Hong Kong's Bold Move: Stamp Duty Exemptions for REITs and Options Makers to Revolutionize Financial Markets

Hong Kong Legislates Major Stamp Duty Reforms to Boost REITs and Options Markets

In a strategic effort to enhance its financial market competitiveness and adapt to a digital era, the Hong Kong Special Administrative Region (HKSAR) Legislative Council has approved the 2024 Stamp Duty Legislation (Miscellaneous Amendments) Bill. This pivotal legislation introduces significant exemptions on stamp duties for Real Estate Investment Trusts (REITs) transactions and options market makers, while also revamping stamp duty collection mechanisms to support Hong Kong’s transition to a paperless securities market.

Key Legislative Changes and Exemptions

On December 11, 2024, the Legislative Council successfully passed the amendments, which primarily focus on:

Exemption of Stamp Duty for REITs Transactions: The new law exempts stamp duty on the transfer of REITs shares or units. Previously, under the existing Stamp Duty Ordinance, both buyers and sellers were subject to a stamp duty rate of 0.1% on such transactions.
Exemption for Options Market Makers: The ordinance also exempts options market makers from the HK$5 stamp duty per transaction document required under current regulations. This exemption aims to lower operational costs and enhance market efficiency.
Revamped Stamp Duty Collection for Paperless Securities Market: The amendments update the stamp duty collection process to align with Hong Kong’s initiative to implement a paperless securities market. This includes facilitating electronic stamping and payment of stamp duties through the Stamp Duty Department's online platform.

Government's Strategic Objectives

A spokesperson for the HKSAR Government highlighted the government’s objectives: “Exempting stamp duty on REITs share or unit transfers and options market makers' securities dealing will enhance the competitiveness of Hong Kong's REITs, reduce trading costs for options market makers, and improve the efficiency of stamp duty procedures in a paperless securities market environment.”

Financial Secretary Paul Chan Mo-po emphasized the growth trajectory of Hong Kong’s REITs market: “Since the introduction of Hong Kong’s first REIT in 2005, the market has seen substantial growth, with market capitalization increasing nearly fivefold and cumulative dividends outperforming the overall market. The stamp duty exemptions are expected to further bolster this growth by attracting institutional investors and enhancing liquidity.”

Implementation Timeline and Legislative Process

The 2024 Stamp Duty Legislation (Miscellaneous Amendments) Bill was officially published in the Gazette on November 8, 2024, and proceeded to its first reading in the Legislative Council on November 20, 2024. Following its passage on December 11, the ordinance is scheduled to be promulgated on December 20, 2024. The exemptions will take effect immediately on December 21, 2024, ensuring a swift transition to capitalize on the anticipated market benefits.

Enhancing Market Competitiveness and Efficiency

Real Estate Investment Trusts (REITs): The exemption aligns Hong Kong with key Asia-Pacific markets such as Mainland China, Japan, and Singapore, where REITs transactions are generally exempt from stamp duties. This strategic move is expected to:

Increase Competitiveness: Lower transaction costs make Hong Kong’s REITs more attractive to both local and international investors.
Boost Liquidity: Enhanced attractiveness is likely to improve market liquidity, fostering a more vibrant REITs sector.
Expand Investor Base: Reduced costs can attract a broader range of investors, supporting market growth.

Options Market Makers: By exempting options market makers from the HK$5 stamp duty per transaction, the amendments aim to:

Lower Operational Costs: Reducing fixed costs for options market makers encourages greater participation and innovation.
Improve Market Efficiency: Enhanced liquidity and tighter spreads are anticipated as a result of increased market maker engagement.
Align with Regional Practices: Bringing Hong Kong in line with other major markets enhances its attractiveness for derivatives trading.

Transition to a Paperless Securities Market

The amendments are a cornerstone of Hong Kong’s broader initiative to establish a paperless securities market system. This modernization effort seeks to:

Enhance Financial Infrastructure: By enabling digital holding and transferring of securities, Hong Kong aims to streamline processes and reduce reliance on physical documents.
Improve Efficiency: Electronic stamping and payment of stamp duties will simplify and expedite transaction procedures.
Increase Investor Protection and Transparency: A digital framework enhances the security and transparency of transactions, fostering greater investor confidence.

Financial Secretary Paul Chan stated, “The move towards a paperless securities market is integral to enhancing Hong Kong’s financial infrastructure. By leveraging electronic stamp arrangements, we can facilitate seamless online processes, thereby improving market efficiency and investor protection.”

Fiscal Implications and Government Revenue

While the exemptions are poised to significantly boost market activity, they come with notable fiscal implications. The HKSAR Government anticipates an annual revenue reduction of approximately HK$1 billion due to these exemptions.

Financial Secretary Paul Chan acknowledged this impact: “Although the stamp duty exemptions will result in a short-term fiscal sacrifice, the long-term economic benefits of a more competitive and dynamic financial market are substantial. Enhanced market activity can lead to indirect revenue gains through increased financial transactions and broader economic growth.”

Future Outlook and Strategic Alignment

The government, in collaboration with financial regulatory bodies and the Hong Kong Exchanges and Clearing Limited (HKEX), remains committed to monitoring market developments and optimizing stock market measures. These amendments complement earlier initiatives, such as the inclusion of REITs in the Shanghai-Shenzhen-Hong Kong Stock Connect program announced by the China Securities Regulatory Commission in April 2024.

Financial Secretary Paul Chan further elaborated, “These strategic actions are designed to enhance liquidity, attract a broader investor base, and support the sustainable development of Hong Kong’s financial markets. We will continue to work closely with regulatory bodies and market participants to ensure Hong Kong remains a leading global financial hub.”

Conclusion

The passage of the 2024 Stamp Duty Legislation (Miscellaneous Amendments) Bill marks a significant advancement in Hong Kong’s financial sector. By exempting stamp duties on REITs transactions and options market making, and by advancing towards a paperless securities system, Hong Kong reaffirms its commitment to maintaining its status as a premier global financial hub. These measures are expected to lower transaction costs, increase market liquidity, and attract a diverse range of investors, thereby fostering a more robust and competitive financial environment.