Hong Kong plans to expand the scope of application of the preferential tax system for incidental rights to clearly exclude proprietary trading businesses

The Zhitong Finance App learned that on August 12, the Financial Services and Treasury Bureau responded to media enquiries about the section of the “Taxation (Amendment) (Preferential Tax System for Funds, Family Investment Control Instruments and Ancillary Benefits) Bill 2026” (the “Bill”) relating to the preferential tax system for incidental rights.

The Hong Kong Government submitted a “Bill” to the Legislative Council in June this year. The aim is to optimize the preferential tax system for funds sold in private form, family investment control tools eligible for single family office management, and ancillary benefits to attract more funds and family offices to settle in Hong Kong and drive more global capital management in Hong Kong.

The core measure of the Bill is to expand the scope of application of the preferential tax system for ancillary rights. In addition to existing private equity investments, other profits from eligible funds can also generate eligible ancillary interests and enjoy benefits tax and salary tax relief. The preferential tax system applies to eligible ancillary benefits distributed by “funds” that meet the relevant definitions of the Inland Revenue Regulations. According to the current definition, a “fund” generally satisfies the requirement that “participants have no day-to-day control over the management of the property in question”, and a business entity operating for general commercial or industrial purposes does not meet the definition of a “fund”. Therefore, remuneration distributed by businesses that use their own funds to earn income from trading or holding assets for themselves (i.e. “proprietary trading business”) is not eligible for the tax exemption proposed in the Bill.

Eligible fringe benefits refer to non-discretionary returns earned by a fund manager company or its eligible employees by providing investment management services for the fund in Hong Kong and linked to the fund's investment performance. The “investment management services” provided to the fund include: (1) raising funds for the fund; (2) conducting research and providing advice on potential investments to be made to the fund; (3) obtaining, managing or disposing of assets or investments for the fund; and (4) assisting invested entities to raise funds on behalf of the fund. Whether an individual employee's remuneration is an eligible ancillary benefit is subject to whether the actual content of their work is an “investment management service” as described above, and also satisfies other relevant conditions.

The Bill also proposes to optimize the requirements for the distribution of ancillary benefits, including expanding the scope of “associates” and allowing eligible employees to receive ancillary benefits through other entities to cover various arrangements for the distribution of ancillary benefits that may arise in practice.

The Bill is currently being reviewed by the Legislative Council Bills Committee. The review of each provision has been completed. The goal is to resume debate on the second reading in the second half of this year. If approved, the measures could take effect from the 2025/26 year of assessment. The Inland Revenue Department will issue administrative guidelines at the time of implementation to further explain the implementation details. The relevant guidelines will be consistent with the legal framework. The Government has made it clear that it has no plans to further expand the scope of application of preferential measures.

The Hong Kong Government stated that it has always maintained close contact with the industry, explained the policy concept and scope of application of the preferential tax system, and actively discussed the implementation details of the new system with the industry. In the process, a number of fund management companies, both local and overseas, have indicated that they plan to settle in Hong Kong or expand their business in Hong Kong, taking into account the tax incentives proposed in the Bill. We expect that the optimization measures will attract more global capital management in Hong Kong and the establishment and operation of more funds in Hong Kong, thereby stimulating commercial activity in related professional services industries and strengthening Hong Kong's competitiveness as a leading international asset and wealth management center.