Introduction

The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the “Bill”) was introduced in January 2021, passed by the Legislative Council on 28 April 2021, and came into operation on 7 May 2021.  With a view to heighten Hong Kong’s attractiveness as a choice of jurisdiction for fund domiciliation and operation for private equity (“PE”) funds, the tax concession regime reduces the salaries tax and profits tax chargeable on carried interest distributed by eligible private equity funds operating in Hong Kong on or after 1 April 2020.

Background

Hong Kong has been a renowned leading asset management centre in Asia and across the world. In recent years, PE funds are becoming more and more popular among investors and the total capital under management by PE funds is rising year by year. Given that tax treatment has always been one of the main factors affecting the choice of fund domiciliation and its location for day-to-day management, the HKSAR Government seeks to capture the opportunity to further shape Hong Kong into a competitive hub for PE funds by introducing favourable tax treatments for qualifying fund managers.

Highlights of the Bill

0% profits tax rate on eligible carried interest

In general, profits tax is chargeable on the assessable profits of a corporation on a yearly basis. The corporate tax rate is currently at 16.5%. 

Under the tax concession regime, no profits tax will be payable on all eligible carried interest (qualifications as explained below) received by, or accrued to, qualifying recipients for providing investment management services in Hong Kong on or after 1 April 2020.

Exclusion of 100% eligible carried interest from
employment income for salaries tax calculation

All assessable income (after deductions and allowances) earned by individual employees working in Hong Kong are subject to a progressive salaries tax rate.

However, as part of the tax concession regime, any qualifying carried interest earned by qualifying persons/employees (qualifications as explained below) in Hong Kong (i.e. the profit-related portion on top of the base salary only) can be deducted from their aggregate income for salaries tax calculation purposes. 

Substantial activities requirements

The above tax reductions are subject to a substantial activities requirements. All eligible carried interest should be distributed by a certified investment fund (or its associated corporation/partnership) operating in Hong Kong or the Innovation and Technology Venture Fund Corporation with two or more full-time employees, and incurring not less than HK$2million of annual operating expenditure in Hong Kong.

Qualifications

What is counted as “eligible carried interest”?

“Eligible carried interest” refers to a profit-related return received by, or accrued to, a person for the provision of investment management services which are carried out in Hong Kong. It usually includes the remuneration paid by certified investment funds or the Innovation and Technology Venture Fund Corporation.

A profit-related return should satisfy the following conditions:-

1.     the sum is received or accrued  after the payment of a return on investments in the certified investment fund or specified entity subject to the fulfilment of the hurdle rate;

2.     the sum arises only if there are profits for a period on the investments, or on particular investments, made for the certified investment fund or specified entity, or from a disposal of investment made for the fund or entity;

3.     the sum is variable by reference to those profits; and

4.     the returns to external investors of the fund or entity are determined by reference to those profits.

Who are the “qualifying persons/employees”?

In order to be eligible to enjoy the tax concessions mentioned above, the recipient of the qualifying carried interest has to fall within one of the following categories:-

1.     A corporation or an authorised financial institution licensed under Part V of the Securities and Futures Ordinance (Cap. 571) to carry on a business in any regulated activity as defined under Part 1 of Schedule 5 of the SFO;

2.     A person carrying out investment management services in Hong Kong, or arranging for such services to be carried out in Hong Kong, for a certified investment fund that is a qualified investment fund as defined under section 20AN(6) of the Inland Revenue Ordinance (Cap. 112); or

3.     A person carrying out investment management services in Hong Kong, or arranges for such services to be carried out in Hong Kong, for the Innovation and Technology Venture Fund Corporation.

Qualifying recipients also include an individual employee employed by a qualifying corporation/person or its associated corporation or associated partnership carrying on business in Hong Kong, who carries out the duties of his employment by providing investment management services in Hong Kong for or on behalf of the qualifying person. However, it should be noted that employees with roles in supporting functions of a fund house (e.g. human resources, accounting etc.) are generally not regarded as qualifying employees and are not entitled to the beneficial tax treatments.

Conclusion

The newly introduced tax neutral treatments on qualifying carried interest payments is expected to be an effective tool in boosting the development and attracting the relocation of PE funds in Hong Kong. Eligible applicants may go through a certification process administered by the Hong Kong Monetary Authority to join the tax concessionary regime. 

If you are interested in knowing more about your eligibility under the new tax concessionary regime and/or applying for tax reductions for carried interest, please do not hesitate to contact us at capital@onc.hk.