Hong Kong – Enhanced Tax Regime On Carried Interest: What Managers Should Do As Employers.
In June 2026, the Hong Kong Government gazetted the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 (Bill). This landmark legislation not only refines the existing unified tax exemption applicable to investment funds and family offices but, more significantly, expands the scope of profits tax and salaries tax concession regime for carried interest.
This strategic enhancement will further anchor Hong Kong’s financial position as a premier wealth management hub and bolster its ability to attract and retain industry talent.
Legislative History
The carried interest tax concession, introduced in 2022, exempts eligible carried interest from profits tax for qualifying private equity funds. At individual level, qualifying employees providing investment management services in Hong Kong may be exempt from salaries tax on such eligible carried interest.
Enhancements Under the Bill
The Bill expands the preferential tax regime beyond private equity investments. Profits from other asset classes (e.g. listed securities, loans, private credit, digital assets etc.) may also give rise to eligible carried interest for profits tax and salaries tax concessions. This means fund managers and their qualifying employees managing non-private equity strategies, including hedge funds, may enjoy tax concessions previously not available to them upon meeting relevant statutory conditions.
What fund managers should do?
The enhanced salaries tax concession is not automatic. An employee does not obtain the concession simply because the manager or fund qualifies. The employee must independently satisfy the statutory requirements.
Fund managers should implement robust measures to maximise the likelihood that eligible employees benefit from the concession. Key areas for review include:-
(1) Eligibility – Fund managers must identify which employees are entitled to carried interest or performance fees and determine whether they meet the definition of “qualifying employees”.
Under the existing regime, “qualifying employees” must be employed by a “qualifying person” (or its associated corporation or associated partnership carrying on a business in Hong Kong) and provide investment management services in Hong Kong for the qualifying person. This definition has two distinct limbs: the employment relationship and the nature and location of the employee’s duties.
The Bill broadens the definition of associate to allow employees of a “closely related entity” of a qualifying person to qualify, irrespective of the legal form of the employing entity. The Bill also removes the requirement for carried interest to flow through a qualifying person, recognizing the market practice where funds pay carried interest to special purpose vehicles.
This enhancement is important for multinational fund managers. A Hong Kong employee may, for example, be employed by a group service company, while the fund manager sits elsewhere in the group, may now qualify.
Another important consideration is the role and duties of the employee – whether an employee can benefit from the tax concession depends on whether the his/her duties, in substance, constitute “investment management services”. The Bill defines these services as: (a) seeking funds for the fund; (b) researching and advising on potential investments to be made for the fund; (c) acquiring, managing or disposing of property or investments for the fund; and (d) acting for the fund with a view to assisting an entity in which the fund has invested to raise funds.
(2) Remuneration structure – The Bill’s proposed expansion does not mean that every bonus labelled “carry” will automatically qualify. Eligible carried interest must link to the fund’s investment performance, and be non-discretionary in nature. Employment remuneration in the form of a discretionary bonus does not qualify for salaries tax concession.
(3) Update to employment contracts and documents –Fund managers should enhance its record-keeping for every employee receiving carried interest or performance-linked remuneration, and review employment contracts, carried interest participation agreements, carried interest / performance fee allocation policies, and any other individual remuneration arrangements. In particular, these documents should –
- clearly identify the correct employing entity and its relationship with the qualifying person;
- contain meaningful description of the employee’s investment management duties;
- set out the place where the employee is providing investment management services, and specify “Hong Kong” if applicable;
- replace discretionary remuneration language with a clearer structure identifying the relevant fund and specifying the right to profits, allocation methodology, vesting conditions, leaver and clawback provisions and timing of payment.
Fund managers shall note that shifting from a discretionary bonus to a contractual carried interest scheme may impact their statutory payments liabilities as employers under the Employment Ordinance. Contractual carried interests (except for those falling within the ambit of “end-of-year” payments under the Employment Ordinance) may be treated as part of “wages” and will be included in calculating statutory payments to employees such as payment in lieu of notice and annual leave pay. Careful structuring is desirable to minimise costs for employers and meanwhile to maximise benefits to employees.
Conclusion
The Bill is testament to the Hong Kong Government’s efforts to attract global capital to be managed in Hong Kong. Whilst awaiting the passing of the Bill by the Legislative Council, the Inland Revenue Department is expected to issue further guidance to clarify matters relating to the Bill’s implementation.
With the Bill intending to take retrospective effect, fund managers should work closely with tax advisers and lawyers, to optimise the available advantages.
Please reach out to us for further information.
