Xu Zhengyu: Hong Kong plans to introduce six tax optimization measures to enhance the attractiveness and competitiveness of preferential tax systems through multiple measures.

On March 2nd, the Secretary for Financial Services and the Treasury of Hong Kong, Christopher Hui, spoke about optimizing the tax system for funds, family investment vehicles, and associated entities to enhance their attractiveness and competitiveness. After consulting with various industry sectors, a series of optimization measures have been proposed, including expanding the definition of "funds," broadening the types of eligible investments for funds and family control tools, relaxing tax exemptions for specific purpose entities, and improving tax relief arrangements for associated entities. Hui mentioned that tax treatment is often a key factor considered by funds and family offices when deciding where to establish themselves, and the government has been working to create a favorable tax environment to attract more funds and family offices to operate in Hong Kong. The aim is to submit a revised bill to the Legislative Council by the first half of 2026. If approved, these measures could take effect from the 2025/26 tax year. The specific measures include: 1. Broadening the definition of "funds" to include retirement funds, donation funds, and specific single-investor funds to allow more types of funds to benefit from tax exemptions and attract large single investors; 2. Expanding the types of eligible investments for funds and family control tools to cover real estate outside Hong Kong, carbon emission derivative instruments/carbon emission allowances and credits, insurance-linked securities, equity interests in non-corporate entities, loans (including private debt investments), digital assets, precious metals, and specific commodities, aligning with government policies in areas such as promoting carbon trading, digital assets, and precious metals and commodities trading; 3. Eliminating the current 5% threshold for associated transactions to provide more flexibility for funds, family control tools, and specific purpose entities to earn profits from eligible investments (e.g. interest income) without paying capital gains tax as long as profits are generated through eligible investments and meet specified conditions; 4. Expanding the tax exemption for specific purpose entities, suggesting that regardless of the ownership stake of funds or family control tools, these entities could be fully exempt from taxation, subject to anti-avoidance tax provisions applicable to funds; 5. Relaxing anti-avoidance tax provisions for the unified fund tax exemption system and adopting exemptions under the family control tool tax relief system, including individuals residing in Hong Kong, funds exempt from paying taxes under the unified fund tax exemption system, etc.; 6. Improving tax relief arrangements for associated entities, including abolishing the HKMA certification requirements, removing the threshold return rate in the definition of eligible associated interests under the tax system, etc. To implement these optimization measures, Hong Kong will establish similar requirements for the unified fund tax exemption system as the family control tool tax relief system, including a requirement for an average of at least two eligible employees and annual operating expenses of at least HKD 2 million brought to Hong Kong. Additionally, it is proposed to introduce a tax reporting mechanism to facilitate effective monitoring and compliance with international standards of tax transparency. When formulating the details of these mechanisms, the government will consider industry feedback to reduce the compliance burdens on funds and specific purpose entities. Hui expressed confidence that the proposed optimization measures can attract more funds and family offices to establish and operate in Hong Kong, creating new business opportunities for the asset and wealth management industry and consolidating Hong Kong's position as a leading hub for asset and wealth management. This will particularly help attract private debt investment activities within the region and align with Hong Kong's developments in other areas such as digital assets and precious metals and commodities trading.