Although the budget statement contained a variety of measures referring to work being carried out to bolster wealth management, for example, one eye-catching feature was a new top tax rate.

Hong Kong’s government unveiled budget measures designed, among other goals, to strengthen wealth management. One measure that will have jolted advisors, however, is a rise in income tax on the top earning cohort – the first such hike in 20 years.

A two-tier tax system will be introduced from April, with income of up to HK$5 million ($640,000) taxed at a maximum of 15 per cent. Amounts higher than this figure will be taxed at 16 per cent. Currently the rate for all individuals is capped at 15 per cent.

“It is estimated that about 12,000 taxpayers will be affected, accounting for 0.6 per cent of the total number of relevant taxpayers, and government revenue will increase by approximately HK$910 million annually. Even if the above-mentioned two-tiered standard tax rate system is implemented, Hong Kong's effective tax rate is still lower than that of other advanced economies,” Paul Chan, financial secretary, said in a statement yesterday. 

Chan said the government will propose legislative amendments to the progressive rates system for residential properties in the first half of this year, with the target of taking effect in the fourth quarter of 2024/25. The new system will only affect residential properties with a rateable value exceeding HK$550,000, accounting for 1.9 per cent. 

Higher rates on top-tier earners shows that even a traditionally low-tax jurisdiction such as Hong Kong – now increasingly integrated into mainland China – is raising rates. Hong Kong is competing against the likes of Singapore and Dubai as a place to attract HNW individuals, family offices, and capital owners more generally. 

The Asian city has a deficit to fill – as is the case around the world. The deficit for the financial year ending 31 March is estimated at HK$101.6 billion, almost double the estimate laid out a year ago.

Among other moves, Chan referred to the previously-announced Capital Investment Entrant Scheme, designed to attract high net worth investors. The government is trying to build Hong Kong’s wealth sector in competition against rival centres such as Singapore and Dubai.

The city’s wealth and asset sector has assets under management of around HK$30 trillion. There are more than 250 open-ended fund companies and 780 limited partnership funds in Hong Kong.

“To promote market development, the government will extend the `Open-ended Fund Companies and Real Estate Investment Trust Fund Subsidy Scheme’ for three years and will also set up a task force to discuss with the industry measures to further promote the development of the asset and wealth management industry,” Chan said.

“Attracting global family offices and asset owners to Hong Kong will help bring in more funds and stimulate related economic activities. We have implemented a number of measures, including providing tax relief for qualifying transactions by single family offices and streamlining the assessment process for high-end professional investors,” he continued. 

Chan said the New Capital Investor Entry Scheme will soon accept applications. Eligible investors who invest HK$27 million or more in eligible assets in Hong Kong and invest HK$3 million in the new Capital Investor Entry Scheme Investment Portfolio can apply to come to Hong Kong to reside and develop. 

Minimum corporate tax
Chan reiterated the city’s pledge to adopt a minimum corporate tax rate of 15 per cent – as urged by the Organization for Economic Cooperation and Development’s at the behest of US President Joe Biden. 

“We are currently consulting on the implementation plan and expect to submit legislative proposals in the second half of this year,” Chan said. “The relevant plan is expected to bring about HK$15 billion in tax revenue to the government every year starting from 2027/28. After the implementation of the plan, Hong Kong's tax competitiveness is still better than that of most tax jurisdictions.”

Reactions
“For the family office industry, we are pleased to see the government’s commitment to further supporting its development, evident in measures such as further enhancing the preferential tax regimes for single family offices,” Chi-man Kwan, group CEO and co-founder of Raffles Family Office, said.

“We welcome the new Capital Investment Entrant Scheme, which has generated a lot of interest among our clients. This strategic initiative leverages Hong Kong’s role as a pivotal ‘super-connector’ in the region, promoting the continuous growth of private wealth management and injecting new energy into Hong Kong’s economy,” Kwan said. “Additionally, as we celebrate the fifth anniversary of the Greater Bay Area and reflect on last year’s full border reopening, we’ve observed an accelerated trend of affluent families from the Greater Bay Area establishing family offices in Hong Kong, a movement encouraged by the tax incentives.”

Helen Wang, counsel in the corporate and securities practice at Mayer Brown, talked about the budget segment relating to “opening up new capital sources” and “re-domiciliation mechanisms”: “The move to attract Middle East capital is to be expected but it remains to be seen how much of an impact the announcement has in the retail funds' space.”

“Hong Kong fund structures already have re-domiciliation mechanisms in place and whilst removing red tape and making the re-domiciliation process easier certainly helps, fund sponsors still need a tangible and compelling reason to make the move in the first place,” Wang said. “For open-ended fund companies (OFCs), a continuation of the government grant scheme, which is set to expire on 9 May 2024, would help to attract fund managers to re-domicile and set up in Hong Kong.”