Did you know that every time you buy or sell Hong Kong-listed stocks, you’re contributing to one of the city’s most significant revenue streams? Hong Kong’s stamp duty on securities transactions isn’t just a tax—it’s a critical policy tool that shapes market liquidity, influences investment decisions, and affects Hong Kong’s competitiveness as a global financial hub. With recent reforms in 2023 and 2024, understanding this levy has never been more important for investors and market participants.

Understanding Hong Kong’s Stamp Duty System

Hong Kong’s stamp duty on securities represents one of the world’s oldest continuously-operating transaction taxes. Unlike many major financial centers that have abolished such levies, Hong Kong maintains this ad valorem tax on stock transfers, making it a defining characteristic of the city’s market structure and competitive positioning.

The stamp duty is charged on both the buyer and seller of Hong Kong-listed securities at 0.1% each (totaling 0.2%) of the transaction value or market value, whichever is higher. This tax applies regardless of where the transaction takes place or the residency of the parties involved, encompassing all transfers of Hong Kong-incorporated companies’ shares.

Total Transaction Costs Breakdown

While stamp duty is the largest component of transaction costs on the Hong Kong Exchange (HKEX), accounting for approximately 90% of all official fees, investors also face additional levies:

• Securities and Futures Commission (SFC) levy: 0.0054% (split between buyer and seller)
• Financial Reporting Council levy: 0.0003% (split between buyer and seller)
• HKEX trading fee: 0.01% (split between buyer and seller)
• Hong Kong Securities Clearing Company settlement fee: 0.004% (split between buyer and seller)

Combined, these additional fees total approximately 0.0197%, bringing the total transaction cost to roughly 0.22% per side or 0.44% for a round-trip trade at current rates.

The Rollercoaster Ride: Recent Stamp Duty Changes

The 2021 Increase: A Controversial Decision

In February 2021, Financial Secretary Paul Chan Mo-po announced a 30% increase in stamp duty rates, raising the levy from 0.1% to 0.13% per party (from 0.2% to 0.26% total). This marked the first increase in nearly three decades and was implemented on 1 August 2021.

The government’s rationale centered on revenue enhancement, projecting an additional HK$12.9 billion in annual stamp duty receipts. The pandemic-induced recession had severely impacted government finances, and securities stamp duty offered a tempting revenue source given HKEX’s record-breaking performance in 2020.

Measured Impact of the 2021 Increase

The concerns proved prescient. Market data revealed significant trading volume declines following the stamp duty increase:

The 2023 Reversal: Restoring Competitiveness

Recognizing the need to revitalize Hong Kong’s stock market, Chief Executive John Lee Ka-chiu announced in his October 2023 Policy Address that stamp duty rates would return to pre-2021 levels. The Stamp Duty (Amendment) (Stock Transfers) Bill 2023 was gazetted on 25 October 2023, and the rate reduction to 0.1% per party took effect on 17 November 2023.

2024 Reforms: Targeted Exemptions

Building on the 2023 rate reduction, the Hong Kong government passed the Stamp Duty Legislation (Miscellaneous Amendments) Ordinance 2024 on 11 December 2024, with provisions taking effect on 21 December 2024. This legislation introduced two significant exemptions:

• REIT Stamp Duty Waiver: Eliminated the 0.1% stamp duty (per party) on transfers of Real Estate Investment Trust shares or units, aligning Hong Kong with international practices in markets such as the United States, Singapore, Japan, and Mainland China.
• Options Market Maker Waiver: Removed the HK$5 fixed stamp duty on contract notes for options market makers engaged in jobbing business, bringing them into parity with market makers in other products who already enjoyed stamp duty exemptions.

How Transaction Taxes Affect Market Liquidity

Impact on Trading Volume

Academic research consistently demonstrates that securities transaction taxes reduce trading volume. A comprehensive 2011 IMF study found that stock market trading volume elasticities with respect to transaction costs generally range between -0.5 and -1.7. This means a 1% increase in transaction costs typically reduces trading volume by 0.5% to 1.7%.

These elasticities suggest that Hong Kong’s 30% stamp duty increase in 2021 would be expected to reduce trading volume by approximately 15% to 51% based purely on the transaction cost effect, though other factors complicate direct comparisons.

