The Hong Kong Financial Services and the Treasury Bureau (FSTB) issued a briefing paper to the Legislative Council on 4 April detailing its proposals to provide a tax concession for eligible family-owned investment holding vehicles (FIHVs) managed by single family offices (SFOs) in Hong Kong.
To attract family offices to set up a presence in Hong Kong, and to provide tax certainty to FIHVs owned by ultra-high-net-worth individuals (UHNWIs), the Financial Secretary announced his intention to offer a tax concession in the 2022-23 Budget Speech. A government task force has since examined the tax concession proposal and launched an industry consultation in March.
Subject to satisfying the requirements under the proposed regime, an FIHV would be exempted from profits tax in respect of its assessable profits earned from qualifying transactions carried out or arranged by an SFO in Hong Kong, including, subject to the 5% threshold, profits earned that are incidental to the qualifying transactions.
The qualifying transactions of an FIHV must be carried out in Hong Kong by or through an SFO or arranged in Hong Kong by the SFO. In line with the tax treatment under the unified tax regime for privately offered funds, it is also proposed to allow the FIHV to establish family-owned special purpose entities (SPEs) to hold and administer the specified assets.
The FSTB proposes that an FIHV must fulfil the following conditions to be eligible for the tax exemption:
- The FIHV must be a corporation, partnership or trust that is incorporated, registered or established in or outside Hong Kong.
- All the issued shares / interests of the FIHV must be exclusively and beneficially owned by one or more individual(s) who are ‘connected persons’ of the same family, either directly or indirectly. This requirement must be stipulated in the articles of association or constitutive documents of the FIHV.
- The assets of the FIHV must be managed by an SFO in Hong Kong.
- The central management and control (CMC) of the FIHV must be exercised in Hong Kong.
- The FIHV(s) must only serve as an investment vehicle for holding and administering the assets of the single family and must not directly engage in activities for general commercial or industrial purposes.
To fulfil the policy objective of bringing investment management and related activities to Hong Kong, the assets of the FIHV must be managed by an SFO in Hong Kong, which must:
- Be a private company (incorporated in or outside Hong Kong) exercising CMC in Hong Kong.
- Be exclusively and beneficially owned directly or indirectly by the Single Family holding the FIHV.
- Not provide investment management services to entities other than the FIHV(s) exclusively and beneficially owned by the Single Family.
To ensure effective ongoing monitoring and enforcement of the proposed tax regime, the FSTB proposes that, the maximum number of FIHVs that are managed by the same SFO and benefit from the proposed regime will be restricted to 50. A formal and irrevocable election mechanism is proposed to ensure that sufficient safeguards are in place to prevent potential manipulation and tax abuse.
To ensure that the FIHV is a genuine investment vehicle for UHNWIs, the FSTB proposes to impose a minimum threshold for a FIHV’s assets under management (AUM) of at least HKD240 million in each of the following family-owned structures:
- A single FIHV that is managed by an SFO in Hong Kong.
- Multiple FIHVs that are exclusively and beneficially owned by a single family, directly or indirectly, and are managed by the same SFO in Hong Kong.
The average AUM may be calculated by reference to either a yearly average of the valuation of net assets made at the beginning and end of a year of assessment for which a FIHV is claiming the tax concession, or a three-year average of the valuation of net assets made at the end of the subject year and the previous two years.
To comply with the latest international tax standards, FIHVs seeking to benefit under the proposed regime must carry out their core income generating activities (CIGAs) in Hong Kong. For the tax exemption to apply, each FIHV will be required have an adequate number of full-time qualified employees and incur an adequate amount of operating expenditure for carrying out the CIGAs in Hong Kong to the satisfaction of the Commissioner of Inland Revenue during the basis period for the year of assessment, including:
- Employing a minimum of two full-time employees in Hong Kong who carry out the activities concerned and have the qualifications necessary for doing so.
- Incurring not less than HKD2 million operating expenditure in Hong Kong for carrying out the activities concerned.
The CIGAs refer to the management of assets of an FIHV, which includes:
- Researching and advising on potential investments to be made by the FIHV.
- Acquiring, holding, managing and disposing of investment for the FIHV.
- Establishment or administration of an SPE for the purpose of holding and administering one or more underlying investments.
- Leasing premises.
- Entering contracts, including contracts of employment and contracts for the provision of services.
Outsourcing of CIGAs to the SFO is permitted, provided that the use of outsourcing is not for circumventing the substantial activities requirement. The number of qualified full-time employees and amount of operating expenditure incurred by the SFO on behalf of the FIHV must be commensurate with the level of the CIGAs carried out in Hong Kong.
To prevent tax abuse, if the Commissioner of Inland Revenue is satisfied that the main purpose, or one of the main purposes, of the FIHV or the SPE entering into an arrangement is to obtain a tax benefit, the tax exemption will not apply to the FIHV or the SPE concerned. Modified anti-round tripping provisions will also be introduced, modelled on the round tripping provisions applicable for funds
The Inland Revenue Department (IRD) will be responsible for the administration of the tax regime for FIHVs. To ensure the fulfilment of the eligibility criteria, the FIHV and SFO will have to file tax returns to the IRD annually and keep sufficient records on the beneficial owner(s) of the FIHV and the SFO.
“This proposal is a very welcome and should help to attract more family offices to set up and operate in Hong Kong, generating more demand for investment management and other related financial, legal, and accounting services. It will also expand the funding pool in Hong Kong and create business opportunities for the financial sector,” said Peter Fenyves, Consultant at Sovereign Trust (Hong Kong) Ltd.
With its comprehensive financial services platform as well as a liquid capital market that is uniquely connected to the Mainland, Hong Kong is the natural choice for UHNWIs to manage their portfolios in the region. The Securities & Futures Commission (SFC) recorded a 46% year-on-year increase to HKD2,037 billion (circa USD260 billion) in 2020 in Hong Kong’s private banking and private wealth management business attributed to family offices and private trusts clients.
“The multiplier effect of family offices could play a substantial role in bringing businesses to financial and related professional services, as well as channelling capital to Hong Kong’s IPO market, venture capital and private philanthropy. To help the industry seize new business opportunities, we have also been actively stepping up our efforts to attract family offices to set up and operate in Hong Kong,” said Fenyves.