HK Budget 2024-25: A Closer Look at the Tax Reforms

Just over a year has passed since Hong Kong lifted the last COVID-19 measures, but the city is still facing challenges in recovering its economy to pre-COVID levels. External factors such as a complex geopolitical situation and high interest rates have added to the difficulties, alongside sluggish economic growth and a quiet property market.

Against this backdrop, Hong Kong’s Financial Secretary, Mr. Paul Chan, delivered the 2024-25 Budget Speech on 28 February 2024, outlining several new measures aimed at revitalizing the city's economy.  In this article, we will highlight the major tax-related measures which may impact high net worth individuals, fund managers, investment funds, family investment holding vehicles and property investors. 

Two-Tiered Standard Rates for Salaries Tax and Personal Assessment

Boosting public revenue is one of the focuses of the Budget.  In accordance with the "affordable users pay" principle, the government has proposed a two-tiered standard rate regime for salaries tax and tax under personal assessment.

Currently, employees are charged income tax on a progressive system, starting at 2 percent and ending at 17 percent, or at a standard rate of 15 percent on net income, whichever is lower.

With the introduction of a two-tiered standard rate regime, the first HK$5 million of net income will continue to be subject to the standard 15 percent rate, while any amount exceeding HK$5 million will be taxed at a rate of 16 percent. 

Implications

According to the government, this change will primarily affect some of the city's wealthiest individuals, impacting around 12,000 taxpayers, which account for 0.6 percent of the total number of taxpayers chargeable to salaries tax and tax under personal assessment.

The impact of these reforms on taxpayers is expected to be minimal.  Even with the introduction of the two-tiered salaries tax regime, Hong Kong's new tax rates will still be lower than those in many other countries, such as Australia and the United Kingdom at 45 percent, the United States at 37 percent, and Singapore at 24 percent. Hong Kong's low-tax environment continues to make it an attractive destination for high-income professionals and talents. 

All Property Market Curbs Lifted

Given the stagnant property market, the government announced scrapping all property cooling measures with effect from 28 February 2024.  These measures, which had been in place for a decade, included the Buyer's Stamp Duty (BSD) targeting non-permanent residents, the higher rate of ad valorum stamp duty (AVD) at Part 1 of Scale 1 (sometimes referred to as 'the New Residential Stamp Duty' (NRSD)) for non-permanent residents and second-time purchasers, and the Special Stamp Duty (SSD) aimed at homeowners who resold their property within two years.  This decision came four months after the government relaxed some property market cooling measures last October, which, involved amongst others, a 50 percent reduction in BSD and NRSD. 

With the complete removal of all cooling measures, sellers and buyers of residential properties in Hong Kong will now only be required to pay AVD at Scale 2 rates, ranging from HK$100 up to 4.25 percent of the consideration or value of the residential property, irrespective of whether they are first-time buyers and whether they are Hong Kong permanent residents.  The same AVD rate would apply if the purchase or acquisition is made by a corporate vehicle or trust structure.  

Implications

It is anticipated that the cancellation of these property measures will restore investor confidence in the property market and lead to an increase in transaction volume. 

Further, it is expected that more individuals will explore purchasing properties using corporate vehicles or trust structures and transferring properties into trust during their lifetime as part of their succession planning and for asset protection purposes. Previously, these actions would have been subject to Stamp Duty at 30 percent of the value of the property, comprising AVD of 15 percent and additional BSD of 15 percent (although in October 2023 both the AVD and BSD were reduced to 7.5 percent). 

The cancellation should also provide greater flexibility for the restructuring of corporate structures which hold Hong Kong residential properties, for example the transfer of these properties to another entity or to the shareholder. Previously these transfers might have triggered a Stamp Duty liability of up to 30 percent, unless the transfer was made as part of the liquidation of the entity or certain exemptions applied (such as the intra group transfer exemption which is subject to a number of conditions).  

Preferential Tax Regimes for Related Funds, Single Family Office, and Carried Interest

In a bid to attract more fund managers and family offices to Hong Kong, the government stated in the Budget its intention to further enhance the preferential tax regimes for related funds, single family offices and carried interest. This will include reviewing the scope of these tax concession regimes, expanding the types of qualifying transactions and providing greater flexibility in handling incidental transactions. 

Up to now, only the trading income derived from certain 'qualifying transactions', which are mainly transactions in traditional financial products, would be eligible for the profits tax concession. The government proposes to expand the list of assets such that eligible funds, family investment holding entities and fund managers (who receive carried interest) would not have to pay profits tax in Hong Kong with respect to the trading of these assets.  

Currently profits from 'incidental transactions', which include interest and dividends are only tax exempt if the amount does not exceed a 5 percent threshold, making the concession quite restrictive, particularly, if the investments are made in products which generate interest or coupons.  It is hoped that these restrictions will be lifted.

While specific details are yet to be disclosed, the proposed reforms underscore the government's commitment to supporting and fostering the growth of related funds and, single family offices in Hong Kong.  These reforms are expected to attract more investment and activity in these sectors, further establishing the city as an international asset and wealth management centre.