Hong Kong plans to expand the scope of the preferential tax system for ancillary rights, explicitly excluding proprietary trading businesses.

On August 12, the Financial Services and the Treasury Bureau responded to inquiries related to the preferential tax regime for associated rights in the media concerning the Taxation (Amendment) (Preferential Tax Regime for Funds, Family Investment Holding Vehicles, and Associated Rights) Bill 2026 (the Bill). In June this year, the Hong Kong government submitted the Bill to the Legislative Council, aiming to optimize the preferential tax regime for funds offered privately, family investment holding vehicles managed by qualified single family offices, and associated rights, in order to attract more funds and family offices to set up in Hong Kong and drive more global capital management in the city. The core measure of the Bill is to expand the scope of the preferential tax regime for associated rights. In addition to existing private equity investments, other profits of eligible funds may also generate qualified associated rights, benefiting from profits tax and salaries tax deductions. The preferential tax regime applies to qualified associated rights distributed by funds that meet the relevant definitions in the Inland Revenue Ordinance. According to the current definition, a fund generally must satisfy the provision that participants have no day-to-day control over the management of the assets involved, and business entities operated for general commercial or industrial purposes do not meet the fund definition. Therefore, businesses that earn returns by trading or holding assets using their own funds (i.e., proprietary trading businesses) do not qualify for the tax exemption proposed in the Bill for their distributed compensations. Qualified associated rights refer to non-discretionary returns linked to the investment performance of the fund earned by the fund management company or its qualified employees through providing investment management services for the fund in Hong Kong. The investment management services provided for the fund include: (1) raising capital for the fund; (2) conducting research and providing advice on potential investments for the fund; (3) acquiring, managing, or disposing of assets or investments for the fund; (4) assisting entities already invested by the fund in raising capital. Whether an individual employee's remuneration constitutes qualified associated rights depends on whether their substantive job content falls within the above investment management services and meets other related conditions. The Bill also proposes to optimize the distribution regulations for associated rights, including expanding the scope of related parties and allowing qualified employees to receive associated rights through other entities, to cover various possible practical distribution arrangements for associated rights. The Bill is currently under review by the Legislative Council's Bills Committee, which has completed the line-by-line discussion of its provisions, with the aim of resuming the second reading debate in the second half of this year. If approved, the relevant measures could take effect from the 2025/26 tax year. The Inland Revenue Department will issue administrative guidelines upon implementation, further clarifying the details of implementation, which will align with the legal framework. The government has clearly stated that there are no plans to further expand the scope of the preferential measures. The Hong Kong government has indicated that it has maintained close contact with the industry to explain the policy rationale and the scope of the preferential tax regime, and is actively discussing the implementation details of the new system with industry stakeholders. Along the way, several fund management companies, both local and overseas, have expressed their consideration of establishing themselves in Hong Kong or expanding their business in the city, motivated by the tax incentives proposed in the Bill. We anticipate that these optimization measures will attract more global capital management in Hong Kong and facilitate the establishment and operation of more funds, thereby stimulating commercial activities in related professional services sectors and reinforcing Hong Kong's competitiveness as an international leading asset and wealth management center.