Frequently Asked Questions & Answers on Completion of Supplementary Form S15 – Persons deriving eligible carried interest (applicable for year of assessment 2020/21 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
1.
Q:
What is meant by “Qualifying Person”?
A:
“Qualifying person”, as defined in section 4(3) of Schedule 16D to the Inland Revenue Ordinance (Cap.112) (“IRO”), means a person who: | ||
(a) | is a corporation licensed under Part V of the Securities and Futures Ordinance (Cap. 571) to carry on, or an authorized financial institution registered under that Part for carrying on, a business in any regulated activity as defined by Part 1 of Schedule 5 to Cap. 571; | |
(b) | carries out investment management services in Hong Kong, or arranges such services to be carried out in Hong Kong, for a certified investment fund that is a qualified investment fund as defined by section 20AN(6) of the IRO; or | |
(c) | carries out investment management services in Hong Kong, or arranges such services to be carried out in Hong Kong for a specified entity. |
2.
Q:
What is meant by “eligible carried interest”?
A:
"Eligible carried interest", as defined in section 3 of Schedule 16D to the IRO, is a sum received by, or accrued to, a person by way of profit-related return from the provision of investment management services by the person for a certified investment fund or a specified entity. The term “profit-related return” encompasses four conditions –
- the sum is received or accrued after the payment of a return on investments in the fund or entity subject to the fulfilment of the hurdle rate which is a preferred rate of return on investments in the fund or entity, that is stipulated in the agreement governing the operation of the fund or entity;
- the sum arises only if there are profits for a period on the investments, or on particular investments, made for the fund or entity, or there are profits arising from a disposal of investment made for the fund or entity;
- the sum that is to be, or may be, received or accrued is variable by reference to those profits; and
- the returns to external investors of the fund or entity are also determined by reference to those profits.
3.
Q:
For the purpose of section 1.2, should I report the information of all the investment funds for which I carried out investment management services in Hong Kong or arranged such services to have been carried out in Hong Kong, regardless whether eligible carried interest was received or accrued from those funds for the year of assessment?
A:
No. You need to provide the information in section 1.2(a) to (f) in respect of each fund for which you carried out investment management services in Hong Kong or arranged such services to have been carried out in Hong Kong in relation to eligible carried interest received by, or accrued to, you from those funds or funds’ associated corporations or funds’ associated partnerships for the year of assessment concerned.
4.
Q:
I carried out investment management services in Hong Kong or arranged such services to have been carried out in Hong Kong for a number of investment funds from which eligible carried interest was received or accrued. Those funds applied to the Monetary Authority for certification on the same date and adopted the same hurdle rate on investment. May I provide details in section 1.2(a) to (f) in respect of those funds as if they were one fund?
A:
No. You are required to provide details in section 1.2(a) to (f) in respect of each fund, unless those funds you provided the investment management services have been collectively certified by the Monetary Authority as one single fund.
5.
Q:
How should section 1.2(b) and (e) be completed if the fund, the fund’s associated corporation or the fund’s associated partnership (as the case may be) does not have a Business Registration Number?
A:
You should leave the relevant section blank.
6.
Q:
The fund from which eligible carried interest was received or accrued has not applied to the Monetary Authority for certification. Can I leave section 1.2(c) blank?
A:
No, section 1.2(c) is not allowed to leave blank. "Certified investment fund", as defined in section 2 of Schedule 16D to the IRO, means a fund within the meaning of section 20AM that is certified by the Monetary Authority to be in compliance with the criteria for certification published by the Monetary Authority. A fund has to apply for certification with the Monetary Authority before the qualifying person can apply for concessionary profits tax treatment in respect of eligible carried interest. To apply for certification, the fund or its authorized representative needs to submit an application to the Monetary Authority for certification. You are required to fill in the date of such application in section 1.2(c). The Department will be responsible for determining whether the fund is within the meaning of section 20AM of the IRO.
7.
Q:
What is meant by “qualified investment fund”?
