In December 2020, the Financial Services and the Treasury Bureau (the “FSTB”) of the Government of HKSAR published the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the “Bill”) in the Gazette. The Bill aims to amend the Inland Revenue Ordinance (Cap. 112) to provide tax concessions for carried interest distributed by eligible private equity funds operating in Hong Kong.
The FSTB proposed to define “eligible carried interest” as a sum received by or accured 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 which is stipulated in the agreement governing the operation of the fund. In the Bill, the FSTB proposed that eligible carried interest would be charged at a profits tax rate of 0 per cent, while 100 per cent of eligible carried interest would be excluded from employment income for the calculation of salaries tax.
In order to benefit from the tax concession regime, the following conditions should be met:
1. “Qualifying 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). The fund must be certified by the Hong Kong Monetary Authority (the “HKMA”) and, in the case of non-resident fund, an authorized local representative must be appointed.
Application can be made to the HKMA for certification if the investments and local substance requirements are met. In the year eligible carried interest distributions are made, the fund is required to engage in an external auditor to verify that the substantial activities requirements and the conditions for the tax concession regime have been met.
2. “Qualifying transactions of certified investment funds”
It is proposed that eligible carried interest must arise from private equity transactions and must meet the relevant requirements under the profits tax regime for privately offered funds under sections 20AM to 20AY of the IRO for funds regime.
3. “Qualifying carried interest recipients”
Fund managers may only qualify for the tax concession if they carry out investment management services, or arrange for such services to be carried out, to a HKMA certified investment fund in Hong Kong from the day they start providing such services to the fund, to the day when they receive the carried interest. The investment management services must also not be partially carried on through a permanent establishment which the fund manager has outside of Hong Kong.
In the case of employees, they may only qualify for tax concession if they are employed by a qualifying fund manager or an associate of such qualifying fund manager who carries on a business in Hong Kong. Under the “substantial activities” requirement and in order for the concessionary tax treatment to apply, it was proposed that the qualifying carried interest recipients must have at least two qualified full-time employees and more than HK$2 million operating expenditure for its investment management services incurred in Hong Kong.
The Bill was passed by the Legislative Council on 28 April 2021. The concession will have retrospective effect and will apply to eligible carried interest received by or accrued to qualifying persons on or after 1 April 2020. However, the Bill makes it clear that the concession will not apply to carried interest accrued before 1 April 2020, even if it is only received after 1 April 2020.
For assistance with tax-related matters when setting up or restructuring of an investment fund or to obtain your certification for the carried interest concession, please contact us today.