On 31 December 2020, the Legislative Council Panel on Fiscal Affairs released its discussion paper on the proposed tax concession regime for carried interest (“Carry”). It is proposed that Qualifying Carry would be taxed at 0% Profits Tax rate. For individuals deriving assessable income from employment with qualifying institutions, 100% of the eligible Carry (with certain requirements) would also be exempt from Salaries Tax. Subject to the approval of the Legislative Council, the proposed tax concession is expected to be applied retrospectively to eligible Carry received by or accrued to qualifying Carry recipients on or after 1 April 2020.
Substance requirements are imposed on the fund managers in Hong Kong. It must i) employ at least 2 investment professionals; and ii) incur at least HK$2 million operating expenses annually. To qualify for the tax concession, the fund will need to apply to Hong Kong Monetary Authority to certify that whether investments and local substance requirements are likely to be met. In addition, an external auditor will need to be appointed to verify that the substance requirement is fulfilled.
Points to Note
Considering the huge difference in the tax rate of Carry (0%) and other principal income (8.25% or 16.5%) of the taxpayer, we expect the Inland Revenue Department to enforce strict requirements on classifications of expenses attributable to Carry and other principal income in the Profits Tax computation. Expenses attributable to Carry are not tax-deductible on the basis that they are not incurred in the production of profits chargeable to Hong Kong Profits Tax.