A:
“Qualified investment fund” as defined in section 20AN(6) of the IRO refers to a fund satisfying all of the following conditions: | ||
(a) | at all times after the final closing of sale of interests- | |
(i) | the number of investors (other than the originator or the originator’s associates) exceeds 4; and | |
(ii) | the capital commitments made by those investors exceed 90% of the aggregate capital commitments; and | |
(b) | an agreement governing the operation of the fund provides that not more than 30% of the net proceeds arising out of the transactions of the fund are to be received by the originator and the originator’s associates, after deducting the portion attributable to their capital contributions (which is proportionate to that attributable to the investors’ capital contributions). |
8.
Q:
What is meant by “hurdle rate”? If no hurdle rate was specified in the agreement governing the operation of the fund, how should section 1.2(f) be completed?
A:
"Hurdle rate", as defined in section 3(11) of Schedule 16D to the IRO, means a preferred rate of return on investments in a fund, that is stipulated in the agreement governing the operation of the fund. If no hurdle rate was specified in such agreement, please insert "0"% for section 1.2(f).
9.
Q:
What is meant by “specified entity”?
A:
“Specified entity”, as defined in section 2 of Schedule 16D to the IRO, means The Innovation and Technology Venture Fund Corporation (“ITVFC”) incorporated under the Companies Ordinance (Cap. 622).
10.
Q:
I, as the investment manager of a co-investment partner, carried out investment management services in Hong Kong for the ITVFC from which eligible carried interest was received or accrued. How should I fill in section 1.3? Is there any extra document required to submit?
A:
You should state the name of the co-investment partner in section 1.3(a) and the amount of eligible carried interest received or accrued from the specified entity (i.e. ITVFC) in section 1.3(b). You must also submit a distribution notice or any other supporting document issued by the ITVFC together with the tax return and the supplementary form S15.
11.
Q:
Should I report the items under section 2 of the form on the group consolidated basis?
A:
No. You should report the data of your own business.
12.
Q:
If I have prepared financial statements for a period of more than 12 months (or less than 12 months), how should section 2 be completed? Should the amounts be apportioned or grossed up to show figures for a 12-month period?
A:
It is not necessary to apportion (or gross up) the figures if the financial statements for a period of more (or less) than 12 months have been prepared. Amounts extracted from the Statement of Comprehensive Income/Profit and Loss Account should be used in completing section 2.
13.
Q:
Should I fill in “Total eligible carried interest” for section 2.1?
A:
You are not required to fill in “Total eligible carried interest” for section 2.1 as the amount will be automatically arrived at based on your information provided in sections 1.2 and 1.3.
14.
Q:
What is meant by "Outgoings and expenses" for the purpose of section 2.2? How should section 2.2 be completed if I did not incur outgoings and expenses during the basis period for the year of assessment to produce eligible carried interest?
A:
"Outgoings and expenses" refers to all outgoings and expenses to the extent that they were incurred during the basis period for the year of assessment to produce eligible carried interest. They include a sum paid/payable out of the eligible carried interest to an employee who carried out duties of the employment by providing investment management services in Hong Kong for, or on behalf of, you for a potential certified investment fund or ITVFC. If no outgoings and expenses were incurred, you should insert "0" for section 2.2.
15.
Q:
What is meant by "Allowances" for the purpose of section 2.3? How should section 2.3 be completed if no depreciation allowances or balancing allowances were involved?
A:
"Allowances" refers to the depreciation allowances or balancing allowances allowed under Part 6 of the IRO to the extent that the relevant assets counted for the allowances were used during the basis period for the year of assessment to produce eligible carried interest. If no depreciation allowances or balancing allowances were involved, you should insert "0" for section 2.3.
16.
Q:
What is meant by "Balancing charge" for the purpose of section 2.4? How should section 2.4 be completed if no balancing charge was involved?
A:
"Balancing charge" refers to the balancing charge made under Part 6 of the IRO to the extent that the relevant assets counted for the balancing charge were used during the basis period for the year of assessment to produce eligible carried interest. If no balancing charge was involved, you should insert "0" for section 2.4.
17.
Q:
What is meant by “Net eligible carried interest” in section 2.5?
A:
“Net eligible carried interest” should be computed as follows:
Total eligible carried interest [section 2.1] – Outgoings and expenses [section 2.2] – Allowances [section 2.3] + Balancing charge [section 2.4]
18.
