Summary

The HKSAR Government has unveiled more details about the proposed concessionary tax regime under the preferential policy package to attract strategic industries and investments to the Hong Kong SAR (Hong Kong).

Under the government’s proposal, qualifying enterprises operating in five selected key sectors could enjoy a concessionary tax rate of 5% or half-rate (i.e. 8.25% for corporations) for a qualifying period of up to five years, subject to possible renewal. The proposed tax concession is expected to take effect from the year of assessment (YoA) 2027/28 upon the completion of the legislation process.

In this tax alert, we discuss the key features of the government proposal and share our observations.

As mentioned in the 2026/27 Budget¹ and the 2026 Policy Address², the HKSAR Government plans to introduce a concessionary tax regime under the preferential policy package (which covers policy tools such as land grants, government subsidies and/or tax incentives) to attract high value-added and high-potential enterprises in strategic sectors to establish or expand their operations in Hong Kong.

In late September 2026, the government published a Legislative Council briefing paper³ outlining its proposal on the concessionary tax regime and held a briefing session for the accountancy sector on the proposed regime.

The proposed concessionary tax regime

1. Key sectors covered

The following five sectors would be covered by the proposed regime initially:

Key sectors	Specified activities to be performed by enterprises
1. Advanced manufacturing	Manufacturing products using innovative technology, digital equipment or advanced materials. Examples: Manufacturing of green and smart construction materials or other products using autonomous production lines, etc.
2. R&D in innovation and technology (I&T)	Activities to (i) extend knowledge in natural or applied science, (ii) gain new scientific or technical knowledge and understanding, or (iii) apply research findings or knowledge to introduce new or substantially improved products before commercial production or use. Examples: R&D for Chinese medicine, pharmaceuticals, advanced medical devices and semiconductors, etc.
3. Headquarters activities	Global or regional headquarters in Hong Kong to manage, coordinate and control the business and operations of group companies with operations in Hong Kong and at least one jurisdiction outside Hong Kong. Examples: Sourcing and procurement, supply chain management, and group treasury activities.
4. Logistics and supply chain management	Providing services relating to the storage, sorting, packaging, transportation or customs declaration of goods or materials on behalf of another person, without taking title to them. Examples: Services relating to inventory and supply chain management, cargo handling, and freight forwarding, etc.
5. Finance	Investment management services for quantitative funds⁴, activities relating to the derivatives market, commodities or financial technology (fintech) Examples: Managing quantitative funds, trading in derivatives and establishing a fintech hub.

KPMG observations:

R&D in I&T – Given that the concessionary tax rates would apply only to assessable profits derived from qualifying activities, the proposed tax concession for this sector would mainly benefit enterprises conducting contracted R&D in return for service fees or other remuneration, as in‑house R&D activities would not normally generate any profits.
Investment management services for quantitative funds – This would cover performance fees and management service fees that do not qualify as carried interest but the scope is limited to investment management services offered to “quantitative funds”.

2. Qualifying enterprises and qualifying profits

Both enterprises newly established in Hong Kong and enterprises already operating in Hong Kong may benefit from the proposed regime. For enterprises already operating in Hong Kong, the concessionary tax rate will apply to the qualifying incremental profits⁵ from the relevant activity only.

3. Concessionary tax rates and qualifying period

Approved enterprises would enjoy a profits tax rate of 5% or half-rate (i.e. 8.25% for corporations) on their qualifying profits for a qualifying period of up to five years. Extension of the qualifying period is possible subject to a new application with a new investment / development plan.

KPMG observations:

The maximum duration of the qualifying period for an initial application is five years. In practice, the actual duration may be shorter (e.g. three years).

4. Substantial activity requirements

Minimum thresholds for (i) the amount of operating expenditure and (ii) the number of full-time qualified employees would be set out in the Inland Revenue Ordinance (IRO). If an enterprise’s application is approved, the specific requirements on the amount of expenditure and number of employees applicable to the enterprise will be set out in a certificate of approval issued to it.

5. Application, assessment and approval

The table below summarises the government units involved and their respective roles in the application, assessment and approval process:

Government units	The respective roles
InvestHK / OASES⁶	Identifying and reaching out to target enterprises Formulating tailor-made arrangements for the enterprises and facilitating the preparation of their applications / business plans Post-approval monitoring and follow-up (e.g. ensuring compliance of the agreed terms and conditions as supported by relevant reports and other documentary proof)
The SCPP⁷ (led by the Financial Secretary)	Assessing and approving applications from enterprises (including the investment / business plan submitted)
Relevant policy bureaux and departments	Providing support and comments to InvestHK and OASES Assisting the Steering Committee in reviewing the applications
The Financial Secretary	Issuing a certificate of approval to an approved enterprise that sets out the concessionary tax rate, qualifying period, the substantial activity requirements and other applicable additional conditions, etc. Revising, revoking or cancelling the approval granted if the enterprise could not meet the key specified conditions or comply with the obligations under the approval, etc.
The Inland Revenue Department	Calculating the tax amount using the applicable concessionary tax rate (based on confirmation from InvestHK / OASES) and issuing a demand note

Interaction with existing preferential tax regimes

The proposed regime would complement the existing preferential tax regimes. Enterprises meeting the scope and conditions under the existing preferential tax regimes could continue to enjoy them without seeking approval under the proposed regime.

