Entity Setup
Hong Kong’s Enhanced Carried Interest Regime: What Funds, FOs & Investors Should Know
Hong Kong is expanding its preferential tax regime for carried interest in a Bill introduced in 2026. This article explains which carried interest qualifies, key eligibility criteria, and practical implications for fund structures.
By NomadicTax Research Team • 5-8 min read • August 24, 2026
## What’s Proposed Under the Carried Interest Enhancement Bill
In June 2026, Hong Kong’s government tabled the **Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026**. Its aims include enhancing tax concessions for carried interest for both **funds** and **qualifying employees** under certain conditions. ([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai))
Key features:
- Carried interest that was earlier limited largely to private equity will be broadened to other profits of eligible funds.
- The carried interest must be linked to the **investment performance** of the fund, based on a non-discretionary agreement for investment-management services. These services include fundraising, investment research/advice, asset acquisition and disposition, and assisting investee entities in fundraising. ([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai))
- Proposals also seek to refine distribution mechanisms, e.g. allowing qualifying employees to receive carried interest through other entities and expanding the definition of “associate”.
- If passed, measures will take effect for the **Year of Assessment 2025/26**. ([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai))
## Implications for Funds, Family Offices, and Employee Remuneration
### For Fund Managers / Family Offices:
- Structures need to ensure the eligible carried interest agreements are in writing and conditional on fund performance. If you’re using proprietary trading or businesses where owners manage capital for themselves, those are **not eligible**. ([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai))
- Clarity in defining “investment management services” is crucial—because only activities falling under those definitions will qualify.
### For Employees / Beneficiaries:
- Employees must perform eligible investment management services materially. Ability to receive carried interest through other vehicles may allow flexibility in incentive structure and tax planning.
- As distributions must comply with statutory rules when law is in force, ensure your carried interest plan documents support that. If not, you may lose preferential rates.
## Comparison: Pre-Bill vs Post-Bill Regime
| Feature | Pre-2026 Regime | Proposed Enhanced Regime |
|---------|------------------|--------------------------|
| Eligible Funds | Private equity only | Broad range of eligible funds (meeting the definition in IRO) |
| Eligible Employees | With direct contracts under fund management companies | Also eligible employees via other entities & expanded “associate” relationships |
| Revenue Types Covered | Usually profits from private equity carried interest | Other profits tied to funds’ income under investment performance clauses |
| Effective Year | Limited retrospective operation | Set to apply from Year of Assessment 2025/26 (if bill passed) |
## Practical Steps If You're Structuring Funds or Compensation Now
- Review your fund documents and carried interest agreements for performance linkage and conditions.
- If your carried interest is going through subsidiaries or holding entities, ensure those entities fall under proposed “associate” definitions.
- For international funds: check that “participating persons” do not control day-to-day management, so that fund qualifies under definition.
- Keep tracking of the Bill’s progress—shape of final law (after LegCo) may include modifications. Engage with the Inland Revenue Department’s administrative guidance when issued.
## Risks and Caveats
- Until the Bill is enacted, there’s uncertainty—agreements made prematurely may not suffice.
- If a fund is deemed not to qualify (e.g. due to control, discretion, or nature of services), carried interest may be taxed at full profits tax or salaries tax rates, losing preferential treatment.
- The retrospective aspect (2025/26) means agreements should already be compliant from that year—even before pass-age.
## Summary
If you’re a fund manager, family office, or structuring incentive plans, Hong Kong’s policy proposal on carried interest offers important opportunities. A carefully drafted fund agreement, clear service definitions, and attention to how distributions are structured can allow you to benefit from lower tax rates while staying compliant.