Q:
Should I fill in “Net eligible carried interest” for section 2.5?
A:
You are not required to fill in “Net eligible carried interest” for section 2.5 as the amount will be automatically arrived at based on the total eligible carried interest at section 2.1 and your information provided in sections 2.2 to 2.4.
19.
Q:
What is meant by “qualifying employees”?
A:
“Qualifying employee”, as defined in section 8(4) of Schedule 16D to the IRO, means an individual who satisfies both of the following conditions: | ||
(a) | the individual is employed by a qualifying person or an associated corporation/associated partnership of a qualifying person, if the associated corporation/associated partnership carries on a business in Hong Kong; and | |
(b) | the individual is carrying out the duties of the employment by providing investment management services in Hong Kong for, or on behalf of, the qualifying person. |
20.
Q:
I paid sums out of eligible carried interest in section 2.1 to a number of qualifying employees and was told by them that they would not apply for the salaries tax concessions in respect of eligible carried interest. May I fill in “0” for sections 2.6 and 2.7?
A:
No. Regardless whether the qualifying employees apply for the salaries tax concession in respect of eligible carried interest, you must state the exact amount of sums paid or payable to them in section 2.6 and exact number of qualifying employees who received or will received those sums in section 2.7.
21.
Q:
What is meant by “Applicable Period”?
A:
“Applicable Period”, as defined in section 5(4) of Schedule 16D to the IRO, means the period beginning on the day on which the Taxpayer begins to carry out investment management services directly or indirectly for a certified investment fund or ITVFC and ending on the day on which eligible carried interest is received by, or accrued to, the Taxpayer.
If the Taxpayer had provided investment management services for more than one entity (i.e. either a potential certified investment fund or ITVFC) and received or accrued eligible carried interest from these entities, the Applicable Period commenced on the earliest date on which the Taxpayer carried out investment management services for those entities.
If eligible carried interest was received or accrued from more than one entity in the year of assessment, the Applicable Period ended on the date on which the final eligible carried interest was received or accrued.
22.
Q:
I carried out one or more activities for producing eligible carried interest ("Relevant Activities") during the Applicable Period, but some of the Relevant Activities have ceased now. What should I tick for section 3.2?
A:
You should tick the boxes for all the Relevant Activities that you carried on during the Applicable Period even though some of them have ceased after the Applicable Period.
23.
Q:
What is the difference between the Relevant Activities carried out by the employees of associated corporation(s) or associated partnership(s) in box 1 and the Relevant Activities carried out by the Taxpayer's associated corporation(s) or associated partnership(s) in box 2 for section 3.3?
A:
For the scenario in box 1, it generally refers to the situation that the employees of the associated corporation(s) or associated partnership(s) are assigned/seconded to work for the Taxpayer. For the scenario in box 2, it involves the engagement of the service of the associated corporation(s) or associated partnership(s) at a fee charged to the Taxpayer on an arm’s length basis. Please refer to the examples in Note 17 and Note 18 of the form for details.
24.
Q:
I am the qualifying person and wish to claim profits tax concessions in respect of eligible carried interest as provided in Schedule 16D to the IRO. If my associated corporation or associated partnership (as the case may be) does not have Business Registration Number, how should section 3.4 be completed?
A:
You are required to fill in the name of your associated corporation or associated partnership (as the case may be) and state "NA" for the Business Registration Number in section 3.4.
25.
Q:
What is meant by "Operating expenditure incurred in Hong Kong for the Relevant Activities" in section 3.5? Do I need to provide a breakdown of the expenditure?
A:
It refers to the operating expenses that were incurred in Hong Kong for the provision of the investment management services concerned (i.e. the Relevant Activities). Please refer to Note 20 of the form. You do not need to provide a breakdown of the expenditure at the time of filing tax return and supplementary form. However, documentary evidence in support of your claimed amount of operating expenditure incurred in Hong Kong should be retained for a period of 6 years after the expiration of the relevant year of assessment. You may be required to provide such evidence in the event that your case is subsequently selected for review.
26.
