Hong Kong: Tax incentives include 0% tax rate for “carried interest”

Concessional tax treatment for carried interest includes a 0% tax rate for “qualifying carried interest”

Concessional tax treatment for carried interest, and 0% tax rate for “carried interest”

The “Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021” passed its third reading in the Legislative Council (unamended) and once published in the official gazette, will become law.

The legislation is the culmination of an extensive consultation process between the Hong Kong Monetary Authority and the asset management industry, and reflects the importance of the industry (and in particular, private equity funds) to economic growth in Hong Kong. 


The bill provides concessional tax treatment for carried interest, effective from 1 April 2020, and a 0% tax rate for “qualifying carried interest.”

Qualifying carried interest broadly includes carried interest received from gains from investments in private companies. With some expectation, a gain on an investment in a public company or from any other non-private company investment would not qualify.  The concession will therefore be restricted to permanent establishment-type investments only.

The tax concession involves a number of conditions that must be satisfied for a carried interest to qualify for the concession. These include being a qualified recipient, the need to comply with headcount and operating expenditure substance requirements, as well as the need for the fund be certified by the Hong Kong Monetary Authority and the Inland Revenue Department (IRD).

Application procedures

The new concession applies to carried interest received or accrued from 1 April 2020. 

Guidance on the application procedures have been released by the Hong Kong Monetary Authority setting out how a fund may seek to become certified with the authority. In draft guidance made available for comment, the application process may involve an application to the Hong Kong Monetary Authority and an application for assessment to the IRD to confirm that the fund qualifies as a fund. Details of what information the IRD will require have not yet been provided. 

  • Certification of the fund must demonstrate that it will invest in private equity type investments and that it will have a sufficient level of domestic staffing and expenditure. Also, specific details of the qualifying investments made by the fund may be required (perhaps a level of detail that was not anticipated by the industry).
  • The application procedures may differ slightly depending on whether the application is made upfront or in the year in which the carried interest is earned.  However, essentially the same level of information will be required.
  • Ongoing requirements under the concession may also require further approval requests to the Hong Kong Monetary Authority in the year carry distributions are made, together with an external auditor’s report, that the criteria for certification still apply. 
  • The criteria in the auditor’s report are yet to be issued by the Hong Kong Institute of Certified Practicing accountants, although the Hong Kong Monetary Authority has clarified that the focus of the report will be on whether distributions have been paid out of eligible investments, and whether domestic substance requirements on employment and expenditure have been met. 
  • Additionally, a responsible officer may be required to notify the Hong Kong Monetary Authority within 30 days of the fund no longer complying with the criteria for certification.

KPMG observation

Tax professionals expect that the concessional tax treatment for carried interest distributions on carried interest would be welcomed by the industry.  While acknowledging the Hong Kong Monetary Authority’s need for a base level of information to satisfy itself that the fund will operate as intended under the concession, some hope that the level of detail required is not excessive because this may cause many existing offshore funds to question whether it will be worth providing such information—particularly given that the IRD may have a greater involvement in the certification process that previously expected.  Earlier consultation documents indicated that the Hong Kong Monetary Authority would administer the concession and that the IRD would only consult with the authority to consider if investment management services are eligible.

For more information contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com



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