The Financial Services and the Treasury Bureau plans to introduce 6 optimization measures to expand the definition of funds and types of investments, aiming to attract more funds and family offices

The Secretary for Financial Services and the Treasury, Hui Cheng-yu, announced today (2nd) at the Legislative Council's Financial Affairs Committee that a series of measures will be launched to optimize the tax regime for funds, family investment control tools, and associated benefits, including expanding the definition of funds and eligible investment types, in order to attract more funds and family offices to establish themselves in Hong Kong. A draft amendment is planned to be submitted to the Legislative Council in the first half of 2026; if approved, the relevant measures could take effect from the 2025/26 tax year. Enhancing the Attractiveness of the Tax Regime Hui Cheng-yu pointed out that the total value of Hong Kong's asset and wealth management business has exceeded HKD 35 trillion by the end of 2024, with a year-on-year growth of 13%; another study shows that there were over 3,380 single family offices in Hong Kong by the end of last year, an increase of about 25% over two years. To further enhance the attractiveness and competitiveness of the tax regime, the Financial Services and the Treasury Bureau, together with the Hong Kong Monetary Authority, the Securities and Futures Commission, and the Inland Revenue Department, reviewed the situation and, after consulting the industry, formulated a series of optimization measures, including: Allowing Investment in Digital Assets and Precious Metals (1) Expanding the definition of "fund" to cover retirement funds, donation funds, and specific single investor funds, facilitating more types of funds to utilize the tax exemption system and attracting large-scale single investors; (2) Expanding the eligible investment types for funds and family control tools to include real estate located outside Hong Kong, carbon emission rights derivatives/carbon emission quotas and carbon credits, insurance-linked securities, equity interests in non-corporate entities, loans (including private debt investments), digital assets, precious metals, and specific bulk commodities. This will complement the government's policies in related areas such as promoting carbon trading, digital assets, and trading in precious metals and bulk commodities; Abolishing the 5% Threshold for Associated Transactions (3) Abolishing the current 5% threshold for associated transactions, allowing funds, family control tools, and their specific purpose entities greater flexibility in earning profits through eligible investments (e.g., through interest income). Profits earned from eligible investments that meet specified conditions will be exempt from profits tax; (4) Relaxing the tax exemption treatment for specific purpose entities. Currently, the profits tax exemption scope for specific purpose entities is equal to the percentage of the fund or family control tool holding that specific purpose entity. We propose that regardless of the ownership share of the fund or family control tool, the specific purpose entity can be fully exempt from tax, provided it complies with the same anti-avoidance provisions applicable to funds; (5) Relaxing the anti-avoidance provisions of the unified fund tax exemption system and adopting the exemption situations under the family control tool tax relief system to include residents who are natural persons, funds exempt from tax under the unified fund tax exemption system; and (6) Optimizing the tax relief arrangements for associated benefits, including the cancellation of the certification requirements by the Hong Kong Monetary Authority, and removing references to threshold return rates in the definition of eligible associated benefits under the tax regime. Proposed Substantial Activity Requirements To implement the relevant optimization measures, the government will stipulate substantial activity requirements similar to those under the family control tool tax relief system for the unified fund tax exemption system, requiring an average of at least two qualified employees and annual operating expenses incurred in Hong Kong of no less than HKD 2 million, and it is proposed to introduce a tax reporting mechanism to achieve effective regulation