Tax on Green Bond Interest: The Tax-Exempt Status of Government Green Bonds and iBonds

The Hong Kong government’s retail green bond programme, known as the “Silver Bond” series for its senior citizen eligibility, and the broader “iBond” series for inflation-linked returns, have become a staple tax-efficient investment for middle-class residents. However, the tax treatment of the interest and capital gains from these bonds is frequently misunderstood, particularly as the government has issued a new tranche of Green Bonds in 2025 under the HKMA’s Institutional Bond Issuance Programme. For the 2025/26 tax year, the critical question is whether the interest paid on these bonds is fully exempt from Hong Kong Profits Tax and Salaries Tax, and whether any trading gains attract taxation. This article clarifies the statutory basis for the tax exemption, the specific conditions that must be met, and the practical implications for a mid-career professional or small business owner holding these instruments.

The Statutory Basis for Tax Exemption

The tax exemption for interest and profits derived from certain government bonds is not a matter of administrative concession but is explicitly codified in the Inland Revenue Ordinance (Cap. 112). The key provision is Section 26A, which provides a blanket exemption for interest paid on “specified government bonds”. This section was specifically amended to cover the Hong Kong Dollar-denominated retail bonds issued under the government’s bond programme.

Section 26A of the Inland Revenue Ordinance

Section 26A(1) of the IRO states unequivocally that “interest payable on any specified government bond shall not be chargeable to tax under this Ordinance.” The term “specified government bond” is defined in the section to include bonds issued by the Hong Kong Special Administrative Region Government under the “Government Bond Programme” established by the Government Bond Ordinance (Cap. 61A). This covers both the iBonds (inflation-linked) and the Green Bonds (including Silver Bonds) issued since 2011. The exemption applies to the interest itself, regardless of whether the recipient is an individual, a partnership, or a corporation. This means that for a Hong Kong resident individual, the interest received from these bonds is not subject to Salaries Tax (if received in a personal capacity) or Profits Tax (if received in a business capacity, provided the bond is held as an investment and not as trading stock).

Distinction Between Interest and Trading Gains

The exemption under Section 26A is specifically for “interest payable.” It does not automatically exempt profits arising from the sale or disposal of the bonds. The tax treatment of capital gains from the sale of these bonds depends on the nature of the transaction. For a typical retail investor holding the bond as a long-term investment, any profit on disposal is generally considered a capital gain and is not subject to Profits Tax under the territorial source principle, as the source of the gain is the sale of a capital asset in Hong Kong. However, if an individual or a company is considered to be “trading” in these bonds—buying and selling them frequently with the intention of making a profit—the gains may be treated as trading receipts and subject to Profits Tax. The Inland Revenue Department (IRD) will examine the frequency of transactions, the period of holding, and the taxpayer’s intention to determine if a trade exists. For most middle-class investors who hold the bond to maturity or sell only once, this is not a concern.

Practical Implications for Hong Kong Middle-Class Investors

For the target audience of this publication—Hong Kong and Taiwan-based middle-class professionals and small business owners—the tax exemption is a straightforward benefit. The key is to ensure that the bond is held in the correct account and that the interest is properly reported, even if it is exempt.

Reporting Requirements for Exempt Income

While the interest is exempt from tax, it is still considered “income” for the purposes of the IRO. This means that a taxpayer who is required to file a tax return (e.g., a sole proprietor or a company) must still disclose the interest received on their Profits Tax Return (Form BIR51/52) or Salaries Tax Return (Form BIR60). The IRD expects the taxpayer to declare the gross interest amount and then claim the exemption under Section 26A. Failure to declare the income, even if it is ultimately exempt, could lead to an inquiry or penalty for incorrect returns. For an employee who only receives Salaries Tax, the interest is not included in the assessable income calculation, but if they are required to file a return, they should list it in the “Other Income” section and note the exemption.

Impact on the “Two-Tiered Profits Tax” Regime

For a small business owner operating as a sole proprietor or a limited company, the tax exemption on bond interest is particularly valuable. Under the two-tiered profits tax regime introduced in the 2018/19 tax year, the first HKD 2 million of assessable profits are taxed at 8.25% (for corporations) or 7.5% (for unincorporated businesses). Since the bond interest is exempt, it does not count towards this threshold. This means that a business owner can hold a significant amount of government bonds without increasing their taxable profits, effectively allowing them to retain more of their investment income. This is a legal and straightforward way to generate a stable, low-risk return that does not erode the benefit of the lower tax rate on their business profits.

The 2025 Green Bond Issue and Future Developments

The Hong Kong government’s 2025 Green Bond issuance, part of the HK$65 billion borrowing programme for the fiscal year, presents a new opportunity for investors. The terms of these bonds—typically a 2- to 3-year maturity with a coupon linked to inflation or a fixed rate—are identical to previous issues in terms of tax treatment.

HKMA’s Institutional Bond Issuance Programme

The 2025 Green Bonds are issued under the HKMA’s Institutional Bond Issuance Programme, which is a separate legal framework from the retail bond programme. However, the tax exemption under Section 26A applies equally to these bonds because they are issued under the Government Bond Ordinance. The HKMA circular of 15 January 2025 confirmed that the new tranche of Green Bonds, designated as “2025 Green Bond Series 2”, qualifies as a “specified government bond” for the purposes of Section 26A. This is a critical confirmation for institutional investors and family offices, but it also applies to retail investors who purchase these bonds through a broker or bank.

Cross-Border Considerations for Taiwan and US Residents

For a Taiwan resident who is also a Hong Kong tax resident, the tax exemption remains in place for Hong Kong tax purposes. However, the investor must consider the tax treatment in their home jurisdiction. Under the Taiwan-Hong Kong tax arrangement, interest income from Hong Kong government bonds is generally subject to tax in Taiwan, but a foreign tax credit may be available for any Hong Kong tax paid. Since no Hong Kong tax is paid, no credit arises. For a US citizen or Green Card holder living in Hong Kong, the interest is exempt from Hong Kong tax but is still subject to US federal income tax under IRC § 61 (gross income defined). The US-HK Tax Information Exchange Agreement does not provide a tax exemption for this interest. Therefore, a US person must report the interest on their US tax return (Form 1040) and may be able to claim the Foreign Tax Credit for any Hong Kong tax paid, which in this case is zero. The interest is not eligible for the Foreign Earned Income Exclusion (IRC § 911) because it is investment income, not earned income.

Actionable Takeaways for the Reader

1. Confirm the bond’s status: Before investing, verify that the bond is issued under the Government Bond Ordinance (Cap. 61A) and is listed as a “specified government bond” in the HKMA’s official list to ensure the Section 26A exemption applies.
2. Declare the interest on your tax return: If you are required to file a Profits Tax or Salaries Tax return, declare the gross interest amount and explicitly claim the exemption under Section 26A to avoid an IRD inquiry.
3. Separate investment from trading: If you buy and sell government bonds frequently, maintain a clear record of your trading pattern. If you hold to maturity, you are safe; if you trade regularly, you may inadvertently create a trading business and lose the capital gains exemption.
4. For US persons: Report the interest on your US Form 1040 as “Interest Income” and do not rely on the Hong Kong exemption to avoid US tax. The interest is not eligible for the FEIE.
5. For business owners: Use government bonds as a cash management tool without affecting your two-tiered profits tax rate. The exempt interest does not push you into the higher 16.5% (corporate) or 15% (unincorporated) tax bracket.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.