Hong Kong’s Strategic Position in the Asian REIT Market

Hong Kong serves as a pivotal entry point for global investors seeking access to Asia’s dynamic real estate investment trust (REIT) sector. As a leading international financial center, Hong Kong offers a well-established regulatory framework, strategic geographic positioning, and favorable tax treatment for authorized collective investment schemes. The city’s REIT market benefits from robust oversight by the Securities and Futures Commission (SFC) and The Stock Exchange of Hong Kong Limited (SEHK), creating a transparent and investor-friendly environment for cross-border real estate investments.

The Hong Kong REIT structure provides institutional and retail investors with access to diversified real estate portfolios while offering unique tax advantages and regulatory clarity that make it an attractive vehicle for structuring cross-border real estate investments across the Asia-Pacific region.

Tax Treatment of Hong Kong REITs

Profits Tax Exemption at the REIT Level

The cornerstone of Hong Kong’s REIT tax regime is the profits tax exemption available to authorized collective investment schemes. Under Section 26A(1A) of the Inland Revenue Ordinance, a REIT that is authorized by the SFC enjoys full exemption from Hong Kong profits tax. This exemption applies to the trust-level income, allowing REITs to maximize distributions to unitholders without the burden of corporate-level taxation on most types of income.

However, this exemption is subject to important limitations based on how the REIT holds its real estate assets and the geographic location of those properties.

Property Tax on Direct Holdings

When a REIT holds real estate directly in Hong Kong and derives rental income from such properties, that rental income is subject to Hong Kong property tax at the standard rate of 15%. This property tax applies despite the REIT’s overall profits tax exemption status, creating a specific carve-out for directly-held Hong Kong real estate rental income.

This treatment incentivizes REITs to structure their holdings through special purpose vehicles (SPVs) rather than holding Hong Kong properties directly at the trust level.

Indirect Holdings Through SPVs

When a REIT holds real estate properties indirectly through special purpose vehicles, the SPV itself becomes subject to Hong Kong profits tax if it generates Hong Kong-sourced income. Since April 1, 2018, Hong Kong has applied a two-tiered profits tax regime:

• First HKD 2 million of profits: 8.25% tax rate
• Profits exceeding HKD 2 million: 16.5% standard rate

Importantly, dividends paid by SPVs to the REIT are exempt from profits tax at the REIT level, and income derived from real estate situated outside of Hong Kong is exempt from both profits tax and property tax.

Comprehensive Tax Treatment Table

Withholding Tax and Distributions to Investors

Hong Kong does not impose withholding tax on distributions from REITs to unitholders, regardless of whether the unitholders are residents or non-residents. This absence of withholding tax enhances the attractiveness of Hong Kong REITs for international investors, as they can receive distributions without suffering Hong Kong source deductions.

Additionally, distributions received by investors from Hong Kong REITs are not subject to any further tax in Hong Kong, making the tax burden transparent and predictable for unitholders.

Capital Gains Treatment

Hong Kong does not have a general capital gains tax. Gains realized on the disposal of REIT units are exempt from Hong Kong profits tax if such gains are capital in nature. However, unitholders carrying on a trade, profession, or business in Hong Kong that consists of the acquisition and disposal of REIT units may be subject to Hong Kong profits tax on trading gains derived from the disposal of units.

The distinction between capital gains (exempt) and trading profits (taxable) depends on the facts and circumstances of each case, applying established principles from Hong Kong case law.

SFC REIT Code Requirements

Regulatory Framework and Authorization

Hong Kong REITs are governed by a dual regulatory framework. The SFC is responsible for authorizing REITs pursuant to the Code on Real Estate Investment Trusts (REIT Code), including vetting constitutional and offering documents and monitoring ongoing compliance. The SEHK handles the listing of REIT units under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules).

To obtain SFC authorization, a REIT’s structure and investment restrictions must comply with the REIT Code requirements unless a specific waiver is granted by the SFC. The scheme must also be listed on the SEHK.

90% Distribution Requirement

One of the most significant requirements under the REIT Code is the mandatory distribution rule. REITs in Hong Kong must distribute to unitholders as dividends each year an amount not less than 90% of their audited annual net income after tax. This requirement ensures that REITs function as income-generating vehicles, passing through substantially all of their earnings to investors.

The REIT Code allows the trustee to determine whether any revaluation surplus credited to income, or gains on disposal of real estate, shall form part of net income for distribution. The REIT manager may adjust distributable income to account for revaluation gains or losses. For example, the manager may subtract revaluation gains on properties from audited income to arrive at amounts available for distribution. This means that even if audited income is high due to property revaluation gains, unitholders may not necessarily receive correspondingly high distributions.

