Hong Kong 2026-27 Budget insights

As a result of a robust stock market, higher-than-expected profits tax yield and a reduction of government expenditures, the Financial Secretary (FS) reported an expected consolidated surplus of HK$2.9 billion for 2025-26 on 25 February 2026. 

This is even though the Capital Account is still expected to run into a large deficit of HK$151.7 billion due to investment in infrastructure, including the Northern Metropolis (NM). Given that this is an investment for the future, funding for such investment will largely come from bond issuance, which generated net proceeds of HK$103.3 billion for 2025-26 after repayment. 

Regarding the infrastructure investment, the FS indicated that given the record-breaking investment returns of the Exchange Fund of HK$330 billion last year, he proposed transferring HK$75 billion in each of the coming two financial years, totaling HK$150 billion, from the Exchange Fund to the Capital Works Reserve Fund to support the NM and other infrastructure projects.  

On increasing revenue, the FS announced that the stamp duty rate on residential property transactions valued above HK$100 million will be raised from 4.25% to 6.5%, effective from 26 February 2026. The introduction of the global minimum tax (GMT) and the Hong Kong minimum top-up tax is also expected to generate additional revenue of about HK$15 billion annually starting from 2027-28. 

Considering the improved fiscal position, the FS offered “sweeteners” to business and individual taxpayers in the form of a one-off tax reduction and rates waiver of HK$3,000 and HK$1,000 respectively, which are double those of last year. He also proposed moderately increase personal tax allowances for individuals and married persons, child allowances and dependent parent and grandparent allowances. The tax deduction for elderly residential care expenses will also be slightly increased.

Also receiving enhanced support are senior citizens and the underprivileged, who will now receive an extra month of old age allowances and other social security allowances, compared with the half-month allowances last year.

Under the theme “Driving High-quality, Inclusive Growth Innovation and Finance”, the FS indicated that he would enhance current tax incentives for further promoting Hong Kong as an international trade, maritime, asset and wealth management (AWM) hub and regional intellectual property (IP) trading center.

Recognizing that tax policy is a key component to economic competitiveness and the evolving global tax environment in recent years, the FS will also establish and chair an Advisory Committee on Tax Policy to gather views from commercial, industrial and professional sectors to ensure Hong Kong’s tax policy reinforces economic development. 

The FS devoted a significant part of his speech to detailing how Hong Kong can embrace the emerging opportunities of artificial intelligence (AI). This includes: (a) the HK$3 billion AI Subsidy Scheme to subsidize research and development (R&D) applications in areas such as large language models, new materials and biomedicine, to enhance local AI research standards and application; (b) AI training for all – targeting students, young people and the public financed by an earmarked HK$50 million fund; (c) upgrading the Employees Retraining Board as Upskill Hong Kong, providing skill-based training courses, including AI application; and (d) earmarking HK$2 billion to advance digital education in primary and secondary schools by offering school-based AI education programs and subsidizing students to participate in related activities. 

In addition, the FS noted how the Government has actively steered local manufacturers toward smart manufacturing, leveraging technologies such as Internet of Things, real-time data, application of data analytics, advanced human-machine interfaces and robotics, and supporting enterprises in developing semiconductor chip technology and equipment. 

In terms of attracting enterprises and investments, the FS noted that any one or a combination of the policy tools including land grant arrangements, financial subsidies and tax incentives – in the form of preferential tax rates at either half rate or 5% – will be granted based on the merits of each case.

Beyond economic diversification and development, the FS also stressed the importance of accelerating green development and finance through initiatives such as injecting funds into the Green Tech Fund to support the development of green technology and issuing green bonds. 

While the “sweeteners” may not be as generous as some had hoped for, this may be understandable given the geopolitical tensions and volatile external environment Hong Kong faces. 

Overall, the FS seems to have outlined a blueprint for how Hong Kong can reinforce its existing strengths and embrace emerging opportunities for sustainable growth by investing in the future so that everyone can better benefit in the longer term. 

Major tax measures announced

Enhancing the tax incentive for corporate treasury centers (CTCs)

The Government will formulate proposals to enhance the concessionary tax regime for CTCs in Hong Kong.

Under the current framework, qualifying CTCs are eligible for a concessionary profits tax rate of 8.25% on qualifying profits derived from an intra‑group financing business, corporate treasury services or corporate treasury transactions. Since its introduction in 2016, the CTC regime has bolstered Hong Kong’s competitiveness as a regional treasury hub by providing a clear and attractive tax incentive to multinational enterprises.

