Looking to invest in Asian real estate through a tax-efficient structure? Hong Kong’s Real Estate Investment Trust (REIT) regime offers one of the most attractive platforms in the region. With its strategic position as Asia’s financial hub, favorable tax treatment, and robust regulatory framework, Hong Kong REITs provide global investors with unparalleled access to diversified real estate portfolios across the Asia-Pacific region and beyond.

Hong Kong’s Strategic Position in the Asian REIT Market

Hong Kong serves as a pivotal gateway for international investors seeking exposure to Asia’s dynamic real estate markets. As a leading international financial center, the city combines a well-established regulatory framework with strategic geographic positioning and favorable tax treatment for authorized collective investment schemes. The dual oversight by the Securities and Futures Commission (SFC) and The Stock Exchange of Hong Kong Limited (SEHK) creates a transparent, investor-friendly environment that has made Hong Kong a preferred destination for cross-border real estate investments.

Tax Treatment of Hong Kong REITs: A Comprehensive Guide

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.

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.

The property tax calculation follows this formula: (Rental income – Rates paid) × 80% × 15%. The 20% statutory allowance accounts for repairs and other outgoings.

Indirect Holdings Through Special Purpose Vehicles (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. Hong Kong applies a two-tiered profits tax regime:

• First HK$2 million of profits: 8.25% tax rate for corporations
• Profits exceeding HK$2 million: 16.5% standard rate for corporations
• For unincorporated businesses: 7.5% on first HK$2 million, 15% on remainder

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.

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.

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.

SFC REIT Code Requirements: The Regulatory Framework

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.

Investment Restrictions and Asset Allocation

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.

Management and Licensing 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.

Government Support and Grant Scheme

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 HK$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.

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

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.

Comparison with Other Asian REIT Regimes

Hong Kong’s REIT regime offers one of the most attractive platforms in Asia for cross-border real estate investments. With its favorable tax treatment, robust regulatory framework, and strategic position as Asia’s financial hub, Hong Kong provides global investors with efficient access to diversified real estate portfolios. Whether you’re considering establishing a new REIT or investing in existing ones, understanding the tax and regulatory landscape is essential for maximizing returns and ensuring compliance.