Carried interest (“carry”) is a share of profits realized from the private equity fund’s investments that is paid to the general partner in return for their role in sponsoring and managing the fund. A typical carry is usually at 20% of the fund’s overall profits after return of capital to its investors. It is common for certain restrictions to be applied to carried interest such as vesting period or a claw back provision where the limited partners have a right to reclaim the carry from the general partner due to subsequent losses.
Taxation of carried interest has been a subject of a constant debate in various jurisdiction revolving around the treatment of which as either a capital gains or ordinary income. In the US, the IRS currently characterizes carried interest as capital gains rather than ordinary income which attracts a lower tax rate as compared to the 37% rate for salaries and wages. However, this may set to change soon as the Biden administration has called for an end to the carried interest tax preference and the lower capital gains tax rate.
In Hong Kong on the other hand under the new Tax Concessions for Carried Interest, eligible carried interest will be taxed at 0% profits tax rate and all of the eligible carried interest would also be excluded from the employment income when it comes to calculating the tax liability of the investment professionals receiving the carry. This concessionary tax treatment will take retrospective effect from 1st April 2020.
In Singapore, the taxation of carried interest has yet to be settled. There are no specific provisions within the Income Tax Act which provide any form of safe harbour or legislative clarity. Structurally, it is not uncommon for investment professionals to participate in carried interest arrangements through the offshore general partner of a limited partnership, or through a specific carry entity. Dividends subsequently will be paid by the said general partner or entity to the investment professionals. Alternatively, there are structures where the carry will flow through the fund manager and be paid to investment professionals in the form of taxable performance bonuses.
Established since 2013, Lymon has been providing regulatory compliance and risk management services to financial institutions and their fund products. To find out more about how we can assist with your regulatory or structuring needs, do reach out to your usual contact at Lymon or our specialist below:
Jovi Gan, Director
+65 6709 4110