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Hong Kong is making bold moves to elevate its status as a leading offshore financial center. In a strategic shift, the territory is planning to exempt private equity funds, hedge funds, and the investment tools of the ultra-wealthy from taxes on cryptocurrency gains, private credit, and other assets.
This week, a detailed 20-page proposal, which the Financial Times has reviewed, was circulated by Hong Kong’s government. The document emphasizes that taxation is “a crucial factor” for asset managers when choosing where to set up shop, and aims to foster a “favorable environment” for them.
Hong Kong is striving to establish itself as a hub for cryptocurrency enterprises. The recent surge in Bitcoin’s value, following Donald Trump’s victory in the US presidential election, is seen as investors betting on his supportive stance towards the crypto industry boosting it further.
The government is looking to widen the scope of tax-exempt investments to include areas like private credit, overseas properties, and carbon credits. They have kicked off a six-week consultation to discuss these plans.
This proposal comes as a part of the intense rivalry between Hong Kong and Singapore, both vying to strengthen their positions as premier offshore finance centers. Their efforts to attract billionaires and investors include introducing new fund structures with low tax burdens, allowing them to manage substantial pools of capital.
If these new tax exemptions are put into place, it would bring “certainty” to family offices and investors, according to Patrick Yip, vice chair and international tax partner at Deloitte China, who focuses on family offices.
“This is a pivotal move to enhance Hong Kong’s reputation as a financial and crypto trading hub,” Yip added. He mentioned that some family offices in Hong Kong currently invest around 20% of their portfolios in digital assets, which is a significant portion.
Meanwhile, many affluent Chinese individuals are establishing private investment vehicles outside mainland China, especially as President Xi Jinping clamps down on ostentatious displays of wealth. However, Singapore’s stringent anti-money laundering measures have made some investors hesitant, as stricter due diligence processes have slowed the setup of family offices, say private bankers and lawyers.
Hong Kong is in a race with Singapore to attract investors launching funds. Data shows that fund launches in Hong Kong have been trailing behind Singapore.
“These proposed changes aim to align Hong Kong with Singapore and Luxembourg, ensuring that funds are not subject to the risk of taxation,” explained Darren Bowdern, head of asset management tax for Asia at KPMG.
The territory has been advocating for the “open-ended fund company,” a low-tax legal framework that can hold various assets and sub-funds. By October, over 450 such funds had been launched in Hong Kong, according to government data.
In contrast, Singapore introduced the variable capital company—a new fund structure—in 2020, and now hosts over 1,000 of these funds.
UBS CEO Sergio Ermotti warned earlier this year that Switzerland might lose its top spot as a global wealth management hub to Hong Kong, which he noted has been advancing impressively alongside Singapore in the sector.
