Introduction to “Family Office” in Hong Kong

As regards the idea of having “Family Office” in Hong Kong, it usually relates to a single-family office (rather than multiple-family office) arrangement as established for the sole purpose of serving the needs of members of a single family such as financial needs, family governance, wealth planning and preservation, wealth transfer and philanthropic endeavours.

There are no published statistics on the number of single-family offices incorporated or based in Hong Kong SAR basically for the reason that there is (unlike in Singapore) no pre-approval or licensing required for the establishment or any registration requirement in respect thereof. It is estimated that a total of about 2700 single-family offices are present in Hong Kong (nearly doubling the number in Singapore) as of the end of last year. There will be expectedly about 200 more such offices to be established in Hong Kong in the year to come.

It has transpired that Hong Kong has been quite attractive and competitive for high net-worth individuals and families rallying to consider Hong Kong as one key area for setting-up their bases or establishments as family office. Ostensibly, the depth and innovation of Hong Kong’s capital market, its proximity to the mainland market and its global connectively and not least, its overall flexibility all stand out as major strengths of Hong Kong.

There is also the obvious support and countenance of the Hong Kong Government to promote and encourage the establishment of family offices in Hong Kong by taking the lead in creating a conducive and competitive environment for global family offices and assets owners to thrive and prosper in Hong Kong. In 2023, the Hong Kong Government announced eight-policy measures for that matter, including a new capital investment entrants program for residence in Hong Kong. It is noteworthy that the investment portfolios for such government program for each application also represents a unique opportunity to invest in project companies especially chosen by the Government in technology and innovative industries not otherwise be ordinarily made available.

More importantly, the Hong Kong Government has been instrumental in introducing or mulling to introduce tax concession scheme for family offices in Hong Kong, one of which already came to legislative effect in May 2023 relating to the ownership threshold by family members of eligible entities from 95% to 75% if a Hong Kong tax-exempt charity (or charities) holds the rest of the beneficial interest of the family office structure.

In the same connection, in terms of the tax advantages in relation to a family office in Hong Kong, it is important to note generally that if a family office is structured as a pure investment vehicle and does not conduct any trade or business activities in Hong Kong, it may be eligible for profit tax exemption in Hong Kong. Also regardless of whether the recipients are Hong Kong residents or non-residents, there is no withholding tax on dividend distributions. There is likewise no capital gains tax and estate duty in Hong Kong. As for the cross-border investments and transactions of a family office, the benefits of Hong Kong having an extensive network of double taxation treaties with many jurisdictions may help minimize tax liabilities in this respect.

All in all, the principal idea and utility of establishing- “Single-Family Office” in Hong Kong is to implement and actualize the time-honoured heritage and working culture of one’s family business with its concomitant wealth in the way of establishing and/or operating the same through working instrumentality such as corporate entity, limited partnership funds company, trust and/or other legal vehicle(s) as relevant and appropriate for the very nature and fostering of such family business in Hong Kong. In respect of all these matters, we, with our specialty in corporate and commercial law and practice, shall be in the useful position to assist. In case of your need for further clarifications or elaborations, please feel free to contact us.

Family Offices in Hong Kong: Legal Structure, Profits Tax Concessions, Licensing, Compliance and Reporting

Legal Structure

A family office may take a variety of forms in Hong Kong. It may take the form of a single entity, for example a private company limited by shares, a trust, a partnership or a fund. It may also take the form of multiple entities, for example a private limited company holding a trust.

To enjoy profits tax concessions as provided under the Inland Revenue Ordinance (Cap. 112) (“IRO”) in Hong Kong, there are two main ways for a family office to be structured.

First, a family office of one family may be structured as a private company, i.e. a “single family office” (“SFO”), managing or controlling (as service provider) usually under an investment management agreement a “family-owned investment holding vehicle” (“FIHV”) (or multiple FIHVs commonly involving “multi-family offices” (“MFO”) with relevant financial licences for regulated activities), which may be a corporation, a partnership or a trust.

Second, a family office may be formed as a “corporate treasury centre” (“CTC”), which is a corporation, depending on needs for treasury business plan and risk management.

Profits Tax Concessions – Single Family Office and Family-Owned Investment Holding Vehicle

Assessable profits of a qualifying FIHV managed by a SFO earned from qualifying transactions and incidental transactions (subject to a 5% threshold as explained below) are taxed at a 0% concessionary tax rate upon satisfaction of the relevant requirements under the IRO. The key definitions and requirements include:-

Eligible SFO

• A private company (incorporated in or outside Hong Kong) which is normally managed or controlled in Hong Kong
• At least 95% of the SFO’s beneficial interest is held (directly or indirectly) by members of the family at all times during the basis period for the assessment year
  • Exception: a charitable entity may hold up to 25% of beneficial interest (directly or indirectly) in the SFO
• Provides services to specified persons of the family during the basis period for the year of assessment and the fees for the provision of those services are chargeable to Hong Kong profits tax

• At least 75% of the SFO’s assessable profits are derived from the services provided to specified persons of the family

