GAME-CHANGING ENHANCEMENTS TO STRENGTHEN HONG KONG’S POSITION AS A LEADING ASSET AND WEALTH MANAGEMENT HUB
Hong Kong’s Carried Interest Tax Concession now includes Performance Fees and should generally apply to all funds including Private Equity, Real Estate, Credit and Hedge strategies
Introduction
The Hong Kong Government gazetted the long-awaited Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (the “Bill”) on 12 June 2026. The Bill proposes enhancements to the existing preferential tax regimes for funds, family‑owned investment holding vehicles (“FIHVs”) managed by single family offices and the carried interest concession. The Bill follows extensive industry engagement and consultation and is expected to be introduced to the Legislative Council on 24 June 2026 for the First Reading and commencement of the Second Reading debate.
This alert focuses on the Carried Interest Tax Concession. Please refer to our separate alerts on the enhancements to the Unified Fund Regime (“UFR”) and the FIHV regime (family office regime).
What is Changing?
The enhancements to the carried interest concession address practical challenges that have limited the uptake of the current regime. The key changes are:
- Concession expanded beyond private equity
The concession is proposed to be extended to managers of all types of funds, including hedge funds, credit funds and venture capital – and their employees.
- 0% tax rate on genuine carry and performance fees
Carried interest and performance fees that are linked to fund performance can qualify for a 0% concessionary tax rate at both the corporate (profits tax) and individual (salaries tax) levels.
- Specified right
Carried interest and performance fees qualify only where the qualifying person or qualifying employee holds, directly or indirectly, a specified right to a share of the fund's profits. That entitlement must be “determined in accordance with an agreement governing the operation of the fund or entity, or any other agreement in relation to the provision of investment management services for the fund or entity”. Further, the entitlement should not be attributable to capital contributions and must not be discretionary “but may allow a degree of flexibility concerning the amount, timing and manner of payment”.
- Removal of HKMA certification requirement
The requirement for funds to be certified by the HKMA is proposed to be removed. “Fund” is now defined by cross-reference to the UFR.
- Application from 1 April 2025
Once enacted, the reforms are expected to take effect from 1 April 2025.
Additionally, the substantial activities requirement in terms of local full-time employment of not less than 2 qualified employees and annual operating expenditure incurred in Hong Kong for carrying out investment management services of not less than HK$2 million (approx. US$255K) continues to apply, requiring core investment management functions to be carried out in Hong Kong.
It remains to be confirmed whether the substantial activities requirements will be applied to each fund and whether outsourcing of investment management services is allowed, provided the fund exercises adequate monitoring and control over the relevant activities by the outsourced entity.
We have set out our detailed comments in the Appendix.
What Should You Do?
Fund managers providing investment management services from Hong Kong (or indeed those who may now be considering to set up and manage funds from Hong Kong) should review their existing carry and performance fee structures and documentation. In particular, it will be essential to review the detailed documentation for multi-strategy funds and other funds with more complex structuring and fee arrangements.
Employers should consider whether all employees that receive carry or performance fees fit within the definition of qualifying employees.
Careful consideration should be given to whether carry that has already been paid after 1 April 2025 might qualify such that employees might be able to seek a refund of tax paid.
Review of employment arrangements including any carry or similar agreements will be required. Managers should determine their approach to reporting under these rules and communicate the same to their employees.
In addition, the IRD has clarified that, as a transitional administrative measure, taxpayers who are eligible for the concession under the Bill may submit their tax returns for the year of assessment 2025/26 on that basis[1]. Given salaries tax returns may be due imminently, this gives significant comfort that the Bill is likely to be passed as proposed.
If you have any questions on how the revised rules apply to you, please do not hesitate to contact us.
