Hong Kong’s low-tax lure is getting a reality check

Shuli Ren, Bloomberg

Hong Kong’s competitiveness as a financial center is about to be tested. The low-tax haven has two opposing forces transforming its $5.4 trillion asset management industry, which overtook Switzerland as the world’s largest cross-border wealth hub last year.

The city is widely expected to approve a landmark tax reform designed to attract overseas asset managers. Under the proposal, effective taxes on qualified carried interest and performance fees would be wiped to zero. It’s super attractive considering that residents face a salaries tax of up to 15%. The concession will apply to a wide range of funds, from private equity to family offices, and eligible transactions will include physical commodities and cryptocurrencies.

This generous offering will speed up global hedge funds’ expansion in the city. Top-tier firms from Jane Street Group to Qube Research & Technologies Ltd. have taken up space in high-end skyscrapers. Premium office vacancy rates in Central are at their lowest since 2023, while rents rose 6% in the first half. Expats are returning, and luxury retail sales are rebounding.

But if hedge fund employees are dreaming about paying no taxes on million-dollar bonuses, the city’s private wealth managers are panicking, fearing clients could flee in response to Beijing’s latest cross-border crackdown. China is getting serious about its global tax hunt. Mainland authorities said they would begin taxing returns from offshore trusts and overseas insurance policies, closing longstanding loopholes.

China’s 20% levy on overseas capital gains is a long-standing policy. However, Beijing is now actively enforcing it, leveraging the Common Reporting Standard, or CRS, a global information-sharing framework. Those relying on golden visas or complex financial structures to obscure their money trail will have a hard time hiding offshore assets, especially with CRS 2.0, which Hong Kong plans to adopt in 2028.

As far as Beijing is concerned, people who spend most of their time in the mainland, or generate the bulk of their wealth in China, are tax residents. Foreign passports offer no exemptions.

Beijing’s tax hunt puts Hong Kong in an awkward spot. The city has been a magnet for mainland wealth, because it doesn’t have a capital gains tax. But will its financial products remain attractive if Chinese investors must pay 20% to local tax bureaus?

The outcome could see a divergence of fortunes. Global hedge funds may further expand their presence to enjoy the city’s zero-tax regime and be closer to mainland China’s deep talent pool. On the other hand, private wealth management is likely to suffer as Hong Kong loses its low-tax appeal for mainland Chinese.

The question is whether Hong Kong’s finance industry can diversify internationally fast enough. In 2025, net inflows from institutional managers surged more than three times to HK$1.4 trillion ($176 billion), according to the Securities and Futures Commission. But China still looms large: Boston Consulting Group estimates mainland flows accounted for 59% of cross-border wealth under management last year.

This is why passing the fund industry’s landmark tax reform is all the more important. Hedge fund bros making millions and paying no taxes may not be a good look and might push up the cost of living. But that’s a price Hong Kong has to pay to blunt the blow from the north. When China takes away the sugar bowl, you have to find the high somewhere else.

[Abridged]

Courtesy Bloomberg/Shuli Ren