Singapore is considering fresh tax measures to keep investment professionals from shifting to Hong Kong, as competition between Asia’s two biggest financial centres enters a new phase.

Singapore’s financial regulator has held discussions with investment companies over possible tax changes and other incentives after concerns grew that Hong Kong’s planned tax reforms could attract highly paid portfolio managers away from the city-state, reported Financial Times.

The talks involve the Monetary Authority of Singapore (MAS), which has met investment industry executives in recent months to discuss ways to protect Singapore’s position as a leading financial hub. Industry leaders have warned that Hong Kong’s proposed tax incentives could make it harder for Singapore to retain top talent unless it offers more attractive conditions.

One person familiar with the discussions told Financial Times that some investment firms have already started exploring options to expand in 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,” the person said. “MAS is hearing that and the discussions have intensified.”

Is Hong Kong attracting investment professionals?

The latest issue centres around Hong Kong’s plan to introduce major tax changes aimed at the investment industry. The city wants profits from a wider range of investment activities to qualify as carried interest, allowing eligible earnings to be taxed at a zero per cent rate.

If approved, the changes could benefit hedge fund managers, private equity firms, venture capital investors, private credit funds and family offices, reported Financial Times. Professionals in these sectors could reduce their tax bills even further under the proposed rules.

The move forms part of Hong Kong’s broader effort to rebuild its position as an international financial centre after thousands of foreign professionals left during the Covid-19 pandemic and a period of political unrest.

For several years, Singapore benefited from that migration as many financial firms and investment professionals relocated to the city-state. The new tax proposals now threaten to reverse part of that trend.

How could Singapore respond?

People familiar with the discussions told Financial Times that Singapore may not simply copy Hong Kong’s tax policy because such a move could face political resistance at a time when many households are dealing with rising living costs.

Instead, officials are looking at ways to lower business costs for investment firms rather than offering direct tax benefits to individuals. “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,” one person involved in the discussions told Financial Times.

Among the ideas under consideration is reducing the corporate tax rate under a special incentive programme for investment companies. Firms that qualify currently pay a 10 per cent tax rate instead of Singapore’s standard corporate tax rate of 17 per cent, reported Financial Times.

The Monetary Authority of Singapore confirmed it is reviewing policies to strengthen the country’s financial sector. “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 Financial Times.

Tax experts believe Singapore still holds important advantages despite Hong Kong’s latest push. Darren Bowdern, head of Asia-Pacific asset management tax at KPMG, told Financial Times that many investment firms have already established operations and investment structures in Singapore over the past few years.

“It’s going to get harder for Singapore” because of Hong Kong’s tax changes, Bowdern said. “But the advantage they have is that a lot of funds have already moved their investment structures there, and they aren’t just going to get up and move back,” he told Financial Times.