Hong Kong Advances Tax Exemption for Insurance-Linked Securities, Says Christopher Hui

(HONG KONG) — Hong Kong is moving forward with legislation to extend its preferential profits tax exemptions to cover insurance-linked securities, widening a regime officials say aims to make the city more competitive in fund and wealth management.

The planned expansion adds insurance-linked securities (ILS) such as catastrophe bonds, and also brings a broader set of transactions and instruments into scope, including exposure to real estate outside Hong Kong, carbon emission rights derivatives, digital assets, precious metals and commodities.

Christopher Hui, Secretary for Financial Services and the Treasury, announced the proposal in a speech to the Legislative Council’s Finance Committee, tying the change to efforts to optimize Hong Kong’s tax regime for investment funds, family offices and family wealth structures and to attract more investors.

ILS are securities that transfer insurance risks to capital markets, and can include catastrophe bonds and related structures that link returns to specified insurance events. Hong Kong’s decision to treat these instruments under the profits tax exemption framework signals an effort to broaden the types of strategies and assets that can qualify under its preferential treatment.

The proposal also reflects a push to widen the range of asset classes treated as eligible transactions under the regime, spanning both alternative assets and newer areas such as carbon-related derivatives and digital assets. Officials have framed the change as a way to support product development and deepen the city’s capital markets offering, while keeping the tax treatment aligned with how funds and family wealth vehicles invest across markets.

Hui delivered the announcement in the Legislative Council setting as part of a broader competitiveness pitch focused on funds and family wealth structures. The government’s stated objectives include improving Hong Kong’s attractiveness to investment fund managers, family offices and other investors, while drawing more deal flow to the city.

For ILS in particular, the inclusion under a preferential profits tax exemption framework links risk-transfer products more directly to Hong Kong’s ambition to expand the range of capital markets structures that can be arranged, issued or managed from the city. The government has also positioned the broader addition of alternative assets as supportive of different fund strategies that may combine traditional investments with commodities, precious metals, digital assets and carbon-related exposures.

Eligibility under the expanded regime rests partly on an updated definition of what counts as a “fund,” and the proposal extends exemptions to additional fund types such as retirement plans, pensions, endowments and charity-related funds. The government also plans to recognize “fund-of-one” structures, described as wholly owned funds set up for specific investments by entities such as the Asian Infrastructure Investment Bank.

A fund-of-one is a single-investor vehicle rather than a pooled fund, and the proposal’s inclusion of these structures would bring them into the same preferential profits tax exemption framework used for other funds. The move targets institutional or strategic investment arrangements that use dedicated vehicles, while anchoring eligibility to a scale threshold.

Under the proposal, qualifying structures would need at least HK$240 million (US$31 million) in qualified assets. That threshold functions as a gatekeeper designed to focus the exemption on larger professional setups, while also creating a practical compliance line for firms that must track what counts as qualified assets and which transactions fall under the expanded categories.

For fund managers, family offices and administrators, the broadened coverage adds operational considerations beyond simple eligibility. Firms would need to maintain recordkeeping that supports asset classification, demonstrates that transactions meet the definitions in the exemption regime, and documents how investments—such as ILS positions or carbon emission rights derivatives—fit the qualifying framework.

Hong Kong plans to submit an amendment bill in the first half of 2026 (by June), with the changes set to take effect from the 2025/2026 tax year. The legislative path means the details remain subject to the drafting of the bill and consideration by the Legislative Council, and market participants typically watch for how definitions, qualifying transactions and guardrails are written into the final text.

Stakeholders also tend to focus on how implementing rules translate into day-to-day requirements, including documentation expectations and any anti-avoidance provisions. Even when legislation uses “effective from” language, firms still have to align internal systems and audit trails to the final definitions, particularly when a regime expands into additional asset classes with different valuation, custody and transaction practices.

The proposal builds on Hong Kong’s earlier ILS framework launched in 2021, under which the Insurance Authority oversees special purpose insurers used for ILS issuance structures. That regulatory base has also been paired with financial incentives meant to support an ILS ecosystem in Hong Kong and encourage activity to be structured through the city.

A Pilot ILS Grant Scheme has been extended to 2028, subsidizing 50-100% of upfront costs, with at least 40% required to be attributable to Hong Kong service providers. Taken alongside the proposed profits tax exemption expansion, the combination links tax policy, issuance economics and local service-provider participation in a package intended to make Hong Kong more competitive for structuring and servicing ILS transactions.

The government has also pointed to complementary incentives and streamlined processes in adjacent areas. The Insurance Authority has streamlined processes for related products such as investment-linked assurance schemes (ILAS), a change that sits alongside tax policy as part of the broader set of tools that can influence whether products are developed and managed through Hong Kong.

Market participants are expected to monitor concrete next steps as the proposal moves through the Legislative Council, including the introduction of the amendment bill, any accompanying guidance that clarifies definitions and qualifying transactions, and implementation details that determine how quickly firms can align systems and documentation to the expanded regime.