Impact on Market Liquidity

The reduction in trading volume has direct implications for market liquidity. As the IMF study notes, “Because STTs (Securities Transaction Taxes) render some trades unprofitable, they reduce trading volume. This generally also reduces liquidity, defined as the price impact from a given trade.”

The Market Maker Problem: A particular concern for Hong Kong is that its stamp duty, unlike duties in some other markets, does not differentiate between liquidity makers and takers. This means market makers – who provide essential liquidity services – face the same transaction costs as other traders. The 2024 exemptions for options market makers and REIT transfers represent an acknowledgment of this concern and a move toward more sophisticated transaction tax design.

Hong Kong in Global Context

Examining how other major financial centers approach securities transaction taxes provides crucial context for evaluating Hong Kong’s stamp duty policy.

Global Trend Toward Elimination

The international trend over the past several decades has been toward reducing or eliminating securities transaction taxes:

• Japan eliminated its turnover tax on stock trading through the end of the 1990s to revitalize its ailing stock market
• Australia abolished its federal stamp duty on share transfers in 2001
• Italy sharply reduced its capital and transaction duties in 2000
• France eliminated its share transaction tax in 2009, though it reintroduced a modified version in 2012

Revenue Considerations and Fiscal Trade-offs

Stamp Duty as Revenue Source

Securities stamp duty represents a significant component of Hong Kong’s tax revenue:

• 2021-2022: HK$65.9 billion in stamp duty revenue from securities
• Share of total tax revenue: 15.4%
• Share of GDP: 2.3%

The Laffer Curve Effect

The 2021-2023 experience provides a compelling case study of transaction tax revenue dynamics. While the government projected that increasing stamp duty rates by 30% would boost revenue by HK$12.9 billion annually, the actual outcome was likely different due to the dramatic decline in trading volumes.

With average daily turnover falling from HK$188.5 billion (H1 2021) to HK$115 billion (H1 2023) – a 39% decline – the revenue increase from higher rates was partially or entirely offset by reduced transaction volume. This classic “Laffer Curve” dynamic suggests there is an optimal transaction tax rate beyond which higher rates actually reduce revenue.

Impact on Different Market Participants

Stamp duty affects different types of traders asymmetrically:

• High-frequency traders: Most severely impacted due to narrow profit margins on individual trades; 0.2% round-trip cost eliminates profitability of many short-term trading strategies
• Long-term investors: Least impacted as transaction costs are amortized over extended holding periods; 0.2% on entry and exit represents modest total cost for multi-year investments
• Market makers: Previously disadvantaged versus jurisdictions with market maker exemptions; 2024 options market maker waiver addresses this partially
• Retail investors: Bear proportionally higher effective costs when combined with broker commissions and platform fees
• Institutional investors: Large block trades face significant absolute stamp duty costs, potentially discouraging portfolio rebalancing

Future Outlook and Policy Implications

The Task Force on Enhancing Stock Market Liquidity

Recognizing declining market liquidity as a critical challenge, the Hong Kong government established the Task Force on Enhancing Stock Market Liquidity. The November 2023 stamp duty reduction and December 2024 targeted exemptions represent implementation of the Task Force’s recommendations.

Potential Further Reforms

Several policy options merit consideration for further enhancing Hong Kong’s market competitiveness:

• Further rate reductions: Gradually reducing stamp duty toward or to zero, following the example of Japan, Australia, and Singapore
• Market maker exemptions: Extending the options market maker exemption to all designated market makers to enhance liquidity provision
• Product-specific exemptions: Expanding exemptions to additional product categories such as bonds, structured products, or small-cap stocks
• Volume-based incentives: Introducing reduced rates for high-frequency liquidity providers or institutional investors making long-term commitments

Hong Kong’s stamp duty journey from 2021’s controversial increase to 2023’s reversal and 2024’s targeted exemptions demonstrates the delicate balance between fiscal policy and market competitiveness. As regional competition intensifies, particularly from Singapore and Mainland China, Hong Kong’s approach to transaction costs will continue to shape its position as a leading international financial center. For investors, understanding these dynamics is crucial for navigating the market effectively and anticipating future policy shifts.