Hong Kong’s tax authorities have intensified scrutiny of private equity and venture capital firms, as the government seeks to close fiscal gaps amid prolonged economic headwinds, according to a report by Bloomberg.
The Inland Revenue Department (IRD) has ramped up audits and post-assessment reviews over the past 12-24 months, focusing on management and advisory fees as well as carried interest paid to Hong Kong-based fund managers. Tax advisers report a significant uptick – some as high as 50% – in funds seeking guidance in responding to regulatory queries.
Authorities are clearly ramping up their collection efforts, said Patrick Yip, Vice Chair and International Tax Partner at Deloitte China, citing a noticeable rise in inquiries from fund clients navigating increased scrutiny from the IRD.
The stepped-up enforcement comes as Hong Kong wrestles with budget deficits exacerbated by prolonged Covid restrictions, a weak property market, and political instability. Measures to narrow the shortfall have included a tax hike for high earners – the first in 20 years – and proposals to reduce public sector headcount.
The IRD maintains that its audit approach remains risk-based and applies across all sectors, though fund professionals suggest the private capital space has drawn particular attention. Carried interest is generally taxed at 15-16.5%, while management fees face the standard 16.5% corporate rate.
In 2023/24, the IRD’s audit and investigation unit recovered HKD3.3bn ($422m) in back taxes and penalties – a 27% increase year-on-year – despite case volume holding steady at around 1,800.
According to Kenneth Yim, Tax Partner at KYT, recent audits have increasingly pushed for fee income and carried interest to be recognised in Hong Kong entities, rather than offshore jurisdictions such as the Cayman Islands.
Hong Kong is home to approximately 650 private equity and VC firms managing $215bn in assets, with nearly 60% operating as regional headquarters, per Hong Kong Monetary Authority (HKMA) data. Despite ongoing compliance pressure, the city has concurrently rolled out tax incentives to retain and attract fund managers and family offices.
Notably, a 2021 concession aimed at exempting qualifying carried interest has seen limited uptake, in part due to burdensome requirements such as HKMA certification. The Financial Services and Treasury Bureau issued reform proposals in late 2024, including the removal of the certification mandate and expansion of eligible transactions.
Revised measures are expected to be tabled to the Legislative Council in 2025, with a view to implementation in FY2025/26.
However, the timing is challenging. Fundraising has slowed significantly, particularly from US LPs, as geopolitical tensions mount. At the same time, tax authorities are reportedly auditing legacy fund structures from the pre-Covid era, ahead of the six-year statute of limitations.
