Tax crackdown erodes edge for Hong Kong insurers

China’s scrutiny of offshore insurance income is forcing a rethink of return advantages for Hong Kong policies, which could weaken the appeal of dividend and savings products

By Lee Shih Ta

Hong Kong insurance policies have long been popular with Mainland Chinese, offering higher long-term returns, multi-currency options and access to globally diversified investments beyond traditional protections. But now this cross-border insurance business faces another cost that customers will have to factor into their calculations: personal income tax on offshore insurance income.

The issue surfaced on Aug. 5, when Chinese media reported that tax authorities in Beijing, Hangzhou and other cities had begun reviewing offshore insurance policies held by Chinese residents, including policies issued in Hong Kong. Some policyholders were reportedly required to pay a 20% personal tax on income such as policy dividends and interest earned on prepaid premiums.

Subsequent reports indicated that realized gains from policy surrenders, reductions in coverage and dividend withdrawals could also fall within the tax net. China’s State Taxation Administration responded on Aug. 7 by saying the requirement for Chinese residents to declare and pay tax on overseas income has long been in place, stressing that the enforcement was “not a new policy” and was not specifically targeting Hong Kong’s insurance market.

Nonetheless, insurance stocks wasted no time reacting to the news. The selloff hit London first, where Prudential plc (PRU.L) plunged as much as 13% on Aug. 5 after the original reports. The pressure spread to Hong Kong the following day, with AIA Group (1299.HK) tumbling as much as 8.5% intraday on Aug. 6, and Hong Kong-listed Prudential (2378.HK) also coming under heavy selling pressure. The reaction showed how quickly investors came to view the tax crackdown as a potential threat to demand from Mainland Chinese for Hong Kong insurance.

Those concerns are not without basis. Mainland visitors contributed HK$62.8 billion ($8 billion) in new premiums to Hong Kong in 2024, up 6.5% year-on-year and accounting for about 29% of new premiums. The Hong Kong Insurance Authority subsequently suspended separate publication of Mainland visitor statistics for 2025 while reviewing the reporting methodology for non-local policyholders. Even so, Hong Kong’s overall long-term insurance market continued to expand rapidly, with new premiums surging 50.6% to HK$330.9 billion in 2025.

Cross-border wealth management edge

Much of the appeal of Hong Kong insurance to Mainland customers has come from dividend and savings products. In addition to offering multiple currency options, including the U.S. and Hong Kong dollars, insurers can invest across global markets, giving such policies the potential to offer higher returns than comparable products on the Mainland. UBS estimates that returns for Hong Kong policies are around 6% to 6.5%, compared with about 3% for similar Mainland products. Combined with their foreign-currency exposure, global investment opportunities and wealth-transfer functions, they form a comprehensive cross-border wealth management tool.

But it is precisely this return advantage that a 20% tax would erode first.

Based on the cases disclosed so far in Beijing and Hangzhou, as well as interpretations from industry professionals and tax lawyers, taxable income may extend beyond policy dividends and interest on prepaid premiums to gains realized when policyholders surrender a policy, reduce coverage or withdraw cash dividends. In other words, the cases reported to date suggest that the 20% rate is primarily applied to gains deemed taxable income, rather than simply applying the 20% rate to the policy’s total premiums or cash value. But detailed nationwide rules on how gains from different types of policies should be defined and calculated have yet to emerge.

There is a clear tax rationale behind the move. Chinese residents are subject to tax on their worldwide income, meaning overseas interest, dividends and certain investment gains have long been subject to reporting requirements. As the Common Reporting Standard (CRS) has increased transparency around cross-border financial assets, rules on offshore income that were once difficult to enforce have become easier for tax authorities to administer. In the first five months of this year, taxpayers who received overseas income paid about 13 billion yuan in back taxes.

That means the impact can vary significantly by policy type. Pure protection products with no savings component — such as policies primarily covering death, medical expenses or critical illness — should be less affected. Dividend and savings policies are more exposed, particularly when policyholders surrender policies, reduce coverage or withdraw dividends, turning accrued gains into realized income. For returns that remain accumulated within a policy and have not yet been withdrawn, publicly available information does not yet point to a uniform nationwide method of taxation. It would therefore be misleading to simply cut the expected returns on Hong Kong policies by 20%.

How much of the return gap will remain?

Goldman Sachs believes a key question is how much of the return gap between Hong Kong policies and comparable Mainland products will remain after taxes are paid. As long as a meaningful gap persists, long-term growth drivers for business from Mainland visitors may not be fundamentally affected. UBS holds a similar view. It notes that China’s current individual income tax rules still lack detailed guidance on how insurance-policy returns should be taxed, while returns on domestic Mainland policies are not generally taxed in practice. Even if taxation reduces the relative appeal of Hong Kong products, their higher returns, multi-currency features and broader investment universe should remain competitive advantages.

More important is whether tax authority scrutiny now seen in individual Chinese cities develops into broader enforcement. If such enforcement gradually becomes routine, the tax cost of offshore policies will become a standard part of the purchase calculus for Mainland customers.

In the short term, taxation alone may not be enough to reverse the flow of Mainland customers buying insurance in Hong Kong. But if taxation of offshore policies becomes routine across China, dividend and savings products marketed primarily on their higher returns will face growing pressure. The real test is whether Hong Kong products can retain a sufficiently large return advantage over their Mainland counterparts after tax costs are taken into account.

But returns are not the only source of Hong Kong insurance’s competitive appeal. Multi-currency options, global asset allocation, insurance protection and wealth-transfer functions should continue to support cross-border demand. The current tax crackdown may therefore not immediately change the broader trend of Mainland customers buying policies in Hong Kong. But if enforcement continues to widen, the challenge for investors in insurance stocks will shift from a short-term share-price shock to more fundamental adjustments to assessments of new business growth, product mix and customer demand.

Lee Shih Ta is an editor at Bamboo Works.

You can contact him at shihtalee@thebambooworks.com

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