried interest tax concession regime. However, the actual application procedures, process and timing are yet to be confirmed. We expect the validation process to be a relatively straightforward and streamlined one given the HKMA's inspection power and the requisite certification by the auditor. We look forward to the HKMA and Inland Revenue Department jointly introducing a "one-stop-shop" approach for validation of fund and application for tax concession.
  • Mandatory hurdle rate – "Eligible carried interest" is defined under the Proposal to be a sum linked to profit-related return subject to a hurdle rate. As mentioned above, this seems to be an arbitrary requirement given not all private equity funds' distribution and waterfall provisions would include a hurdle or preferred return. The FSTB may consider removing the hurdle rate requirement in the amendment bill, and only require carry to arise only if there are profits generated from the investments of the fund, so as to allow flexibility for sponsors in designing the fund economics.
  • Eligible hedge funds – It is currently proposed that carried interest generated by certain hedge funds (which by nature typically invest in public securities) may also qualify for carried interest tax concession. We look forward to the FSTB, HKMA and the Inland Revenue Department providing further guidance as to the eligible hedging transactions.
  • Eligible individual carry recipients – it is currently provided under the Proposal that individuals have to provide investment management services to the certified investment funds or the ITVF Corporation on behalf of the qualifying carried interest recipients in Hong Kong in order to be able to enjoy concessionary tax treatment. This seems to suggest that non-investment management staff (such as human resources, finance, legal and compliance and other back office supporting staff) would not be able to enjoy such concession as their day-to-day job may not involve "investment management" as set out under the Proposal. We note however it is common for sponsors to create a special limited partnership fund (with selected employees as limited partners) for the purposes of its staff receiving a share of the carried interest. The restriction applicable to the eligible carry recipients under the Proposal would impact fund flow and may mean that such non-investment management employees may not be able to enjoy the concessionary tax treatment if they receive carry directly from the fund.

4. Conclusion

We support the FSTB's Proposal to the carried interest tax concession regime, which complements the Hong Kong limited partnership fund regime which was introduced in August 2020[3]. We see this as an essential component to bolster the attractiveness of the funds industry in Hong Kong, and would further enhance the competitiveness of Hong Kong as a full service asset management centre.

For a more detailed discussion about how the carried interest tax concession proposal might affect your business or for any assistance required in setting up or expanding your funds business, please do not hesitate to contact us.

The authors would like to thank Boer Ma and Lucia Lu for their contributions to this article.


Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".



[2] For details on the Consultation Paper, please refer to our earlier publication, available at:

[3] For details on the Hong Kong Limited Partnership Fund regime, please refer to our earlier publication, available at:

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