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Executive summary

The Hong Kong Government introduced the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (the Bill) on 28 January 2021. The Bill proposes a tax regime offering tax incentives for eligible carried interest of qualifying persons and qualifying employees. Subject to the passage of the Bill by the Legislative Council, the provisions of the Bill will apply to eligible carried interest received or accrued on or after 1 April 2020.

This Alert summarizes the key provisions of the tax regime.

Detailed discussion

The proposed Bill 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 return¹ from the provision of investment management services.

In-scope transactions

As a prerequisite to the concessionary tax regime, the eligible carried interest must arise from profits on the in-scope transactions² of private equity (PE) funds which are exempt from profits tax under the Unified Fund Exemption Regime (UFR).

Qualifying payers

A "qualifying payer" is any of the following:

• A certified investment fund, which falls within the definition of "fund" under the Inland Revenue Ordinance (IRO) and has been certified by the Hong Kong Monetary Authority
• An associated corporation, or an associated partnership, of a certified investment fund
• The Innovation and Technology Venture Fund Corporation in Hong Kong (a specified entity)

Qualifying recipients

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:

• A corporation or an authorized financial institution licensed/registered under the Securities and Futures Ordinance to carry on regulated activity.
• A person, other than 1) above, carrying out investment management services in Hong Kong, or arranging such services to be carried out in Hong Kong, for a certified investment fund which is a "qualified investment fund" under the UFR or a specified entity.
• A qualifying employee, who is an individual employed by a qualifying person in 1) or 2) above or their associated corporation, or the associated partnership (provided that the associated corporation/partnership carries on a business in Hong Kong) and carries out the duties of the employment by providing investment management services in Hong Kong for, or on behalf of, the qualifying person.

Provision of investment management services

The Bill sets out a non-exhaustive list of investment management services as follows:

• Seeking funds from external investors or potential external investors
• Researching and advising on potential investments
• Acquiring, managing or disposing of property or investments
• Assisting investee companies to raise funds

Additional requirements

In addition, the Bill 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)³ as follows:

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

David Chan | david.chan@hk.ey.com

Paul Ho, Financial Services | paul.ho@hk.ey.com

Ernst & Young LLP, Hong Kong Tax Desk, New York

Rex Lo | rex.lo1@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

Chris Finnerty | chris.finnerty1@ey.com

Bee-Khun Yap | bee-khun.yap@ey.com

Dhara Sampat | dhara.sampat2@ey.com

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ENDNOTES

¹ The Bill proposes that a sum is a profit-related return if all of the following conditions are satisfied:

• 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 (a preferred rate of return on investments in a certified investment fund or specified entity that is stipulated in the agreement governing the operation of the fund or entity).
• 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.
• The sum is variable by reference to those profits.
• The returns to external investors of the fund or entity are determined by reference to those profits.

² Including profits on investments, on particular investments, or on a disposal of investment that are earned from a transaction:

• In shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company specified in Schedule 16C to the IRO
• In shares of, or comparable interests in, a special purpose entity (SPE) or an interposed SPE that holds (whether directly or indirectly) and administers one or more investee private companies and no other assets of a class specified in Schedule 16C
• In shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, an investee private company
• Incidental to the carrying out of the above qualifying transactions, subject to the 5% threshold in section 20AN of the IRO

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.

³ 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.