Faced with tighter restrictions on the flow of mainland Chinese capital into the city, Hong Kong is looking to recast itself as a global tax haven for proprietary-trading companies and private money managers.
The city has for the last four years been positioning itself as a base for family offices, attracting them with a 0% concessionary profits tax rate for investment holding vehicles that manage at least HK$240 million ($30 million).
Hong Kong is planning to extend the favorable treatment by introducing a “Big Bang” tax cut for asset managers. In the latest development, it is considering extending a profits-tax break to the employees of proprietary-trading companies.
Big Bang to draw more private money
The Big Bang tax package, introduced for comment before the Hong Kong government in June, is being unveiled with the goal of “attracting more funds and family offices to establish a presence in Hong Kong.”
The new tax regime would eliminate income taxes on performance-linked bonuses for alternative asset managers such as hedge funds, private-equity managers and family offices.
Now Hong Kong is considering extending the tax break to prop-trading companies such as Jane Street and Citadel Securities, which trade their own or employee capital rather than managing money for outside investors.
The government may amend the existing Big Bang tax bill, or it may simply issue “guidance” that prop traders qualify for the tax break, according to the Financial Times, which first reported the potential boon for proprietary-trading houses.
Family offices an ongoing priority
Hong Kong is a Chinese special administrative region with its own financial laws, securities markets and currency. It is attempting to position itself as the leading Asia base for fund managers. But it faces strong competition from Singapore in particular, as well as global financial hubs such as London and New York.
Hong Kong has been losing its attractiveness as a financial hub since China effectively introduced many aspects of mainland Chinese law in June 2020, by imposing the dreaded National Security Law on the city, without input from the local government. But while the new law cracked down on dissent and effectively outlawed political opposition, the city retains its separate financial system, aided by Beijing’s strict rules on transfers of Chinese yuan.
The Hong Kong dollar, by contrast, is freely convertible and transferrable. So international funds can easily move money into and out of the city, trading its securities markets with no special restrictions on overseas investors. There is also no capital-gains tax on securities gains or property in Hong Kong.
The city’s current leader or chief executive, John Lee, identified family offices as a priority in his inaugural policy address, in October 2022. The ranks of family offices have increased rapidly thanks to that 0% concessionary tax rate, with 3,384 single-family offices based in the city as of the end of last year, according to Deloitte.
Singapore, which like Hong Kong does not charge capital gains on investments, is seeking to compete by offering a 100% income-tax exemption at fund-level investment returns, and by offering a concessionary 10% corporate-tax rate for fund managers.
New bill to extend tax break for performance pay
The new bill will dramatically expand the tax breaks. The bill – with the cumbersome full name the Inland Revenue (Amendment) (Preferential Tax Regimes for Funds, Family-owned Investment Holding Vehicles and Carried Interest) Bill 2026 – would allow private funds to structure themselves so that employee performance-related pay is structured as “carried interest” or a contractual share of fund gains. This would avoid income tax.
Jane Street and Citadel Securities have been expanding their presence in Hong Kong, with Jane Street last year inking a deal to rent six floors of an under-development building at a monthly rent of HK$30.6 million ($3.9 million). That’s the largest post-pandemic lease in the city.
Hong Kong has long been the favored offshore destination for wealthy Chinese citizens. But the Chinese government has been cracking down on the methods its richest residents have been using to move money abroad.
The Beijing authorities have punished offshore brokerages such as U.S.-listed Futu Holdings (FUTU) and Tiger Brokers parent UP Fintech Holding (TIGR) for delivering services to Chinese citizens via easy-to-access apps, as I examine in greater detail in a recent story.
Beijing has also begun taxing offshore trusts as well as insurance-policy income from offshore accounts, affecting the business of insurers such as AIA Group (AAGIY) (HK:1299), founded in Shanghai by the American financier Cornelius Vander Starr, and the Hong Kong-British insurer and asset manager Prudential (PUK) (HK:2378).
These new Big Bang tax policies look to cement Hong Kong’s position as a fund-management hub serving investors worldwide. In May, a Boston Consulting Group report found that Hong Kong had surpassed Switzerland as the largest center worldwide for cross-border wealth, with such assets up more than 10% to $2.95 trillion.
At the time of publication, Frew McMillan had no position in any security mentioned.