Hong Kong Carried Interest Tax Concession: Beyond Private Equity

ByRegReportingDesk

On 12 August 2026, Hong Kong’s Financial Services and the Treasury Bureau (FSTB) answered media enquiries about the preferential tax regime for carried interest and used the reply to draw a boundary. Under the current Schedule 16D, the 0 per cent profits tax concession applies to eligible carried interest received by a qualifying person from a qualifying payer. A qualifying payer may currently be a certified investment fund, an associated corporation or associated partnership of such a fund, or the Innovation and Technology Venture Fund Corporation. A business that trades or holds assets on its own account with its own capital, a proprietary trading book, is not a fund, and anything it pays out is not eligible carried interest.

The reply matters because the concession is about to grow. The Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026, gazetted on 12 June 2026 and given its first reading in the Legislative Council on 24 June 2026, expands what can qualify. Until now only carry linked to private equity investments has been eligible. Under the Bill, other profits of an eligible fund may also give rise to eligible carried interest that draws both a profits tax concession and a salaries tax concession. Subject to passage, the measures are backdated to the year of assessment 2025/26, the year that began on 1 April 2025.

For managers whose carry streams fall outside the current private-equity-linked transaction scope, the Bill is a prompt to re-test those streams under the proposed wider rules. The paying arrangement, the nature of the return and the location of investment management services are material tests, but they are not the complete statutory conditions. The FSTB specifically states that employee eligibility depends on whether the employee’s duties, in substance, constitute investment management services; the other Schedule 16D conditions must be tested separately.

Related reading: the MAS single family office class exemption in Singapore, the regime Hong Kong is competing with for asset and wealth management capital.

Where the Bill sits, and the dates that bind

This Bill is still before the Legislative Council, and the calendar is the first thing a reporting team should pin down. The FSTB confirmed on 12 August 2026 that the Bills Committee has finished its clause-by-clause examination and that the Government is targeting resumption of the second reading debate within the second half of 2026. The Bill is intended, subject to passage, to apply the enhanced measures from the year of assessment 2025/26, so enactment would occur after the start of the tax period to which those measures are intended to apply.

  • 12 June 2026: the Bill is gazetted.
  • 24 June 2026: first reading in the Legislative Council.
  • Second half of 2026: Government target to resume the second reading debate, following completion of the Bills Committee’s clause-by-clause examination.
  • Year of assessment 2025/26 (the year beginning 1 April 2025): the intended effective point for the enhanced measures, subject to the Bill’s passage.

The intended application from the year of assessment 2025/26 creates a transitional filing issue, but the IRD has already announced an administrative measure. Taxpayers eligible for an exemption or concession proposed in the Bill may submit their 2025/26 tax returns on that basis while the Bill remains under Legislative Council scrutiny. After enactment, taxpayers should check the final legislation and any further IRD guidance and notify the IRD in writing if a submitted return requires a corresponding revision.

What the 0 per cent concession actually delivers today

The current regime comes from the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Ordinance 2021, which took effect on 7 May 2021 and reaches eligible carried interest received or accrued on or after 1 April 2020. It works on two taxes at once. Eligible carried interest received by a qualifying person, typically the investment manager entity, is charged to profits tax at a rate of 0 per cent under Schedule 16D. Eligible carried interest received by a qualifying employee is excluded from that individual’s assessable income for salaries tax, and the IRD confirms the excluded percentage is currently 100 per cent.

The value of that is easier to see against Hong Kong’s ordinary rates. The normal corporation profits tax rate is 16.5 per cent. Under the two-tiered regime, a qualifying corporation is charged 8.25 per cent on the first HK$2 million of assessable profits and 16.5 per cent above that amount; where there are connected entities, only the nominated entity may use the two-tiered rates. Taking an eligible carry stream to 0 per cent, and the matching salaries tax charge on a qualifying employee’s share to nil, is the difference the regime was built to sell to fund managers weighing Hong Kong against other hubs.

Under the current Schedule 16D, eligibility depends on several conditions tested independently. The recipient must be a qualifying person; the eligible carried interest must be received from a qualifying payer, currently including a certified investment fund, an associated corporation or associated partnership of such a fund, or the Innovation and Technology Venture Fund Corporation; the transaction and underlying-profit conditions in section 4 must be met; and the Hong Kong investment-management and substantial-activities conditions in section 5 must also be satisfied. The 2026 Bill proposes amendments to those rules, including removal of the HKMA fund-certification requirement.

The widening: carry beyond private equity

The single largest change for managers is the scope of what can generate eligible carried interest. Under the existing rules, the eligible transactions are investments in private companies, the classic private equity shape. The FSTB confirmed that the Bill keeps private equity investments covered and adds that other profits of an eligible fund may also give rise to eligible carried interest capable of enjoying the profits tax and salaries tax concessions.

