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Hong Kong 2025-26 Budget insights


In the 2025-26 Budget, the Financial Secretary (FS) detailed his plan on strengthening the foundation to accelerate development, cultivating new productive forces and developing the Northern Metropolis along with a “reinforced version” of fiscal consolidation program as a means of restoring Hong Kong to a position of consolidated fiscal surplus from 2028-29 onwards.

Enhanced fiscal consolidation

In the “reinforced version” of the fiscal consolidation program, the rate of reduction of recurrent government expenditure will be increased from the original 1% to 2% in 2025-26. Such arrangement will be prolonged for an additional two years until 2027-28. This, together with an enhancement in manpower utilization, would result in a reduction of 10,000 positions within the Hong Kong SAR Government (“the Government”). Additionally, civil servants will face a pay freeze for the fiscal year 2025-26. 

Strengthening traditional pillar industries and new productive forces

To strengthen Hong Kong’s position as an international financial center, a key pillar of our traditional sectors, the Hong Kong Stock Exchange and Clearing Limited will step up its promotional campaign within the Association of Southeast Asian Nations and the Middle East. This endeavor is designed to facilitate more private equity funds to consider listing in Hong Kong. In addition, Hong Kong will review its listing requirements to better match the latest economic trends and corporate needs.

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Proposals are also being formulated to enhance the preferential tax regimes for funds and family investment holding vehicles managed by a single-family office, as well as for the distribution of carried interest by private equity funds, as part of our drive to establish ourselves as the world’s largest cross-boundary wealth management center by 2028.

To further advance Hong Kong as an international maritime center, the FS indicated that a half-rate tax concession will be introduced to eligible commodity traders.

Regarding the development of new quality productive forces, Hong Kong will strive to establish artificial intelligence as a core industry and empower traditional industries in their upgrading and transformation efforts.

Intellectual property (IP) is an important foundation for the development of emerging industries. In this regard, the FS indicated that he will review the relevant deduction arrangements for various expenditures, including (i) lump sum licensing fees for acquiring the rights to use IP, and (ii) related expenses incurred on purchase of IP or the rights to use IP from associates (both currently non-deductible). The aim of this proposal is to accelerate the development of IP-intensive industries and foster the growth of IP trading in Hong Kong.

Northern Metropolis

The FS emphasized that the development of the Northern Metropolis is crucial to the social and economic development of Hong Kong. It serves as a catalyst for the growth of the innovation and technology industry, enabling deeper engagement in the development of the Greater Bay Area, while creating quality career development opportunities and living environments for the people of Hong Kong.

To fund this development and other important infrastructure projects geared towards improving people’s livelihood, it is expected that approximately HK$150 billion to HK$195 billion worth of bonds will be issued annually during the five-year period from 2025-26 to 2029-30.

Returning to consolidated fiscal surplus 

After factoring in the proceeds from the cumulative bond issuances, net of repayments, the fiscal reserves of Hong Kong are estimated to stand at approximately HK$579 billion as of 31 March 2030, representing about 13.9% of the GDP or approximately eight months’ worth of government expenditure at that time.

The FS tried to balance the books over a period of time without proposing any new taxes, with the exception of raising the airport departure tax from HK$120 to HK$200 effective from October 2025. This adjustment is expected to generate an additional revenue of HK$1.6 billion per year. 

The raft of measures unveiled in the Budget align with the FS’s view that the fiscal deficit confronting Hong Kong is primarily cyclical rather than structural. The focus on the development of the Northern Metropolis and enhancing Hong Kong’s economic capacity is viewed as a long-term investment in the future. It is expected that these initiatives will in time bring substantial economic benefits to Hong Kong, enabling the repayment of the investments made.

Major tax- or business-related measures mentioned

Implementation of the global and domestic minimum taxes in 2025

 

The FS highlighted that a bill has been submitted to the Legislative Council for the implementation of the global minimum tax and a domestic minimum top-up tax (HKMTT) in Hong Kong commencing from 1 January 20251. Subject to the passage of the bill, the proposal will bring in tax revenue of about HK$15 billion for the Government annually starting from the fiscal year 2027-28.

 

The implementation of these measures is in alignment with Hong Kong’s international tax obligations as a member of the Inclusive Framework of the Organisation for Economic Co-operation and Development and as a means of preserving the taxing right of Hong Kong over low-tax constituent entities located in Hong Kong of in-scope multinational enterprise (MNE) groups.

Legislative bill for foreign companies to redomicile to Hong Kong

The FS indicated that a bill enabling companies incorporated or domiciled in other jurisdictions to redomicile to Hong Kong has been submitted to the Legislative Council.

The bill, when enacted, will allow foreign incorporated or domiciled companies to redomicile to Hong Kong, thereby preserving their legal identity and maintaining their business continuity.