Eligible FIHV

• A body of persons (corporate or unincorporate) or a legal arrangement, and includes a corporation, a partnership and a trust, which is incorporated, registered or established in or outside Hong Kong
• At least 95% of the FIHV’s beneficial interest is held (directly or indirectly) by one or more than one member of a family at all times during the basis period for the assessment year
  • Exception: a charitable entity may hold up to 25% of beneficial interest (directly or indirectly) in the FIHV
• Managed or controlled by an eligible SFO
• Normally managed or controlled in Hong Kong during the basis period for the assessment year

Not a business undertaking for general commercial or industrial purposes

Qualifying Transactions and Incidental Transactions

• Qualifying transactions refer to transactions in assets specified under Schedule 16C to the IRO (“Specified Assets”), which include:-
  • Securities;
  • Shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company;
  • Futures contracts;
  • Foreign exchange contracts under which the parties to the contracts agree to exchange different currencies on a particular date;
  • Deposits other than those made by way of a money-lending business;
  • Deposits (as defined by section 2(1) of the Banking Ordinance (Cap. 155)) made with a bank (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571));
  • Certificates of deposit (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance);
  • Exchange-traded commodities;
  • Foreign currencies;
  • OTC derivative products (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance).
• Profits derived from transactions incidental to qualifying transactions are also exempted from taxation, provided that the trading receipts from incidental transactions do not exceed 5% of the total of the FIHV’s trading receipts from both qualifying and incidental transactions

Minimum Asset Threshold

• Aggregate value of the Specified Assets held by a FIHV must be at least HK$240 million

Substantial activities requirements

• Each FIHV should incur at least HK$2 million annual operating expenditure in Hong Kong for carrying out investment activities for the year
• Each FIHV should employ at least two full-time qualified employees in Hong Kong

Election

• Election for profits tax concession must be made in writing and is irrevocable

Family-owned Special Purpose Entities (“FSPEs”)

• Profits tax concessions also apply to a FSPE held by a FIHV corresponding to the percentage of beneficial interest of the FIHV in the FSPE

Profits Tax Concessions – Corporate Treasury Centre

If a family office is structured as a CTC, it may enjoy profits tax concessions at 50% of the profits tax rate in force from time to time for assessable profits derived from certain transactions and/or services of the family office. The key definitions and requirements include:-

Qualifying CTC

• A corporation (incorporated in or outside Hong Kong) with its central management and control being exercised in Hong Kong
• Carries out or arranges to be carried out in Hong Kong corporate treasury activities that produce qualifying profits

Associated Corporation Qualifying profits

• A parent company, a subsidiary or a sister company of a CTC
• Assessable profits derived from the following corporate treasury activities:
• intra-group lending transactions, where a CTC lends money in the ordinary course of its intra-group financing business to an associated corporation
• corporate treasury services, for example managing the cash and liquidity position of an associated corporation
• corporate treasury transactions, for example providing guarantee for borrowing of money by an associated corporation

Profits Tax Concessions – Profits Outside Hong Kong

Given that the territorial principle applies to taxation of profits in Hong Kong, profits of family offices derived from sources outside of Hong Kong may be exempted from profits tax in Hong Kong generally.

Licensing

There is no specific licensing regime for family offices in Hong Kong. However, a family office may be subject to licensing requirements under the Securities and Futures Ordinance IF (1) the services provided by the family office fall under any “regulated activity” as defined under the Securities and Futures Ordinance, (2) the family office is carrying on a business in providing such services and (3) the family office carries on such business in Hong Kong.

As such, a SFO is generally not subject to licensing requirements under the Securities and Futures Ordinance if it is established to only serve the investment needs of a single family and is not run as a business. Nevertheless, a MFO is more likely to be subject to licensing requirements as it usually operates as a business.

Compliance and Reporting

Generally speaking, SFOs, MFOs and FIHVs registered as Hong Kong companies are subject to certain compliance and reporting requirements. For example, annual returns have to be submitted to the Companies Registry; one annual general meeting must be held every financial year; audited financial statements must be prepared annually and submitted together with profits tax returns to the Inland Revenue Department (“IRD”); business registration certificates issued by the Business Registration Office of the IRD must be renewed annually.

There is no official registration system for the establishment of family offices in Hong Kong.

New Capital Investment Entrant Scheme (“New CIES”)

The New CIES aims to enrich the talent pool of and attract new capital to Hong Kong. Introduction of the New CIES is one of the eight policy measures to promote the growth of family offices in Hong Kong under the “Policy Statement on Developing Family Office Businesses in Hong Kong” issued by the Financial Services and the Treasury Bureau on 24 March 2023.

The key eligibility requirements under the New CIES include:-

1. Net asset requirement – an applicant must be absolutely beneficially entitled to not less than HK$30 million of net assets throughout the two years preceding the application
2. Investment requirement – an applicant must invest in a minimum of HK$30 million in “permissible investment assets”, including a minimum of HK$27 million in “permissible financial assets” (for example equities and debt securities) and “non-residential real estate” (subject to a cap of HK$10 million), and a minimum of HK$3 million in a designated investment portfolio managed by the Hong Kong Investment Corporation Limited.

With the New CIES, foreign high-net-worth-individuals may be attracted to migrate to and settle in Hong Kong, and to possibly set up family offices in Hong Kong for growing their family wealth.