Under the Bill, other profits of an eligible fund may also give rise to eligible carried interest, provided the applicable statutory conditions are met. Law firm analyses of the Bill text report that it also removes the requirement for carry to be paid only after a hurdle rate set in the fund’s constitutive documents is cleared, and that it ties eligibility to a genuine, performance-linked return rather than a fixed entitlement. Those mechanical points sit in the Bill and the eventual IRD guidance; the FSTB reply confirms the direction rather than every drafting detail.

The widening ties every additional carry stream to the same eligibility perimeter: fund definition, qualifying payer, eligible carried interest, and Hong Kong activity. The FSTB was explicit that the Government has no plans to expand the scope further, and that the concession attaches to carry from funds, not to remuneration from businesses that fall outside the fund definition. The next two sections are where that line gets drawn.

The fund definition is the gate, and proprietary trading fails it

Everything in the concession hangs off one prior question: is the paying vehicle a “fund” under the IRO? The FSTB reply restated the statutory test. A fund should generally satisfy the requirement that “participating persons do not have day-to-day control over the management of the property”, and a business undertaking carried on for general commercial or industrial purposes is not a fund.

The consequence the FSTB spelled out is the one to carry into any structuring review. A business that trades or holds assets using proprietary capital to generate profits on its own account, a proprietary trading business, does not meet the fund definition. Remuneration it distributes cannot be eligible carried interest, whatever the internal paperwork calls it. A desk that trades or holds assets using proprietary capital on the firm’s own account is outside the proposed concession because the FSTB states that such a proprietary trading business does not fall within the IRO definition of a fund; remuneration distributed by that business therefore does not qualify for the concessions proposed in the Bill.

The proprietary-capital distinction is structural and must be traced in the records, not asserted after the fact. A manager that runs both a genuine third-party fund and a proprietary book cannot assume the concession blankets the whole business. Only distributions traced to the fund side, where investors are participating persons without day-to-day control, are in play. The split has to be visible in the records, not asserted after the fact.

Eligible carried interest: performance-linked, non-discretionary, earned in Hong Kong

Clearing the fund gate is necessary but not sufficient. The payment itself has to fit the definition of eligible carried interest. The FSTB described it as a return, linked to the investment performance of a fund, earned by a fund management company or its qualifying employees from providing investment management services in Hong Kong for that fund. The entitlement must come from the agreement governing the operation of the fund or the provision of investment management services, and it must be non-discretionary, so the manager or employee is entitled to a performance-based return rather than a payment the firm can hand out at will.

The regime also defines the services that count. Investment management services provided to a fund are: seeking funds for the fund; researching and advising on potential investments; acquiring, managing or disposing of property or investments for the fund; and acting for the fund to help an investee entity raise funds. The FSTB tied employee eligibility directly to that list. Whether a fund management company employee’s pay qualifies as eligible carried interest turns on whether the employee’s duties, in substance, amount to those services.

That substance test is where a well-meaning firm can trip. A discretionary bonus rebranded as carry does not qualify, because it is not a non-discretionary, performance-linked entitlement under the fund agreement. A share paid to someone whose real role is administrative or support does not qualify either, however it is documented. The IRD’s own guidance on the salaries tax side makes the same point from the individual angle: staff such as human resources or secretarial personnel who do not provide investment management services are not qualifying employees. The paperwork has to match what people actually do.

Distribution mechanics: associates and carry vehicles

Carry rarely flows in a straight line from fund to individual, and the Bill acknowledges that. The FSTB confirmed two refinements to the distribution rules. The scope of “associate” is broadened, and qualifying employees are allowed to receive carried interest through other entities rather than only in their own name. In practice that recognises the carry vehicle, a structure through which some fund teams hold their carry entitlement, so that routing carry through such a structure need not break eligibility.

The refinement is welcome, but it is not a licence to interpose any entity. The carry still has to satisfy the applicable eligible-carried-interest and distribution conditions, remain linked to fund investment performance, and arise from investment management services in Hong Kong. Under the current Schedule 16D, a qualifying payer may be a certified investment fund, its associated corporation or associated partnership, or the Innovation and Technology Venture Fund Corporation. Adding a vehicle changes who holds the entitlement, not what the entitlement is. A firm redesigning its carry plan to use the broadened routes should map each layer back to a qualifying person and a qualifying employee, and keep the chain documented, because the IRD will test the substance of the arrangement rather than its label.

For managers used to the tighter 2021 drafting, the carry-vehicle refinement is a practical improvement. It removes a reason teams previously had to keep carry personal and awkward, and it lets remuneration design follow commercial practice more closely, within the eligibility perimeter.

