Hong Kong to move forwards with tax exemption for ILS investments

Hong Kong’s Secretary for Financial Services and the Treasury Christopher Hui explained today that the government aims to enhance its preferential tax regime and extend the eligible asset classes for tax exemptions to include insurance-linked securities (ILS), such as catastrophe bonds.

The goal is to enhance competitiveness of its financial marketplace and attract more investors to it and to domicile in the Special Administrative Region.

Hong Kong has been on a push in the institutional investor and sophisticated investor space, with family offices a particular area of focus.

Already Hong Kong is a major hub for family weather and investment vehicles, but wants to make things even more attractive to continue attracting assets there, while making the market as competitive with other locations as it can.

We reported back in 2024 that Hong Kong had a desire to make investing into insurance-linked securities (ILS) from the SAR more tax efficient for investors.

As we explained at that time, the government of Hong Kong was aiming to boost its investment sector with a broadening of profit tax exemptions, with insurance-linked securities (ILS) one asset class in focus.

The plan was to assess the feasibility of extending tax exemptions to a range of asset classes, including catastrophe bonds and ILS, then to deliver recommendations to the Hong Kong government.

Now, in his speech this morning at the Legislative Council’s Finance Committee, Christopher Hui, Secretary for Financial Services and the Treasury said that optimising the preferential tax regime for investment funds, family offices and family wealth structures, as well as their interests remains in scope and is set to proceed, including for insurance-linked securities.

He noted that efforts to optimise the tax environment and make it more favourable to investors has been working, saying, “The total value of Hong Kong’s asset and wealth management business exceeded HK$35 trillion by the end of 2024, an increase of 13% year-on-year.”

Going on to explain that, “To further enhance the attractiveness and competitiveness of the preferential tax regime, the Financial Services and the Treasury Bureau, together with the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission and the Inland Revenue Department, reviewed the relevant situation and, after consulting with the industry, formulated a series of optimization measures.”

One change coming is that the definition of “funds” under the preferential tax rules will be expanded to include retirement plans and pensions, endowments and some single-investor funds, which will expand the range of funds that can benefit from the tax-free regime.

Next, the eligible range of asset classes is being expanded, those that will be able to benefit from the tax-free environment and among others this is where insurance-linked securities (ILS) comes in.

Hui explained, “Expanding the eligible investment categories of funds and family control instruments to include real estate located outside Hong Kong, carbon emission rights derivatives/carbon emission limits and carbon credits, insurance-linked securities, equity interests in non-corporated entities, loans (including private debt investments), digital assets, precious metals and certain commodities. This complements government policies in related areas such as promoting carbon trading, digital assets, and precious metals and commodities trading.”

Another measure could have some relevance to the ILS community, given it is focused on special purpose vehicles (SPV) in Hong Kong.

Hui said, “The tax exemption for special purpose entities will be relaxed. Currently, the profits tax exemption for special purpose entities is equivalent to the percentage of such special purpose entity held by the relevant fund or family control instrument. We propose that, regardless of ownership shares in funds or family control instruments, their special purpose entities be fully exempt from taxation, but subject to the same anti-evasion provisions applicable to funds.”

The amendment bill to bring this into law is expected to be submitted in the first-half of 2026, and it is expected to come into effect from the 2025/2026 tax year, Hui said.

“We believe that the proposed optimization measures will attract more funds and family offices to be established and operate in Hong Kong, creating more new business opportunities for Hong Kong’s asset and wealth management industry, consolidating Hong Kong’s position as a leading asset and wealth management hub, and in particular, helping to further attract private debt investment activities in the region, and complementing Hong Kong’s development in other areas, such as digital assets and precious metals and commodities trading,” he further stated.

Remember that while Hong Kong has developed a regulatory regime for the issuance of catastrophe bonds and ILS, the investment management of these assets has not previously been an obvious target for the ILS ambitions of the Special Administrative Region.

But, these moves around tax neutrality for ILS investments could serve to make Hong Kong a more competitive location to domicile an ILS investment management infrastructure, so could be positive for the SAR’s future activities in that space, while also making investing into ILS more compelling for major investors located there.