As a recap, our tax updates in January 2021 have introduced the proposed tax concession regime for carried interest. The concessionary tax treatment for carried interest is effective starting from 1 April 2020, and will provide for a 0% tax rate for qualifying carried interest.
On 16 July 2021, the Hong Kong Monetary Authority (“HKMA”) issued a guideline on the certification of funds under Section 16D to the Inland Revenue Ordinance (“IRO”) in relation to tax concessions for carried interest.
Application for Fund Certification
A fund is required to apply for Certification from the HKMA for each relevant Year of Assessment to claim tax concessions on eligible carried interest receipt. The documents required for application for Certification including (i) a completed “Certification Application Form” and (ii) the required supporting documents, including an auditor’s report. The application should be submitted on or before the below applicable deadline, which is the same date as the Profits tax filing deadline: -
Accounting year-end date falling within:
1 April to 30 November
2 May in the following year
1 December to 31 December
15 August in the following year
1 January to 31 March
15 November in the same year
Pre-application screening (optional)
In case where a fund would like to assess whether it would meet the criteria for certification, it could apply for pre-application screening. The pre-application screening is intended to provide an indication of whether a fund could meet the criteria in the actual certification process. The screening is optional and will not affect the outcome of the actual certification process.
Points to note
For carried interest tax concession, the critical requirements on the fund is that it had to qualify for Hong Kong Profits Tax exemption. Please refer to our article for more details.
Before certification from the HKMA, fund managers perform tax study on whether their funds qualify for Hong Kong Profits Tax exemption. Otherwise they may expose the funds into Hong Kong Profits Tax liabilities. There has been a misconception that carried interest tax concession only applies to Hong Kong Limited Partnership Fund. Indeed, it applies to overseas-domiciled fund (e.g., Cayman SPC) as well as long as the fund exemption is satisfied.
Where a fund has satisfied the requirements, the HKMA will endeavor to, within 2 months after receiving all the required information and documents, issue the Certification to the fund and inform the IRD of the issuance of the Certification. As such, if the fund would like to elect for the tax concession for carried interest, it should make sure that all required documents will be ready before the deadline.
Please note that the certification by the HKMA does not mean that the fund is automatically entitled to the tax concession under the IRO. The IRD will take into account all relevant provisions under the IRO and may request taxpayer to supply further information and documents in processing the claim for tax concession.