Hong Kong expands carried-interest tax relief to hedge funds

Hong Kong will extend tax exemptions on carried interest to hedge funds and a wider range of alternative asset managers, with the relief applied retroactively from April 1, 2025. The proposal is set to be introduced to the Legislative Council.

The bill would make eligible performance fees — the share of investment profits paid to fund managers — tax-exempt for qualifying individuals and corporate investment vehicles. Private equity managers already receive a carried-interest exemption; the new framework would cover additional asset classes and investment strategies.

At present, performance-linked fees can face taxation of about 15% to 16.5%, while management fee income generally falls under Hong Kong’s 16.5% corporate tax rate. Under the proposal, certain performance-related earnings that meet the qualifying conditions would be exempt from tax, which would increase net pay for some hedge fund portfolio managers and other investment professionals based in Hong Kong.

Darren Bowdern, head of asset management tax for Asia at KPMG, described the proposed exemption as an extension of favourable tax treatment to eligible hedge fund performance fees that would help attract and retain investment talent. Adam Williams, managing director at Alvarez & Marsal, said the plan would widen carried-interest exemptions across major asset classes and create additional incentives for managers to base activities in Hong Kong.

The proposal forms part of a package of policy changes from Hong Kong authorities that include regulatory adjustments for family offices, measures to support digital assets and proposals to streamline rules governing investment funds.

The bill’s timing for debate and passage has not been announced. The relief would apply to performance fees accrued from April 1, 2025, and would affect both individual fund managers and corporate investment vehicles that meet the qualifying conditions set out in the legislation.