Salaries Tax Concessions for Eligible Carried Interest on Form BIRSP4

Form BIRSP4 Salaries Tax Concessions for Eligible Carried Interest

File Form BIRSP4 with your individual tax return (BIR60) to claim the salaries tax concession for eligible carried interest. This supplementary form applies a reduced tax rate on carried interest from a qualifying investment fund. The concession aligns Hong Kong's tax treatment of carried interest with international practice, reinforcing the city's status as a fund domicile.

Carried Interest Tax Concession Hong Kong

Hong Kong's carried interest tax concession applies to eligible carried interest received by specified employees of qualifying investment funds. It reduces the effective tax rate on such income to 0 per cent, exempting the eligible carried interest from salaries tax. This treatment applies to carried interest arising from the disposal of assets by a qualifying investment fund during the assessment year. The IRD administers the concession through the BIRSP4 form, which captures the specific details needed to verify eligibility and compute the tax exemption.

Enacted under the Inland Revenue Ordinance (Cap. 112), the concession applies to carried interest derived on or after 1 April 2021. Its policy objective is to attract and retain fund management talent in Hong Kong by providing tax certainty and competitive treatment for performance-based remuneration.

Form BIRSP4 Eligibility Criteria

To use Form BIRSP4, the taxpayer must meet several conditions. The individual must be a specified employee of a qualifying investment fund. A specified employee includes a director, employee, or partner of the fund or its investment manager who performs fund management activities in Hong Kong. The carried interest must be derived from the fund's disposal of assets, and the fund itself must be a qualifying investment fund as defined in the Inland Revenue Ordinance.

A qualifying investment fund must satisfy the following criteria: - It is authorised as a collective investment scheme by the Securities and Futures Commission, or is a private open-ended fund company, or is a limited partnership fund registered under the Limited Partnership Fund Ordinance (Cap. 637). - It has at least four investors throughout the year of assessment. - The carried interest is calculated by reference to the fund's net profits or gains from the disposal of assets.

The taxpayer must also hold the carried interest for at least 12 months before the disposal event. If the holding period is shorter, the concession does not apply. The form requires the taxpayer to declare these facts and provide supporting documentation.

Salaries Tax Concession Carried Interest

The salaries tax concession for carried interest operates as a full exemption from salaries tax on the eligible amount. The carried interest is not included in the taxpayer's chargeable income for the assessment year. The concession applies regardless of the taxpayer's marginal tax rate, which in Hong Kong ranges from 2 per cent to 17 per cent on net chargeable income. By exempting the carried interest entirely, the effective tax rate on this income is 0 per cent.

The concession does not apply to carried interest derived from a fund's income other than gains from asset disposals, such as interest or dividend income. The IRD examines the nature of the carried interest to ensure it meets the statutory definition. The taxpayer must complete Part 2 of Form BIRSP4 to detail the carried interest amount and the disposal event that generated it.

Hong Kong Carried Interest Tax Rate

The Hong Kong carried interest tax rate under the concession is effectively 0 per cent. This is a full exemption from salaries tax on the eligible carried interest. The taxpayer does not pay any salaries tax on the exempt amount. However, the taxpayer must still report the carried interest on their tax return and attach Form BIRSP4 to claim the concession. Failure to file the form correctly may result in the carried interest being taxed at the standard salaries tax rates.

The concession is subject to anti-avoidance provisions. If the IRD determines the arrangement was designed primarily to obtain the tax concession, the exemption may be denied. The form requires a declaration that the carried interest is genuine and not part of a tax avoidance scheme.

Form BIRSP4 Filing Guide

Form BIRSP4 is a supplementary form that must be filed with the individual's tax return (BIR60) for the relevant assessment year. The IRD issues the BIR60 to individuals in April each year, and the return is due within one month of the issue date. The taxpayer should complete Form BIRSP4 and attach it to the BIR60 when submitting the return.

The form is divided into several parts: - Part 1: Personal particulars of the taxpayer, including name, Hong Kong Identity Card number, and tax file number. - Part 2: Details of the eligible carried interest, including the fund name, the disposal date, the amount of carried interest, and the holding period. - Part 3: Declaration by the taxpayer that the carried interest meets the eligibility criteria. - Part 4: Certification by the fund or investment manager confirming the carried interest is eligible.

The taxpayer must retain supporting documents, such as the fund's audited financial statements and the carried interest agreement, for at least six years after the end of the assessment year. The IRD may request these documents during a tax audit or investigation.

Tax Computation and Assessment Year

The tax computation for the concession involves determining the amount of eligible carried interest derived during the assessment year. The assessment year runs from 1 April to 31 March. For example, carried interest received between 1 April 2024 and 31 March 2025 is reported in the 2024-25 assessment year. The taxpayer must calculate the carried interest amount in Hong Kong dollars and report it on Form BIRSP4.

The IRD will then issue a tax assessment that reflects the exemption. If the taxpayer has already paid provisional tax on the carried interest, the IRD will refund the excess or apply it against other tax liabilities. The taxpayer should check the IRD's tax computation notice to confirm the concession has been applied correctly.

Qualifying Investment Fund and Specified Employee

The definitions of qualifying investment fund and specified employee are central to the concession. A qualifying investment fund must be a fund that meets the conditions set out in section 20AN of the Inland Revenue Ordinance. The fund must have a minimum of four investors, and the carried interest must be calculated by reference to the fund's net profits from asset disposals. The fund must also be a collective investment scheme authorised by the Securities and Futures Commission, or a private open-ended fund company, or a limited partnership fund.

A specified employee is an individual who performs fund management activities in Hong Kong for the fund or its investment manager. The individual must be a director, employee, or partner of the fund or its investment manager. The carried interest must be derived from the individual's employment or office, and the individual must hold the carried interest for at least 12 months before the disposal event.

Tax Representative and Provisional Tax

If the taxpayer is not resident in Hong Kong or is unable to file the return personally, a tax representative may be appointed to file Form BIRSP4 on the taxpayer's behalf. The tax representative must have written authority from the taxpayer and must submit the form with the tax return. The IRD accepts electronic filing through the Tax Representative Portal for authorised representatives.

Provisional tax is calculated on the taxpayer's estimated income for the current assessment year. If the taxpayer expects to receive eligible carried interest during the year, they may apply to holdover the provisional tax on that amount by filing Form IR1121. The IRD will consider the application based on the taxpayer's circumstances.

Supporting Terms in Practice

The IRD uses several related forms in conjunction with Form BIRSP4. The individual tax return (BIR60) is the primary return, and Form BIRSP4 is attached as a supplementary schedule. The taxpayer may also need to file Form BIR56A if the employer reports the carried interest as remuneration. The IRD's tax computation notice will show the chargeable income after applying the concession.

The disposal of assets by the qualifying investment fund must be an arm's length transaction. The fund's investment manager must certify the eligibility of the carried interest on Part 4 of Form BIRSP4. The taxpayer should ensure the certification is completed before filing the form.

Practical Steps for Filing

To file Form BIRSP4 correctly, follow these steps: 1. Obtain the form from the IRD website or the Tax Representative Portal. 2. Complete Part 1 with your personal particulars. 3. Complete Part 2 with the details of the carried interest, including the fund name and disposal date. 4. Ensure the holding period is at least 12 months. 5. Have the fund or investment manager complete Part 4. 6. Sign and date Part 3. 7. Attach the form to your BIR60 and file by the due date.

The IRD provides guidance notes with the form. If you are unsure about any part of the form, consult a tax adviser or the IRD's helpline. The IRD may reject the claim if the form is incomplete or if the eligibility criteria are not met.