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Keep Making Efforts to Scale New Heights

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