Hong Kong Budget 2023-24

The Financial Secretary of the Hong Kong Special Administrative Region (HKSAR), Paul Chan Mo-po, delivered the 2023–24 Budget speech on 22 February 2023. Please see below for an overview of the key tax proposals for financial services.

1. Tax relief for businesses

The Budget reduced profits tax for 2022/23 by 100%, subject to a ceiling of HK$6,000, to ease the burden of profits taxpayers. The reduction will be reflected in the final tax payable for the Year of Assessment (YA) 2022/23.

2. Tax incentive for the asset and wealth management sector

A tax concession for family-owned investment holding vehicles (FIHVs) was introduced to the Legislative Council in December 2022 and is expected to be passed this year and apply retrospectively from the YA 2022/23.

The conditions for the tax concession are as follows (subject to the final bill passed):

• Pertaining to the FIHV:

—Legal form: A body of persons or a legal arrangement, including a corporation, partnership, and trust (including a discretionary trust), established or created in or outside Hong Kong.

—Central management and control (CMC) in Hong Kong: Only serve as an investment vehicle for holding and administering the assets.

—Minimum asset threshold: HK$240 million where the aggregate Net Asset Value (NAV) of specified assets held by up to 50 FIHVs in relation to a single family managed by the eligible single-family office (ESF Office).

—Substantial activities requirement: Adequacy test based on the number of employees and operating expenditure in Hong Kong. Outsourcing of core income generating activities to the ESF Office is permitted.

• Pertaining to the ESF Office:

—Legal form: A private company incorporated in or outside Hong Kong.

—CMC in Hong Kong: Income from services provided for FIHV is subject to tax in Hong Kong.

—75% safe harbour rule for profits derived from services provided to family members or their holding vehicles.

• Pertaining to the eligible underlying investments:

—Underlying investments are consistent with the scope of tax exemption under the Unified Funds Exemption (UFE) regime: qualifying transactions (in Schedule 16C assets) and incidental transactions (subject to a 5% threshold).

—Additional tests (immovable property test, holding period test, control test, and short-term assets test) are applicable for investments in private companies.

—Tax exemption also applies to special purpose entities (SPEs) established for holding FIHV’s investments.

• Pertaining to family members:

—Members of a single family include, whether alive or deceased, (i) spouse; (ii) parent and grandparent; (iii) child (including adopted and stepchild) and grandchild; and (iv) sibling (including spouse’s sibling), their spouse and child etc.

—Modified anti-round tripping provisions (i.e., deeming provisions) based on the UFE regime with two carve-outs: (i) resident individuals; (ii) certain resident non-individual entities in relation to the single family.

The Budget contained no new tax proposals in relation to the asset management sector, but the Financial Secretary said the Government will review existing tax concessions applicable to funds and carried interest to further strengthen Hong Kong's status as Asia's asset and wealth management hub.

3. Implementation of the global minimum tax regime

In the Budget, the Financial Secretary said Hong Kong will implement the global minimum effective tax rate (GMT) on large multinational enterprise (MNE) groups and domestic minimum top-up tax (DMTT) starting from 2025. A consultation exercise will be launched to enable MNE groups to make early preparations. This is expected to derive tax revenue of about HK$15 billion per year for the Government.

4. Onshore gains on disposals of equity interests

The Government has launched a consultation on enhancing the tax certainty around onshore gains on disposals of equity interests in mid-March 2023. Onshore capital gains are not currently taxable in Hong Kong, and whether a gain is taxable revenue or non-taxable capital is determined based on well-established principles, that is the six badges of trade (including subject matter, length of ownership, frequency of transaction, and motive).

5. Re-domiciliation mechanism

The Budget proposed to introduce a mechanism to facilitate companies domiciled overseas, particularly enterprises with a business focus in the Asia Pacific region, to re-domicile to Hong Kong. The Government will conduct a consultation and submit legislative proposals in 2023–24.

For further information, please contact Roy Phan.