After redomiciling to Hong Kong, such redomiciled companies will then not be required to comply with the regulatory requirements, including the economic substance requirement, of their original place of incorporation or domicile.

Furthermore, the introduction of the global minimum tax initiative, mandating large MNEs to pay a minimum tax rate of 15% in all jurisdictions where they conduct business, would further diminish the attractiveness for such MNEs to establish their operating entities in traditional low or no-tax jurisdictions.

This may also create the demand for such MNEs redomiciling some of their non-Hong Kong investment holding or operating companies to Hong Kong, which is recognized as a leading destination for business and investment, renowned for its ease of doing business and supported by a strong tradition of rule of law.

Under the bill, there are provisions for a unilateral tax credit for taxes paid overseas upon exit in respect of unrealized profits of a redomiciled company. This credit can be applied against the profit tax payable in Hong Kong when the profits are taxed again in Hong Kong upon realization.

This provision, along with the consideration that a redomiciled company could be regarded as a company incorporated in Hong Kong, thereby qualifying as a Hong Kong resident for most Hong Kong’s tax treaties and global minimum tax purposes, should enhance the appeal of Hong Kong’s proposed re-domiciliation regime.

Nevertheless, it appears that the transfer of shares in a redomiciled company would be liable to stamp duty in Hong Kong given that a redomiciled company is essentially treated as a Hong Kong incorporated company and is required to comply with all the applicable provisions of the amended Companies Ordinance. Notably, there is no provision in the bill that exempts or remits the stamp duty.

Enhancing tax incentives for further developing Hong Kong as an international maritime center

 

The FS announced that as a means of further developing Hong Kong as an international maritime center, Hong Kong will introduce a tax incentive for eligible commodity traders.

 

Shipowners, ship operation and ship management companies, as well as eligible commodity traders in physical goods, are key commercial entities within the traditional shipping sector. They constitute a significant core of the maritime cluster, generating business demand for sea transportation and related maritime services.

 

Understandably, eligible commodity traders are those who own the cargoes (e.g., agricultural produce such as sugar and rice, petroleum products and other raw materials such as iron, ore and coal, which are all non-containerized commodities). These traders often manage their fleet, either owned or chartered via their subsidiary companies, to transport cargo from one port to another for delivery to their buyers. They therefore have close linkage with shipowners, who provide vessels for the transportation of goods. Supporting these shipowners are ship management and operation companies that are involved in related maritime services. Hence, there could be substantial business opportunities for the shipping industry in Hong Kong if more physical commodity traders are attracted to establish a base in Hong Kong.

 

In addition, the FS also indicated that, in light of the implementation of the Global Anti-Base Erosion (GloBE) rules in Hong Kong and many overseas jurisdictions, the Government will grant tax deduction on ship acquisition costs for ship lessors under an operating lease. This proposed tax deduction is apparently to be granted in lieu of the current notional reduction in the tax base of the enterprises concerned, which would drag down their effective tax rate (ETR), potentially resulting in them being required to pay top-up taxes under the GloBE rules. The tax deduction thus granted would not however drag down the ETR of the enterprises concerned.

Enhancing the preferential regimes for privately-offered funds, single-family offices and carried interest

The FS indicated that the Government would formulate proposals to enhance the captioned preferential tax regimes this year.

Based on the consultation paper previously issued by the Government, the refined proposals will include expanding the scope of permissible assets to cover immovable property situated outside Hong Kong, emission derivatives/allowances and carbon credit, insurance-linked securities, interests in non-corporate private entities, loans and private credit investments and virtual assets.

In particular, the proposed expansion of permissible assets to include loans and private credit investments has long been asked for by the industry.

Currently, income derived from trading in debt securities by privately-offered funds and family-owned investment holding vehicles is eligible for tax exemption under the existing law. However, interest income earned from such securities is categorized as incidental income. The tax exemption on interest income as incidental income is subject to limitation; specifically, the interest earnings cannot exceed 5% of the total income. If the interest income exceeds this threshold, the entirety of the interest income becomes fully taxable.

Under the refined proposal, such interest income will be regarded as income qualifying for the tax exemption not subject to any limitation.

However, the proposed implementation of tax reporting requirements and the substantial activities requirement for privately-offered funds, which are both not currently required, have generally been not so well-received by the industry.

While we welcome the proposal to expand the scope of permissible assets, the Government may need to further consider the pros and cons of imposing the additional tax reporting and substantial activities requirements for privately-offered funds.


Hong Kong 2025-26 Budget insights

  


Summary

The measures outlined in the 2025-26 budget aim to accelerate the development of innovation and technology that will promote Hong Kong into an international exchange and co-operation hub for the AI industry, empowering traditional industries in their upgrading and transformation. Together we can shape the economy through fiscal consolidation and sustainable growth, driving Hong Kong’s prospects as an international financial center, attracting more talent and investment to Hong Kong.

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