Certification and the reporting trail

Under the current Schedule 16D, a certified investment fund must satisfy the section 20AM fund definition and obtain HKMA certification, and the current IRD procedure requires the fund to have applied for certification before a profits tax concession claim can be made. The 2026 Bill, however, proposes to remove the HKMA certification requirement. A 2025/26 position relying on the proposed amendments should therefore follow the IRD’s transitional filing measure and then be re-tested against the enacted legislation and any subsequent implementation guidance.

The current filing trail differs between the profits tax and salaries tax claims. For a profits tax claim, the IRD requires BIR51 or BIR52 together with supplementary form S15 for each year claimed. All required supplementary forms, including S15, must be submitted electronically through the Profits Tax Return filing services under the Business Tax Portal or Tax Representative Portal for years of assessment 2020/21 to 2026/27, irrespective of the filing mode of the Profits Tax Return. If the Profits Tax Return is filed in paper form, the taxpayer must print and sign the Control List for the electronically filed supplementary forms (IR1477) and submit it with the return.

For an employee filing an original BIR60, the employee reports the full carried interest in box 30, claims the excluded amount in box 34, ticks the relevant Appendix box and completes supplementary form SP4; if available, a copy of Form IR6177 completed by the qualifying person should be attached. For a later application before assessment, SP4 and IR6177 are required; after assessment, the employee must lodge an objection and submit SP4 and IR6177. The employer reports the carried interest on the relevant IR56B, IR56F or IR56G and, where the concession is likely to apply, files IR6177 with the relevant form.

The broader fund package around the carried interest changes also brings new reporting duties. The same Bill introduces a tax reporting mechanism and economic substance requirements for the unified fund regime, alongside changes to the fund definition, qualifying investments, the removal of the 5 per cent threshold for incidental transactions, and relaxed treatment of special purpose entities. A carried interest claim should be tested separately from the fund-level exemption. Section 20AM determines whether an arrangement falls within the statutory definition of a fund, while the Bill separately proposes reporting and economic-substance requirements under the unified fund regime and links the carried-interest rules to qualifying underlying fund or special-purpose-entity profits. Teams that already handle Hong Kong’s OTC derivatives reporting calculation periods will recognise the pattern: the concession is the visible part, and the evidence obligations sit underneath it.

How the concession reads against tax transparency rules

The Hong Kong carried interest concession and cross-border reporting obligations operate on separate tracks. A preferential domestic tax rate does not determine whether account information is reportable under a separate automatic-exchange regime. Under Hong Kong’s AEOI framework, reporting financial institutions identify reportable financial accounts held by tax residents of reportable jurisdictions, or by passive non-financial entities with reportable controlling persons, and furnish the required information on those accounts annually. Whether a carry arrangement creates or forms part of a reportable financial account must therefore be analysed under the CRS account and entity-classification rules rather than inferred from the Hong Kong tax treatment of the carried interest. Managers structuring carry for internationally mobile staff should keep the Hong Kong concession and the exchange-of-information position on separate tracks, because a favourable local rate says nothing about a residence-country charge.

The same separation applies to the newer asset classes the fund regime is opening up. CARF reportability turns on account-classification rules, not on whether a fund holds digital assets. Under Hong Kong’s 2026 CARF Bill, subject to passage, reporting crypto-asset service providers that meet the Hong Kong nexus rules would become subject to registration, due-diligence and reporting requirements from 1 January 2027 in respect of reportable crypto-asset transactions, with Hong Kong’s CARF reporting obligations beginning from 1 January 2027. For a working template of how automatic exchange operates in practice, our CRS reporting guide sets out the mechanics that a Hong Kong carry recipient’s counterpart jurisdiction is likely to apply. The concession is a Hong Kong answer to a Hong Kong charge; the reporting obligations travel further.

Frequently Asked Questions

Can a hedge fund manager claim the carried interest concession once the Bill passes, or is it still private equity only?

The FSTB confirmed that the Bill would allow other profits of an eligible fund, and not only private equity investments currently covered, to give rise to eligible carried interest. The FSTB did not state that a strategy label such as ‘hedge fund’ is itself sufficient; eligibility remains subject to the applicable statutory conditions.

Our traders run the firm’s own book. Can their performance share be eligible carried interest?

No. The FSTB was explicit that a proprietary trading business, one that trades or holds assets using its own capital on its own account, is not a fund, so remuneration it distributes cannot be eligible carried interest. There is no external pool of participating persons who lack day-to-day control, which is a core part of the fund definition. The relevant question is whether the arrangement satisfies the statutory definition of a fund and the other applicable Schedule 16D conditions; the FSTB’s statement excludes proprietary trading businesses but does not create a separate ‘third-party fund’ test.

