Tax Planning
How Hong Kong’s Proposed Carried Interest Regime Could Change Private Equity Tax
Recent amendments in Hong Kong may significantly broaden what qualifies as “carried interest,” with important tax implications for fund managers and employees.
By NomadicTax Research Team • 5-8 min read • August 23, 2026
## What’s Changing?
In August 2026, the Financial Services and the Treasury Bureau (FSTB) issued a *response to media enquiries* regarding the **Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026**.([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai)) The Bill expands the **preferred tax treatment for carried interest**, formerly limited largely to private equity investments, to a wider range of **eligible funds** and qualifies returns that are tied to investment performance under specific circumstances. Qualification requires:
- Returns must be **non-discretionary** and linked to fund performance under the fund agreement;
- The employee or fund manager must provide investment management services in Hong Kong (e.g. research, advisory, acquiring/managing/disposal) to qualify;
- The “fund” must meet the legal definition in the Inland Revenue Ordinance, including that participating persons **do not have day-to-day control** over its management; proprietary trading businesses do not qualify.([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai))
These expansion measures will **take effect for the year of assessment 2025/26**, subject to passage by the Legislative Council.([ird.gov.hk](https://www.ird.gov.hk/eng/ppr/archives/26081201.htm?utm_source=openai))
## Why It Matters – Practical Implications
| Person | Opportunity | Watch-outs |
|---|---|---|
| Fund manager receiving carried interest | If performance-based compensation qualifies, may enjoy **profits tax or salaries tax concessions** rather than full rate. | Must ensure carried interest is structured properly in fund agreement and administration in Hong Kong. Discretionary or unclear agreements may be rejected. |
| Employees of fund-management companies | Expansion allows “qualifying employees” to benefit, not just originating investors or founders. | Must conduct substantial **investment management services** in Hong Kong; remote or ancillary roles likely excluded. |
| Investors or funds planning Hong Kong structure | Hong Kong becomes more competitive as location for funds and single family offices, especially those aiming to receive carried interest benefits. | Must verify whether the “fund” meets the criteria in IRO: non-day-to-day control, substantial activities in HK, etc. |
## Actionable Steps if You’re Affected
1. **Review fund agreements** immediately. Ensure that carried interest obligations are performance-based, clearly documented, and include necessary conditions (non-discretionary, tied to fund performance).
2. Confirm whether **employees’ roles qualify as investment management services** under the law: research, advisory, acquisition, disposal or acting for the fund with funding-raising or advising.
3. Engage legal or tax counsel to assess whether your fund qualifies under the IRO’s definition of “fund” (particularly the non-day-to-day control test).
4. Track progress at LegCo: the Bill is being scrutinised and subject to amendment. Implementation starts for YA 2025/26, so timing matters.
## Example Scenario
| Situation | Old Treatment | With Proposed Bill |
|---|---|---|
| Employee at a local private equity fund earns 10% carried interest under fund’s governing agreement | Carried interest taxed at full salaries tax or profits tax depending on individual/company circumstances. | Eligible under new regime: may receive concession if agreement and services in HK meet conditions; tax savings depend on rate differences. |
| Family office with a fund-of-one investing in insurance-linked securities, seeking to distribute carried interest to founding family members | Fund-of-one may have been excluded under prior “fund” definition; certain investment types not always eligible. | Expanded definition may bring fund-of-one and broader investment classes within scope. |
## Key Takeaways
- This reform signals Hong Kong’s intent to better compete globally for private equity and family offices.
- If you manage funds, now is the time to **structure carried interest and performance fees** to take advantage.
- Legal definitions and active substance in Hong Kong will be critically important – weak connections risk exclusion.