Sparc Fund Offers Tax-Efficient Income Amid U.S. Section 899 Risks

Hong Kong investors holding U.S. bonds and equities may face significantly higher U.S. tax rates under the proposed Section 899, part of the “One Big Beautiful Bill Act” currently pending in the U.S. Congress. This provision targets investors from jurisdictions deemed “discriminatory foreign countries” that impose what the U.S. considers “unfair foreign taxes” on American companies.

If Hong Kong is designated as such a jurisdiction, Hong Kong individuals and entities investing in U.S. stocks and bonds could see their U.S. withholding tax rates on dividends, interest, royalties, and other fixed, determinable, annual, or periodical (FDAP) income increase by 5 percentage points annually, up to a maximum increase of 20% over four years. For example, the current baseline withholding tax rate on U.S. dividends for nonresident aliens is 30%; Section 899 would raise this rate to as much as 50% for applicable persons from discriminatory countries.

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Key points for Hong Kong investors:

• Higher Withholding Taxes: Dividends and interest income from U.S. equities and bonds may be subject to substantially increased withholding tax rates if Hong Kong is designated a discriminatory country under Section 899.

  
  

• Broad Scope: The surtax applies to individuals, corporations, partnerships, trusts, and other entities that are tax residents or effectively managed in the designated jurisdiction, as well as entities substantially owned or controlled by such persons.

  
  

• Override of Tax Treaties: Section 899 is designed to override existing tax treaty benefits, meaning that even if a treaty provides a reduced withholding rate, the surtax would apply on top of that reduced rate, effectively negating treaty relief.

  
  

• Phased Implementation: The surtax would phase in over four years, starting with a 5% increase in the first year and potentially reaching a 20% increase by year four.

  
  

• Effect on Capital Gains: Capital gains from U.S. investments generally remain exempt from U.S. tax for nonresident aliens and are not directly affected by Section 899.

  
  

• Transition Period: There is a transition relief period through the end of 2026 to ease compliance burdens for withholding agents.

  
  

For Hong Kong investors, this means potentially much higher U.S. taxes on dividends from stocks and interest from bonds, which could materially reduce after-tax returns.

As a tax-efficient and reliable alternative, the Sparc Mortgage Income Fund offers exposure to high-quality Hong Kong residential mortgage-backed securities (MBS) with strong local credit quality and rigorous risk management. Importantly, it is not subject to the new U.S. surtax risks under Section 899, providing stable income and capital preservation without the added U.S. tax complications.

Given the uncertain and potentially higher U.S. tax environment for foreign investors, Hong Kong professional investors should consider the Sparc Mortgage Income Fund as a prudent option for steady, tax-efficient payouts.