However, global competition for locating treasury functions has intensified in recent years. Peer jurisdictions, notably Singapore, have adopted more agile regimes with flexible substance requirements and a broader scope of qualifying activities, offering multinational groups additional operational latitude. Against this backdrop, enhancements to Hong Kong’s CTC regime are both timely and necessary to preserve and strengthen its position as a premier corporate treasury hub.

To provide more certainty to taxpayers, the FS indicated that a pre-approval mechanism will be introduced for the concessionary regime. 

One of the key constraints of the existing framework is the requirement that a qualifying CTC must be “centrally managed and controlled in Hong Kong”. While designed to ensure the operations of a CTC have sufficient economic nexus with Hong Kong, this requirement has become increasingly restrictive in practice. 

To better reflect commercial realities, we propose relaxing this requirement to “normally managed or controlled in Hong Kong”. This formulation aligns with many other Hong Kong tax incentives and would cater to situations where the daily business operations of a CTC are normally managed in Hong Kong, such operations may still be subject to the strategic top-level control of its headquarters outside Hong Kong. Disqualifying such an operating model for the tax incentive under the “centrally managed and controlled in Hong Kong” requirement does not seem justified.

In addition, the Government may consider amending the law to the effect that investment returns of CTCs on money borrowed from group companies, e.g. interest income derived from bonds issued by third parties, would also qualify for concessionary tax treatment, similar to on-lending the same funds to other group companies, so as to enhance the liquidity management of CTCs.  

Furthermore, the Government may consider not restricting fees or expenses paid by full-rate Hong Kong group companies to a CTC, even when the income received by the CTC will only be subject to tax at half-rate. 

Developing Hong Kong as an IP trading hub

To accelerate the development of IP‑intensive industries, the FS noted that a public consultation is being conducted on the relaxation of the current restrictions on tax deductions for certain IP‑related expenditures.

Under the proposal, expenditures incurred on the purchase of certain IPs from associates will be deductible. In addition, upfront fees paid under a licensing arrangement for the rights to use IPs, even if they may be capital in nature, will also be deductible based on the amount amortized in the accounts for each year.

Purchase of IPs from associates

However, as an anti-avoidance provision, a “main purpose” test will be introduced to empower the Commissioner of Inland Revenue to disallow the tax deduction if the main purpose, or one of the main purposes, of purchasing of an IP from an overseas associate is to obtain a tax benefit in Hong Kong such as by effectively shifting the overseas tax losses to Hong Kong where the disposal gains of the IP of the overseas associate are sheltered by its tax losses. 

For domestic intra-group transfers of IP in Hong Kong, such transfers will be carved out of the domestic transaction exemption and will therefore be subject to the transfer pricing (TP) rules in Hong Kong. In addition, the full amount of the sales proceeds received by the IP transferor, less any deduction (in respect of the IP) not yet allowed, will be treated as trading receipts chargeable to profits tax in the hands of the IP transferor. In other words, while the group purchaser will be able to claim a tax deduction on the purchase cost of an IP, the group transferor will be taxable on the amount received, even if the IP is a capital asset of the latter. 

Payment of upfront licensing fees

To ensure tax symmetry, a deeming provision would be introduced to treat any such sums, not otherwise chargeable to profits tax under the IRO, e.g. by virtue of them being capital in nature, received by or accrued to a Hong Kong licensor to be chargeable to profits tax, where the corresponding fees paid are deductible under the proposal.

We welcome the Government's initiative to relax the tax deduction rules for IP-related expenditures for facilitating the development of Hong Kong as an IP trading hub. However, given that the transfer of the IPs will already be subject to TP rules, one may wonder whether the proposed anti-avoidance provision is too restrictive and whether the proposed departure from Hong Kong generally not taxing capital gains is justified. 

Enhancing the tax regimes for the AWM hub

Funds and single family offices

The FS noted that the number of single-family offices in Hong Kong exceeds 3,300. To attract more family offices and funds to set up in Hong Kong, the Government will enhance the tax regimes for the AWM sector, including expanding the scope of “funds” to cover specific funds-of-one such as pension and endowment funds, as well as classifying digital assets, precious metals, specified commodities, etc., as qualifying investments eligible for tax concessions. The amendment bill for these measures will be introduced in the first half of this year, applying to the year of assessment 2025-26 onwards.

While the expansion of qualifying investments eligible for tax concession is welcome, the Government may also consider extending eligibility to also cover artworks or antiquities to cater to the growing trends of family offices to invest in such assets. 

Real Estate Investment Trusts (REITs)

An amendment bill will be introduced in the first half of next year to provide for a stamp duty waiver for the transfer of non-residential properties into REITs seeking to list.