May 20, 2021
Hong Kong enacts tax concessions for carried interest
Hong Kong enacted the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the New Law) on 7 May 2021.1 The New Law provides a tax regime offering tax incentives for eligible carried interest of qualifying persons and qualifying employees. The New Law applies to eligible carried interest received or accrued on or after 1 April 2020.
This Alert summarizes the key provisions of the tax regime.
The New Law provides that eligible carried interest arising from in-scope transactions received by qualifying recipients for the provision of investment management services to qualifying payers is not subject to tax in Hong Kong.
Eligible carried interest
Eligible carried interest refers to a sum received by, or accrued to, a person by way of a profit-related return2 from the provision of investment management services.
As a prerequisite to the concessionary tax regime, the eligible carried interest must arise from profits on the in-scope transactions3 of private equity (PE) funds which are exempt from profits tax under the Unified Fund Exemption Regime (UFR).
A ”qualifying payer” is any of the following:
A ”qualifying recipient” includes the following persons providing investment management services to a certified investment fund or specified entity in Hong Kong or arranging the relevant services to be carried out in Hong Kong:
Provision of investment management services
The New Law sets out a non-exhaustive list of investment management services as follows:
In addition, the New Law requires that the qualifying person must have: (i) an adequate number of full-time qualified employees; and (ii) an adequate amount of operating expenditure incurred in Hong Kong in every relevant year of assessment (applicable period)4 as follows:
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
1. The New Law was published in the Hong Kong Gazette on 7 May 2021.
2. The New Law proposes that a sum is a profit-related return if all of the following conditions are satisfied:
3. Including profits on investments, on particular investments, or on a disposal of investment that are earned from a transaction:
Subject to the facts and circumstances, certain hedging transactions forming part and parcel of the PE transaction and the relevant profits are embedded in the profit or loss on the PE transaction for the calculation of eligible carried interest may also qualify.
4. Covering the period beginning on the day on which a person begins to carry out investment management services directly or indirectly for a certified investment fund or specified entity and ending on the day on which eligible carried interest is received by, or accrued to, the person.