KPMG observations:

There are pros and cons to the proposed regime and the existing preferential tax regimes. For example, the proposed regime offers a tax rate as low as 5% and upfront certainty on eligibility once the application is approved (provided that the enterprise continues to meet the terms and conditions specified in its certificate of approval), but the tax concession is subject to pre-approval and a sunset period. In contrast, most existing preferential regimes offer only a half rate and do not provide upfront certainty, but they require no pre approval and are not subject to a sunset period. That said, overlap between the proposed regime and existing preferential tax regimes is expected to be limited, as most of the existing regimes do not cover the specified activities under the five selected key sectors.

Legislative approach and implementation timeline

The details of the proposed regime (e.g. the specified activities, minimum thresholds for substantial activity requirements, concessionary tax rates and qualifying period) would be set out in a new Schedule to the IRO. The Chief Executive in Council would be empowered to amend the Schedule (which is a piece of subsidiary legislation) to allow timely adjustments in response to market changes.

The government plans to introduce a bill with the necessary legislative amendments to the Legislative Council in December this year, with a view to implementing the proposed tax concessionary regime from the YoA 2027/28.

KPMG observations

The preferential policy package represents a novel approach in Hong Kong to attract strategic enterprises and investments. The proposed concessionary tax regime under the package would be the first of its kind in Hong Kong in terms of:
- the breadth of industrial sectors covered;
- the flexibility offered (e.g. case‑by‑case eligibility assessment based on an enterprise’s potential contribution to Hong Kong’s economic growth, enterprise‑specific concessionary tax rate and qualifying period); and
- the mode of administration (i.e. being mainly driven by InvestHK, OASES and the relevant policy bureaux).

We look forward to this new approach delivering win‑win outcomes that support both Hong Kong’s economic development and the business needs of investing enterprises.

We welcome the inclusion of headquarters activities as one of the key sectors, which responds to the industry’s (including our) longstanding call for a dedicated tax incentive to attract more multinational groups to establish their headquarters in Hong Kong and to bring related peripheral business activities to Hong Kong.
However, as with all tax incentives, the impact of the Hong Kong minimum top-up tax (HKMTT) on those MNE groups affected by it will have to be considered. In this regard, we urge the government to expedite its review of the existing income‑based tax concessions in Hong Kong in light of the Substance‑based Tax Incentive Safe Harbour introduced by the OECD in the Side‑by‑Side Package released in January 2026⁸, and to explore possible reform options to make such tax concessions more attractive to Pillar Two in-scope MNE groups.
Based on our understanding, the proposed concessionary tax regime will be highly selective and granted only on a meritorious basis. The application and assessment will be an interactive process involving two‑way communication between the government and the applicant.

Interested enterprises should carefully assess the costs and benefits of the proposed regime (including the impact of the HKMTT where applicable) and be well prepared to produce a business plan that demonstrates their potential contribution to Hong Kong’s economic development and justifies their entitlement to the tax benefits. We expect the government to release more information on the application process under the proposed regime in due course.

If you have any questions or require assistance regarding the above developments, please feel free to contact us via taxservicesenquiry@kpmg.com.

1. The 2026/27 Budget can be accessed via this link: https://www.budget.gov.hk/2026/eng/index.html

2. The 2026 Policy Address can be accessed via this link: https://www.policyaddress.gov.hk/2026/en/index.html

3. The briefing paper can be accessed via this link: https://www.legco.gov.hk/yr2026/english/panels/fa/papers/fa20261005cb1-1126-4-e.pdf

4. Quantitative funds refer to the funds where the use of computer-based quantitative methods is material to the formulation or implementation of investment strategy or investment decision.

5. Qualifying incremental profits (for a YoA in the qualifying period) = Assessable profits derived from the qualifying activity for that YoA - Average assessable profits derived from the same qualifying activity (if any) for the three consecutive YoAs immediately preceding the YoA in which the qualifying period begins.

6. InvestHK stands for Invest Hong Kong and OASES stands for Office of Attracting Strategic Enterprises.

7. SCPP stands for the Steering Committee on Preferential Policies for Attracting Industries and Investment.

8. For more details, please refer to our KPMG BEPS Publication issued in January 2026