With the Hong Kong tax authority conducting regular tax reviews on the city’s private equity and venture capital (PEVC) segment, tax professionals have said they believe the focus of the reviews is on understanding the situation before launching the enhanced preferential tax concession regime for funds and carried interest.

Responding to an inquiry from China Daily Hong Kong, a spokesperson for the Inland Revenue Department of Hong Kong Special Administrative Region said the tax authority is conducting the necessary tax reviews on PEVC funds operating in Hong Kong.

“To protect tax revenue, the IRD has established procedures to review the information provided by taxpayers and to verify the amount of tax payable. Such reviews apply to all taxpayers irrespective of their industries or backgrounds,” the spokesperson told China Daily Hong Kong.

“Owing to the secrecy provision of Section 4 of the Inland Revenue Ordinance, the IRD is precluded from disclosing any information about taxpayers or commenting on its actions on any class of taxpayers,” the spokesperson added.

A Bloomberg news report in May stated that the IRD is “ramping up tax checks on PEVC funds in the Asian financial hub for plugging the budget deficits”.

ALSO READ: Hong Kong's tax revenue rises 10%, expected to hit HK$401.4b in 2025-26

“From what I heard from the PEVC industry in Hong Kong, the industry response is that it is not aware of any specific campaign of the city’s tax authority to target the tax arrangements for eligible carried interest in the PEVC industry,” Lam Chun-ming, a member of the CPA Australia Greater China Taxation Committee, told China Daily Hong Kong.

“The IRD’s review is not industry-specific. It is just an across-the-board action targeting those high-risk financial activities. If the government wanted to target PEVC funds, it would not introduce proposals for enhancing the tax concessionary regime for funds and carried interest,” Lam said.

Following the consultation in 2024, the SAR government has put forward proposals to enhance the tax incentives for funds and carried interest this year, and hopes that the Legislative Council can approve these proposals next year. If approved, the relevant measures will take effect from the year of assessment 2025/26, which began on April 1 this year.

Carried interest is a share of the profit from the investment paid to the PEVC fund manager in the performance fee format for enhancing performance.

Relevant proposals include broadening the types of financial transactions to private credit and virtual assets that can generate eligible carried interest; removing the Hong Kong Monetary Authority’s investment fund certification requirement; abolishing the hurdle rate requirement for defining eligible carried interest; and allowing greater flexibility in the payment flow of the eligible carried interest to qualifying employees other than Hong Kong entities.

A hurdle rate in the private equity fund industry is the minimum return that the fund must achieve for investors before the general partner or investment manager can share in the profits.

Lam said he is optimistic about the future of Hong Kong’s PEVC industry. “Apart from the proposed tax concessionary regime for funds and carried interest, we have the free flow of capital and the ‘one country, two systems’ advantage, as well as the Guangdong-Hong Kong-Macao Greater Bay Area exposure; besides, the city is the ideal destination for sourcing and managing investee companies from the Chinese mainland.”

READ MORE: SAR implements global minimum tax, HK minimum top-up tax

Hong Kong is the second-largest private equity market in Asia after the Chinese mainland, with the AUM (assets under management) of the private equity business amounting to about $230 billion. As of the end of April this year, there were 1,125 limited partnership funds registered in Hong Kong, representing an annual growth of over 30 percent, according to the Financial Services and the Treasury Bureau.