The asset and wealth management industry is one of the strategic areas on which the Financial Services and the Treasury Bureau (FSTB) will focus in its efforts to promote financial development. Our target is the significant opportunities that diversified asset allocation and intergenerational wealth transfer will bring, and the subsequent enormous demand for wealth management platforms and options. The market estimates that between 2023 and 2030, the total amount of intergenerational wealth transfer in the Asia‑Pacific region will reach US$5.8 trillion, of which 60% will come from ultra-high-net-worth families (families with financial assets exceeding US$50 million). In addition, a survey shows that 77% of the family offices in the Asia‑Pacific region anticipate a growth in assets under management in 2024, and 84% expect an increase in their family wealth. These trends not only facilitate the establishment and expansion of family offices, but also entail a greater demand for professional services such as investment management, legal, accounting, custody and family governance services. In particular, according to the latest Global Financial Centers Index, Hong Kong ranks first globally in the industry sector of investment management. All segments of the asset and wealth management industry are indeed intertwined. While family offices currently allocate a relatively low weight to alternative assets (e.g. venture capital funds) in their portfolios, their future demand growth is set to drive a positive cyclical development in the industry as a whole.
In fact, recent years have seen remarkable
achievements in Hong Kong’s asset and wealth management business, which
amounted to nearly HK$31.2 trillion as of
end‑2023, with an increase in net fund inflow by over 3.4 times year‑on‑year. As of the first half of 2024, Hong Kong
ranked second in Asia in terms of capital under management in private equity
(PE) funds, which amounted to over US$233.9 billion. Hong Kong is also Asia’s largest hedge fund
hub and cross‑boundary wealth management centre. At present, there are 435 open‑ended fund
companies (OFCs) and almost 1 000 limited partnership
funds (LPFs) registered in Hong Kong. According
to market estimates, more than 2 700 single‑family offices are operating in the city, over half of which
have assets over US$50 million.
To continue our efforts in developing this important
market and follow up on the earlier proposals in the Policy Address and the
Budget, we plan to enhance multiple aspects of the existing tax concessions for
the asset and wealth management industry, with a view to further expanding the
market to the next level. Specifically,
we propose a number of enhancements to the existing tax concessions for
privately‑offered funds, family‑owned investment holding vehicles (FIHVs) and
carried interest of PE funds through a three‑pronged approach, namely
broadening the definition of “fund”, expanding qualifying investments, and
optimising implementation arrangements. Their
key features are as follows:
Broadening the
definition of “fund”: For a fund to enjoy profits
tax exemption under the tax exemption regime for funds, it must first meet
the definition of “fund”. At present, special provisions
have been made for sovereign wealth funds to enable them to fit the definition
of “fund” even without pooling capital from external investors. We propose to broaden the definition of “fund”
to include pension funds and endowment funds,
allowing them to be exempted from profits tax with the aim of attracting more of
these two types of funds to expand their business to Hong Kong and make use of
our professional services, thereby reinforcing the impact of “patient capital”
in our city.
Expanding qualifying investments: Privately‑offered funds
and FIHVs are currently provided with profits tax exemption, which is only
applicable to transactions in specific asset classes such as shares and
bonds. To align with the FSTB’s overall
financial development strategy, we propose to expand the qualifying investments
to include emission derivatives/allowances, insurance‑linked securities, loans
and private credit investments, virtual assets and so on, allowing transactions
in assets of these classes to enjoy profits tax exemption. On the other hand, given that interest income
is the primary source of business income for financial institutions, insurance
companies and money lenders, we suggest imposing additional safeguards as
preventive measures. A person who carries
on a business as a financial institution, an insurance business or a money
lending business in Hong Kong and has a beneficial interest of 10% or more in a
fund (or any percentage if the fund is the person’s associate) will be deemed to
have obtained assessable profits in respect of the income derived by the fund from
loans or private credit investments.
Facilitating
the distribution of carried interest by PE funds: Carried
interest (i.e. performance return which is linked to investment
performance) distributed by eligible PE funds may
enjoy profits tax
and salaries tax concessions. We propose
to enhance the tax concession arrangements with the implementation and related
details, including retaining the monitoring role of the Inland Revenue
Department only without the requirement of prior certification
by the Hong Kong Monetary Authority, expanding the coverage of qualifying
payers of carried interest to associated entities within the same group, and removing
the hurdle rate requirement.
The above are the key
measures of our overall proposal.
Meanwhile, we also plan to introduce refinements to various technical
details, definitions and processes. To
better consult the market, I will chair a meeting of the newly established task
force on promoting the development of asset and wealth management this week to discuss
the proposed measures with the members. As
a next step, the FSTB will publish a consultation paper on the overall proposal
and, after collecting and analysing the comments received, will propose relevant
legislative amendments for implementing the enhancements, so as to add new
impetus to the development of the industry.
21 October 2024