The initial public offering (IPO) process is a watershed event for most business owners that will have significant implications for their personal wealth. A key challenge facing a business owner is how best to transition the wealth accumulated from his or her business to subsequent generations. It is therefore critical to establish an estate plan early in the pre-IPO planning phase because the opportunities will generally diminish as a deal moves toward the closing date.
One decision is whether or not to place their equity into a trust prior to an IPO. If an appropriate trust and entity holding structure is used, the entrepreneur can retain control and stewardship of the company while minimising the commercial and emotional frictions that can arise before and after an IPO.
If an IPO trust is to be employed, there are many jurisdictions – both onshore and ‘offshore’ – in which it is possible to set up a trust. When choosing the best jurisdiction it is important that it offers:
- Political and economic stability
- A well-established legal system
- A strong tradition of enforcing trusts
- Modern trusts legislation
- A low tax regime.
In addition, there are many jurisdictions where the local trusts law offers unique features. Hong Kong has become a very attractive and competitive trust jurisdiction for an IPO trust, offering the following key features:
- Reserved Powers for the ‘settlor’ – the settlor of a Hong Kong trust is able to reserve the power of investment and management of the trust assets to themselves, and to manage the trust assets in the manner that he/she thinks fit.
- Perpetual Trusts – Hong Kong trusts can continue indefinitely with no perpetuity period, or a settlor can still choose to specify a fixed perpetuity period.
- Forced Heirship’ protection – the forced heirship rules of a foreign jurisdiction will not affect the validity of any settlements of any moveable assets into a trust made by settlors during their lifetime.
- Enhanced trustee default powers – if the trust deed is silent, the trustees may rely upon the Trustee Ordinance to provide them with enhanced default powers.
- Enhanced protection for beneficiaries – new provisions provide for improved protection for beneficiaries and their interests.
Hong Kong’s legal system and judiciary
China’s ‘One Country, Two Systems’ policy for Hong Kong is enshrined in the Joint Declaration between Britain and China. Hong Kong itself has a Bill of Rights and is a signatory to most major international conventions on human rights. It has a stable political environment and a long tradition of respecting property rights.
First established under British rule, Hong Kong’s legal system is based on the English common law. Hong Kong’s trust legislation dates back to 1934 and is also based on English trust law. The Hong Kong Courts continue to apply and follow the case law and judicial precedents of Commonwealth countries. Hong Kong is also an attractive jurisdiction from which to administer trusts, since the judiciary is highly experienced in trust law and there are many professional firms that are experienced in public trusts and private client wealth management services. This ensures a high level of confidence in the legal framework, competitive pricing and the effective protection of assets.
English is the business and legal language of Hong Kong and is used alongside Chinese for doing business within the Chinese-speaking countries of the Asian region. English is the language used in commercial contracts.
A major financial centre
Hong Kong is one of the three major international financial centres in the world, along with London and New York. It has access to a wide range of world class banks and has one of the world’s major stock exchanges. Hong Kong is also a party to a wide range of international Tax Treaties.
As a result, there is a vast pool of investment expertise in Hong Kong. It is the major centre for investment funds, innovative investment vehicles and IPO’s in Asia, and is well supported by professional trustees and fund services providers. Hong Kong is strategically and geographically positioned to take advantage of the enormous growth prospects in the Asia region in the coming years.
Every area of professional service required by corporations, intermediaries and businesses – in accountancy, law, banking, finance, investment, trust and fund services – is catered for in Hong Kong.
Due to its strategic geographic location, it is the gateway to China and the hub of international business in Asia. Hong Kong has one of the best international airports in the world, which makes for convenient and efficient business travel.
Hong Kong has a regulatory framework that is in line with international standards. Money laundering and terrorist financing are criminal offences in Hong Kong and it is a member of the Financial Action Task Force on Money Laundering (FATF).
Taxation in Hong Kong
Hong Kong is also a very favourable tax jurisdiction for trusts and companies. A trust is a taxable entity for profits tax and/or property tax only if it carries on business in Hong Kong, whether by itself or through an agent, and earns Hong Kong-source profits.
In respect of distributions of capital from a trust to a beneficiary, there is no income and/or capital gains and/or gift tax in Hong Kong. Beneficiaries of a Hong Kong administered trust are not liable to any taxation on distributions they receive from the trust, whether income or capital.
There are also no tax implications at the settlor’s death, since estate duty has been abolished.