Hong Kong is weighing a policy change that would exempt fund managers’ performance-linked bonuses, commonly referred to as carried interest, from individual income tax, market participants and advisers said.
Officials and industry sources described the measure as an effort to enhance the city’s appeal to asset managers and high-performing investors. If enacted, the change would mark Hong Kong as the first major financial center in Asia to provide such a tax break for carried interest, according to those familiar with the plans.
Michael Wong Wai-lun, the city’s deputy financial secretary, told a conference this week that the government expects to submit the draft legislation to the Legislative Council as soon as next month. The timing indicates officials are advancing the proposal through the early stages of the lawmaking process.
Industry advisers have signaled strong interest. Eric Lam, an M&A tax services partner at Deloitte, told Reuters that the investment community has reacted with excitement to the prospect of a tax exemption. Deloitte is engaging with clients to help them prepare for potential changes, and the firm has taken part in government consultations on the proposals.
Deloitte also recently ran seminars for asset managers in Beijing, Shanghai, and Hong Kong to discuss the proposals, reflecting active dialogue between the government and market participants. The firm has been involved in consultations as the city evaluates how to structure any exemption.
At present, Hong Kong taxes performance bonuses linked to investment returns at rates of up to 17%. This current treatment affects how hedge funds and other investment vehicles structure compensation, particularly in years when markets perform strongly.
Industry sources said strong market gains last year led several Asia-based fund managers to receive performance-linked payments exceeding $1 million, and that top performers collected sums in excess of $50 million. For those individuals, an exemption from the existing tax treatment would represent a meaningful change to after-tax compensation.
Proponents argue that the proposed change would provide greater tax certainty for carried interest in Hong Kong relative to Singapore, and would bring the city closer to the position of jurisdictions such as Dubai, where individuals do not pay income tax, according to industry commentary cited by advisers.
Details of the draft legislation, including its final scope and the timeline for enactment, remain subject to the formal legislative process and to further government consultation.