Investment Restrictions

The REIT Code mandates that REITs primarily invest in real estate. Specifically, at least 75% of the gross asset value (GAV) of the scheme must be invested in real estate that generates recurrent rental income at all times. This requirement ensures that REITs maintain their character as real estate investment vehicles focused on income-producing properties.

There are no restrictions on the type or geographical location of properties that a Hong Kong REIT may invest in. REITs can hold logistics facilities, data centers, hospitals, infrastructure properties, and other asset classes. REITs can also be established with a single property or include newly developed properties, providing flexibility in structuring investment strategies.

SPV Distribution Requirements

Where a REIT holds real estate via SPVs, each SPV must distribute to the scheme all of its income as permitted by the laws and regulations of the relevant jurisdictions. This requirement ensures that income flows up to the REIT level, enabling the REIT to meet its 90% distribution obligation to unitholders.

Borrowing Limitations

REITs are subject to limitations on borrowings in relation to total gross asset value. These restrictions are designed to prevent excessive leverage and protect unitholder interests by maintaining prudent debt levels relative to the REIT’s asset base.

Management and Custody Requirements

A REIT must appoint a management company licensed by the SFC for Type 9 regulated activity (asset management) to manage the scheme. This licensing requirement ensures professional management by qualified and regulated entities.

Additionally, REIT assets must be held in custody by an independent party, providing safeguards for unitholder assets and ensuring proper segregation and oversight.

Unit Issuance Rules

The REIT Code contains specific requirements for the issuance of new units. If new units are not offered to existing holders on a pro rata basis, holders’ approval by way of ordinary resolution at a general meeting is required, unless the number of new units issued falls within the 20% general mandate prescribed under the REIT Code.

Where new units are issued on a pro rata basis but the issue increases the market capitalization of the REIT by more than 50%, holders’ approval by ordinary resolution at a general meeting is also required.

SFC Support Initiatives

The SFC has established a dedicated one-stop consultation channel to facilitate new REIT authorization applications. Prospective REIT applicants and their professional advisers can contact the SFC through the REIT Channel at [email protected]. Under normal circumstances, the SFC anticipates that a new REIT authorization application can be decided within four weeks from the take-up date of the application.

Additionally, the SFC administers a grant scheme funded by the Hong Kong Government to provide subsidies for qualified REITs to set up in Hong Kong. The scheme covers 70% of eligible expenses paid to Hong Kong-based service providers in relation to REIT listing, subject to a cap of HKD 8 million per REIT. Originally launched on May 10, 2021, the grant scheme has been extended through May 9, 2027.

Cross-Border Structuring Considerations

Geographic Flexibility and Offshore Investments

One of Hong Kong’s key advantages for cross-border REIT structuring is the absence of geographic restrictions. Hong Kong REITs can invest in properties located anywhere in the world, and income from offshore real estate is exempt from Hong Kong profits tax and property tax. This creates significant opportunities for structuring pan-Asian or global REIT portfolios through a Hong Kong platform.

For investors seeking exposure to real estate markets across China, Southeast Asia, and other regions, a Hong Kong REIT structure offers tax-efficient access combined with the credibility and transparency of Hong Kong’s regulatory framework.

SPV Structuring for Tax Efficiency

The choice between direct property holdings and SPV structures has significant tax implications. For Hong Kong properties, holding assets through SPVs rather than directly can provide more favorable tax treatment, as it avoids the 15% property tax on rental income (though the SPV itself becomes subject to the two-tiered profits tax regime).

For offshore properties, the SPV structure provides additional benefits:

• Legal and regulatory compliance: SPVs can be established in the jurisdiction where the property is located, ensuring compliance with local ownership and regulatory requirements
• Tax treaty access: SPVs in appropriate jurisdictions may provide access to double tax treaties, reducing withholding taxes on cross-border income flows
• Asset protection: Separate SPVs for different properties or markets can provide ring-fencing and limit cross-contamination of legal or financial issues
• Exit flexibility: Selling SPV shares rather than underlying properties can provide tax and legal advantages in certain jurisdictions

Treaty Network Considerations

While Hong Kong REITs themselves benefit from profits tax exemption, the SPV layer may be subject to taxation in the source jurisdiction where properties are located. Hong Kong has an extensive network of comprehensive double taxation agreements (DTAs) that can reduce withholding taxes on dividends, interest, and royalties flowing from SPVs to the Hong Kong REIT.