The measures are backdated to the year of assessment 2025/26. What does that mean for carry I received during that year?

If enacted as drafted, the enhanced scope applies from the year of assessment 2025/26. The IRD has already introduced a transitional administrative measure allowing taxpayers eligible for an exemption or concession proposed in the Bill to submit their 2025/26 returns on that basis while the Bill remains under Legislative Council scrutiny. After enactment, check the final legislation and any further IRD guidance and notify the IRD in writing if the submitted return requires revision.

Does the salaries tax concession really take a qualifying employee’s carry to zero?

The concession excludes eligible carried interest from a qualifying employee’s assessable income for salaries tax, and the IRD confirms the excluded percentage is currently 100 per cent. That removes the salaries tax charge on the eligible portion. It does not exempt the employee’s ordinary salary or any payment that fails the eligible carried interest test, and it depends on the employee genuinely providing investment management services.

We want to route carry through a team holding vehicle. Does that break the concession?

The Bill broadens the “associate” scope and allows qualifying employees to receive carried interest through other entities, which recognises the common carry vehicle structure. Routing carry through such a vehicle need not by itself disqualify it, but the payment must still satisfy the applicable eligible-carried-interest, distribution and Hong Kong investment-management conditions. Under the current Schedule 16D, a qualifying payer may be a certified investment fund, its associated corporation or associated partnership, or the Innovation and Technology Venture Fund Corporation. Map each layer back to a qualifying person and employee and keep the chain documented.

Is HKMA certification still required, and when should we start?

Under the current Schedule 16D, HKMA certification applies to a certified investment fund, and the current IRD procedure requires the fund to have applied for certification before a profits tax concession claim can be made. The 2026 Bill proposes to remove the HKMA certification requirement. For a 2025/26 position relying on the proposed amendments, follow the IRD’s transitional administrative measure and confirm the enacted legislation and subsequent IRD guidance.

What form supports an employee’s salaries tax claim?

Form IR6177 is part of the current employee-claim process but is not the only filing artifact. On an original BIR60 the employee must also complete the relevant BIR60 entries and supplementary form SP4, with IR6177 attached if available. A later application before assessment requires SP4 and IR6177; after assessment, the employee must lodge an objection and submit SP4 and IR6177.

Key Takeaways

  • The Bill 2026 lets carried interest from other eligible fund profits qualify, not only private equity, so managers whose carry streams fall outside the current private-equity-linked transaction scope should re-test those streams under the proposed wider rules now.
  • The concession is set to apply from the year of assessment 2025/26 (the year that began 1 April 2025), subject to the Bill’s passage; a distribution in that year may become claimable retrospectively.
  • A proprietary trading business is not a fund under the IRO, so no remuneration it pays can be eligible carried interest.
  • Eligible carried interest must be a non-discretionary, performance-linked return earned from investment management services provided in Hong Kong; a rebranded discretionary bonus does not qualify.
  • The profits tax concession keeps the 0 per cent rate under Schedule 16D, and the salaries tax concession currently excludes 100 per cent of a qualifying employee’s eligible carry.
  • Broadened “associate” scope and permitted carry vehicles ease distribution design, but the underlying carry must still be eligible at source.
  • Under current procedures, a profits tax claim requires BIR51 or BIR52 and supplementary form S15; S15 must be submitted electronically through BTP or TRP, and a paper profits tax return must be accompanied by the signed IR1477 Control List for the electronically submitted supplementary forms. The employee salaries tax process uses BIR60 or an objection, supplementary form SP4 and Form IR6177 as applicable. Current Schedule 16D also uses HKMA certification for certified investment funds, but the 2026 Bill proposes to remove that certification requirement.
  • For the year of assessment 2025/26, apply the IRD’s transitional administrative measure where eligible, then re-check the enacted legislation and any subsequent IRD implementation guidance and notify the IRD in writing if a submitted return requires revision.

Sources and References

What to check before the Bill is enacted

The direction is set, but the operative moment for reporting teams is still ahead. Before the second reading resumes, a manager should map each carry stream to the statutory fund, qualifying-payer, eligible-carried-interest and Hong Kong activity tests; confirm that proprietary trading remuneration is outside the proposed concession; document the current IRD filing trail where relevant; and note that the Bill proposes to remove HKMA fund certification. If the IRD issues further administrative guidance, re-test any distribution made in the year of assessment 2025/26 against it, and adjust the filing position for that year accordingly.

Disclaimer: The information on RegReportingDesk.com is for educational and informational purposes only. It does not constitute legal, regulatory, tax, or compliance advice. Always consult your compliance officer, legal counsel, or the relevant supervisory authority for guidance specific to your institution.

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