Singapore weighs hedge fund tax cuts to rival Hong Kong

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Singapore’s markets regulator has held discussions with investment companies about cutting taxes for fund managers, setting up a battle with regional rival Hong Kong to attract talent.

Investment professionals in Singapore are worried that Hong Kong’s plan for sweeping tax changes could lead high-paid portfolio managers to relocate to the Chinese territory.

That has led to talks in recent months between the Monetary Authority of Singapore and investment industry professionals about what can be done to maintain Singapore’s competitive edge, according to four people familiar with the discussions.

While the conversations have covered a broad set of measures, including lowering the cost of business for investment groups, fund executives have told the regulator that unless Singapore’s already competitive tax rates are cut even lower, portfolio managers are likely to push for relocations to Hong Kong.

“A number of Singapore firms are saying that they need to set up Hong Kong offices or create arrangements where certain members can work in Hong Kong,” said a person involved in the talks. “MAS is hearing that and the discussions have intensified.”

A shift from Singapore to Hong Kong would mark a reversal of a years-long trend following the Covid-19 pandemic. Tens of thousands of white-collar expats bolted from Hong Kong to the city-state over political unrest and a perceived heavy-handed response to the pandemic.

As part of its efforts to convince finance professionals to return, Hong Kong is close to implementing a sweeping set of changes to its tax rules on carried interest and performance fees.

Under the measures, profits from a wide range of investments would be eligible for tax treatment as carried interest at a zero per cent rate.

The change would mean individual managers of hedge funds, private equity, venture capital, private credit and even family offices could structure themselves to reduce their already low Hong Kong tax bills. 

Since the FT reported on Hong Kong’s plans in March, MAS’s Financial Markets Development Department — which works to ensure the city-state is a competitive financial centre — has held discussions with investment groups focused on maintaining Singapore’s edge, the people said.

A move to copy Hong Kong’s carried interest move could face resistance among other government departments and prove politically unpopular during a period when the cost of living is rising, according to two people familiar with the talks. MAS may instead try to reduce costs on investment groups to allow them to pass on the savings to portfolio managers in place of tax cuts.

“Rather than putting money in the hands of individuals, they might find ways to make it more economical for firms to do business so they can pay their people better,” said a person involved in the discussions.

One measure under discussion is to reduce the tax rate of a special incentive scheme, where investment groups pay 10 per cent compared with Singapore’s standard corporate rate of 17 per cent.

“MAS is reviewing measures to sharpen the competitiveness of Singapore as a trusted and dynamic financial centre to financial institutions and talent,” the regulator told the FT.

“It’s going to get harder for Singapore” because of Hong Kong’s tax changes, said Darren Bowdern, head of Asia-Pacific asset management tax at KPMG. “But the advantage they have is that a lot of funds had already moved their investment structures there, and they aren’t just going to get up and move back.”