Investors should carefully analyze the applicable tax treaties between Hong Kong and the jurisdictions where properties are located to optimize the overall tax efficiency of the structure.

Stock Connect and Mainland China Access

A significant recent development is the 2024 inclusion of Hong Kong REITs in Stock Connect, the trading link between Hong Kong and mainland China exchanges. This inclusion provides mainland Chinese investors with direct access to Hong Kong REITs, expanding the potential investor base and enhancing liquidity.

While this inclusion offers a blueprint for greater integration with mainland capital markets, any expansion requires approval from the China Securities Regulatory Commission (CSRC). The Stock Connect inclusion represents Hong Kong’s continuing evolution as a bridge between international capital and China’s growing wealth management industry.

Multi-Jurisdictional Compliance

Cross-border REIT structures must navigate compliance requirements across multiple jurisdictions. Key considerations include:

• Source country taxation: Understanding the tax treatment of rental income, capital gains, and withholding taxes in each jurisdiction where properties are located
• SPV jurisdiction selection: Choosing appropriate jurisdictions for SPVs based on tax efficiency, regulatory requirements, and operational considerations
• Transfer pricing: Ensuring that transactions between the REIT, SPVs, and service providers meet arm’s length standards to avoid tax challenges
• Currency and exchange controls: Managing currency risk and compliance with exchange control regulations in jurisdictions with capital flow restrictions
• Local regulatory compliance: Meeting ownership disclosure, licensing, and operational requirements in each jurisdiction where properties are held

Investor Tax Considerations

While Hong Kong does not impose withholding tax on REIT distributions, investors must consider their own tax positions in their home jurisdictions. Key issues include:

• Tax characterization: How distributions are characterized (dividends, interest, or other income) under the investor’s domestic tax law
• Foreign tax credits: Whether investors can claim credits for taxes paid at the SPV level or in source jurisdictions
• Reporting requirements: Compliance with information reporting obligations for foreign investments
• Tax treaty benefits: Availability of treaty relief in the investor’s home jurisdiction

Regulatory Reporting and Disclosure

Hong Kong REITs must maintain robust reporting and disclosure practices. The dual oversight by the SFC and SEHK requires compliance with both the REIT Code and the Listing Rules, including:

• Regular financial reporting following Hong Kong Financial Reporting Standards (HKFRS) or International Financial Reporting Standards (IFRS)
• Disclosure of connected party transactions and material contracts
• Valuation reports for properties at required intervals
• Compliance certificates and manager attestations
• Unitholder circulars and general meeting materials

Gearing and Financing Structures

The REIT Code’s borrowing limitations must be carefully managed when structuring cross-border acquisitions. Financing strategies may include:

• REIT-level credit facilities providing flexible acquisition funding
• SPV-level financing secured by specific properties
• Perpetual securities or hybrid instruments to provide additional capital without dilution
• Strategic use of the 20% general mandate for unit issuances to raise equity capital opportunistically

Comparison with Other Asian REIT Regimes

Understanding Hong Kong’s position relative to other major Asian REIT markets provides important context for structuring decisions:

Singapore

Singapore REITs (S-REITs) enjoy tax transparency at the REIT level, with no corporate tax on REIT income that is distributed. However, Singapore imposes withholding tax on distributions to non-resident investors (generally 10% to 15%, subject to treaty relief). Hong Kong’s lack of withholding tax on distributions provides an advantage for international investors.

Japan

Japanese REITs (J-REITs) can deduct distributions to unitholders from taxable income, effectively achieving tax transparency if they meet distribution requirements (generally 90% of earnings). However, Japan’s corporate tax environment and regulatory complexity can make J-REITs more challenging to structure than Hong Kong REITs.

Mainland China

China’s REITs market is still developing, with infrastructure REITs (C-REITs) launched in 2020. The regulatory framework is evolving, and access for international investors remains more restricted compared to Hong Kong’s open market approach.

Australia

Australian REITs (A-REITs) benefit from flow-through tax treatment but operate under Australia’s complex tax system. Hong Kong provides simpler tax compliance and more straightforward cross-border structuring for Asian-focused portfolios.

This article is for informational purposes only and does not constitute tax, legal, or investment advice. Investors and REIT sponsors should consult with qualified tax and legal advisors regarding their specific circumstances and the application of Hong Kong and foreign tax laws to their particular situations.