Hong Kong has stepped up tax audits on private equity and venture capital firms as it seeks to close fiscal gaps and modernise its regulatory framework.

According to Deloitte, the city’s Inland Revenue Department (IRD) has significantly increased inquiries into management fees and carried interest allocations over the past two years.

Patrick Yip, vice chair and international tax partner at Deloitte China, noted a sharp rise in fund clients seeking advice on tax authority reviews. “We’ve seen a noticeable increase in inquiries from fund clients,” he said, pointing to growing pressure on managers to justify income allocations between offshore and local entities.

While the IRD maintains that its reviews apply broadly to high-risk cases across sectors, tax advisers observed a targeted focus on attributing carried interest and advisory fees to Hong Kong-based structures. In 2023/2024 alone, the department assessed HK$3.3bn ($422m) in back taxes and penalties – up 27% year-on-year – without increasing the number of audited cases.

The heightened enforcement comes amid wider efforts to boost revenue following economic disruptions and rising deficits. Though Hong Kong retains a competitive 17% top income tax rate with no capital gains tax, the government recently raised taxes on high earners and introduced proposals to tighten oversight of offshore income structures.

Despite the increased scrutiny, authorities continue to pursue reforms aimed at bolstering Hong Kong’s appeal as a private capital hub. The city, home to over 650 PE and VC firms with $215bn in assets, is revising its carried interest tax exemption to encourage fund relocation. Proposed changes include broader eligibility for concessions and the removal of certification requirements from the Hong Kong Monetary Authority.

“The government will refine preferential tax regimes for asset and wealth managers,” an IRD spokesperson confirmed, with legislative proposals expected in 2025/2026.

Kher Sheng Lee, co-head of Asia Pacific at the Alternative Investment Management Association, said improved clarity could boost local income retention. “There’s billions of US dollars at stake in management fees and carried interest tied to Hong Kong’s alternative asset management industry,” he said. “Much of that still sits offshore.”

While enforcement efforts may challenge firms in the short term, Hong Kong’s evolving tax landscape offers long-term opportunities for private equity firms willing to engage with regulatory change and build enduring regional presence.

Source: Bloomberg

If you think we missed any important news, please do not hesitate to contact us at news@pe-insights.com. 

Can`t stop reading? Read more.