Hong Kong proposes tax exemption on fund managers' performance fees to attract asset managers

The Hong Kong government announced a bill to exempt a wide range of alternative asset managers from taxes on carried interest, the share of investment profits paid as performance fees, on June 11. The Inland Revenue (Amendment) Bill was gazetted on June 12, with its first reading scheduled for June 24 at the Legislative Council of Hong Kong ^{[1, 2]}.

The proposed tax break will apply retroactively from April 1, 2025. It covers performance-related income not only for hedge fund employees but also for managers of private equity, venture capital, private credit, carbon credits, insurance-linked securities, certain digital assets, gold, and other commodities. Charity funds, pension funds, and fund-of-one structures set up by global organizations such as the Asian Infrastructure Investment Bank will also be eligible ^{[1, 2, 3]}.

Currently, fund managers pay 15% to 16.5% tax on performance-tied fees while management fees are taxed at 16.5%. Private equity fund managers already enjoy zero tax on carried interest, but the bill seeks to expand this treatment to more asset classes. Darren Bowdern, head of asset management tax for KPMG Asia, said, "The tax break on eligible carried interest will apply to hedge fund employees’ performance fees, which could help Hong Kong attract talent" ^{[1, 3]}.

Adam Williams, managing director at Alvarez & Marsal, added, "For the first time the carry exemption would apply across all major asset classes, creating a compelling tax incentive for managing assets in Hong Kong" ^[1].

Hong Kong aims to become the first major Asian financial center to grant tax relief on performance-linked income to investment vehicles and their staff. The city has also eased regulations for family offices, embraced cryptocurrencies, and proposed looser rules for mutual funds as part of its broader strategy to maintain its status as a global financial hub. Hedge funds have been expanding in the city, with ExodusPoint Capital Management and Qube Research & Technologies signing major office leases in Central ^{[1, 2, 3]}.

The Inland Revenue (Amendment) Bill's first reading is set for June 24. If passed, the exemptions will bolster Hong Kong's position in alternative asset management by offering competitive tax incentives to fund managers across multiple asset classes.