Appendix
Issue | Existing Law | What Changed |
Certification Requirement for Funds | Funds must be certified by the Hong Kong Monetary Authority (“HKMA”) to qualify for the concession. | The certification requirement is proposed to be removed. |
A&M Perspective: The removal of certification as a condition significantly broadens and simplifies access to the concession, reducing administrative and compliance costs. | ||
Definition of eligible carried interest | Eligible carried interest is defined as a sum received by, or accrued to, a person by way of profit-related return from the provision of investment management services by the person for a fund. Additionally, carried interest must be subject to a hurdle rate in order to qualify for the concession but it is not uncommon for there to be no hurdle rate in a carry arrangement. | The meaning of “eligible carried interest” is updated such that it is a sum received by, or accrued to, (a) a “qualifying person”; or (b) a “qualifying employee” of a qualifying person or of a closely related entity of a qualifying person (“Carry Recipient(s)”) from a qualifying payer by virtue of a specified rightheld directly or indirectly by the Carry Recipient(s) in respect of the profits of a fund, by way of a profit-related return from the provision of investment management services in Hong Kong. The Carry Recipients are regarded as holding a specified right where they are entitled to receive, whether directly or indirectly, a share of the profits of the fund, and the entitlement is determined in accordance with an agreement governing the operation of the fund or any other agreement in relation to the provision of investment management services for the fund; is not attributable to capital contributions to the fund and is not discretionary. The hurdle rate requirement is also proposed to be removed. |
It is important to highlight that the Carry Recipient must, either directly or indirectly, hold a specified right entitling them to receive a portion of the fund’s profits. To ensure compliance, it is essential to maintain robust documentation among relevant entities and individuals, clearly detailing how profits are allocated and traced to the profits of the fund, and how the entitlements to carry – arising from the holding of specified rights – are determined. | ||
Transactions Giving Rise to Eligible Carried Interest | Transactions giving rise to eligible carried interest are restricted only to typical private equity transactions exempt under the UFR. | The scope of eligible carried interest has been expanded to include amounts derived from UFR exempt profits (i.e. all classes of assets specified under Schedule 16C which are exempt from Hong Kong profits tax under the UFR), other non-taxable income (such as dividend income) and taxable income derived by the fund / SPE. |
A&M Perspective: The expansion of the scope of qualifying transactions giving rise to eligible carried interest marks a significant step forward, transforming a concession which was historically only applicable to private equity into a more comprehensive framework that now extends across the wider asset management industry – including private equity, hedge funds, private credit and more. By broadening the scope to capture offshore non-taxable profits as well as other taxable profits that may be derived by the fund / SPE, this change streamlines administration and eases the practical challenges of tracking and attributing carry between qualifying assets and non-qualifying assets. This is particularly beneficial for global funds with multi-asset investment strategies. | ||
Qualifying Payer, Qualifying Person and Qualifying Employee | Only a certified investment fund or its associated corporation or partnership can pay eligible carried interest. | The definition of “qualifying payer” has been expanded to include any closely-related entity within the same group, regardless of legal form. This allows carried interest to be paid from a broader range of fund and management entities, as long as the “control” test is met. |
A “qualifying person” must generally be (a) a licensed corporation or an authorized financial institution carrying out investment management services in Hong Kong; or (b) a person carrying out investment management services in Hong Kong for a “qualified investment fund” for the purpose of the UFR. | The definition of a “qualifying person” has been expanded to include unlicensed entities that manage Excepted Funds (as defined under the UFR). | |
A “qualifying employee” is defined as an individual employed by a “qualifying person” or its “associate”. | The definition of “qualifying employee” has been expanded to include individuals employed by the “qualifying person” or a closely-related entity of a “qualifying person”. Additionally, to the extent carried interest is received by or accrued to an entity which is partly or wholly owned by a “qualifying employee”, the carried interest is proposed to be considered as having been received by and accrued to the “qualifying employee”. | |
Eligible carried interest must be paid through a “qualifying person” (investment manager). | The requirement that carry must be paid to a qualifying employee through a qualifying person is proposed to be removed. | |
Additionally, the broader definitions of “qualifying payer” and “qualifying employee” introduce much greater flexibility in how fund entities and fund management entities are structured within the same group. This also means employees can be hired or transferred between entities within the group without inadvertently affecting their eligibility for the carry tax concession. These amendments help ensure that structural adjustments or personnel movements within a group do not unintentionally impact entitlements to the carried interest tax concession. | ||
Subject to legislative procedures, the proposed amended rules generally apply to eligible carried interest accrued to a qualifying employee from 1 April 2025. The IRD is expected to provide further guidance on when eligible carried interest is considered as accrued and/or paid to a qualifying employee. Upon further clarification from the IRD, an analysis should be undertaken to determine whether carried interest not yet paid as at 1 April 2025 to a qualifying employee would be considered as “accrued” and eligible for the tax concession.
[1] Inland Revenue Department, What’s New, https://www.ird.gov.hk/eng/new/index.htm (accessed 12 June 2026).