Q:
Regarding Operating expenditure incurred in Hong Kong for the Relevant Activities, the note stated that "the amount of operating expenditure reported in section 3.5.1 should include the remunerations borne by the Taxpayer in respect of the employees of the associated corporation(s)/associated partnership(s) who carried out the Relevant Activities, and/or the service fee incurred by the Taxpayer for the Relevant Activities carried out by the associated corporation(s)/associated partnership(s) ".
Suppose a taxpayer is recharged by an associated corporation/associated partnership in one lump sum which includes cost of management support, office and administrative charges, and staff remuneration etc. for both relevant and non-relevant activities. But the taxpayer has difficulty to allocate the expenditure incurred in Hong Kong for the relevant activities specifically. What cost allocation method would be accepted by the IRD for the purpose of reporting section 3.5?
A:
The taxpayer may consider to allocate the cost attributable to the Relevant Activities and other activities respectively by reference to a basis as to reasonably reflect the contributions by the employees to the carrying out of the Relevant Activities, e.g. by income or working time. Please note that for any activity which does not generate income to the taxpayer, it should not be allocated with any of the operating expenditure.
27.
Q:
For the purpose of section 3.5.1, what is the basis of calculating the “average number of full-time employees” for a year of assessment falling within the Applicable Period?
A:
The "average number of full-time employees" shall be calculated as: the aggregate of the number of full-time employees as at the end of each calendar month in the basis period concerned as divided by the number of calendar months in that basis period. The figure should be rounded to 2 decimal places. If associated corporation(s)/associated partnership(s) was/were involved in the carrying out of the Relevant Activities, the average number of full-time employees reported in sections 3.5.1 and 3.6 should include the full-time employees of the associated corporation(s)/associated partnership(s) who carried out the Relevant Activities in Hong Kong and had the necessary qualifications.
28.
Q:
How should a taxpayer report if the full-time employee who carried out the Relevant Activities has dual/multiple roles or capacities in the corporation?
A:
As long as the employee was a full-time staff, then no matter the number of roles or capacities he/she had in the corporation, he/she should still be counted as a full-time staff.
29.
Q:
What do employees with the "necessary qualifications" refer to?
A:
The taxpayer should include the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications / with relevant working experiences in relation to the Relevant Activities.
30.
Q:
All of my employees or the employees of the associated corporation/associated partnership in Hong Kong who carried out the Relevant Activities were employed on a part-time basis, what should I fill in for sections 3.5 and 3.6?
A:
If all of the employees are under part-time employment, they should not be counted for the purpose of sections 3.5 and 3.6. However, please note that an employee who worked partly for the company and partly for other companies in the same group in Hong Kong should be treated as a full-time employee.
31.
Q:
What are the bases of computing the yearly average amount of operating expenditure incurred in Hong Kong and the yearly average number of full-time employees in Hong Kong in section 3.5.2?
A:
Yearly average amount of operating expenditure incurred in Hong Kong in section 3.5.2 shall be calculated as: the aggregate of the operating expenditure for each year of assessment concerned in section 3.5.1 as divided by the number of years of assessment falling within the Applicable Period. The figure should be rounded to the nearest dollar.
Yearly average number of full-time employees in Hong Kong in section 3.5.2 shall be calculated as: the aggregate of the average number of full-time employees for each year of assessment concerned in section 3.5.1 as divided by the number of years of assessment falling within the Applicable Period. The figure should be rounded to 2 decimal places.
32.
Q:
What is the basis of computing the yearly average number of full-time employees in Hong Kong of each category of post titles in section 3.6?
A:
Yearly average number of full-time employees in Hong Kong of each category of post titles in section 3.6 shall be calculated as: the aggregate of the average number of full-time employees of that category for each year of assessment concerned as divided by the number of years of assessment falling within the Applicable Period. The figure should be rounded to 2 decimal places. For the computation basis of the average number of full-time employees for a particular category of post titles for a year of assessment, please refer to Q27 and Note 21 of the form.
33.
Q:
What type of employee should I report as "Others" in section 3.6?
A:
You should include the employees whose job duties are directly relevant to the carrying out of the Relevant Activities and who hold the relevant academic / professional qualifications in relation to the Relevant Activities.