The Evolution of Family Office Structures in Hong Kong: A Strategic Guide to Regulatory and Structuring Considerations. Part 1: Regulatory Compliance
This is the first in a two-part series examining Hong Kong’s emerging family office landscape. Part one focuses on regulatory considerations and tax concessions for family offices in Hong Kong. The second part will explore optimal structuring options for family office investment vehicles, including open-ended, closed-ended, and hybrid structures, with a special focus on Hong Kong-domiciled vehicles.
Introduction
Hong Kong's rise as a global financial centre has historically been driven by its strategic location, robust legal framework, and market-friendly policies. In recent years, however, the territory has faced increasing competition from other financial hubs in Asia, particularly Singapore, which has aggressively positioned itself as a wealth management destination for ultra-high-net-worth individuals (UHNWIs) and their family offices.
Recognising the substantial economic benefits that family offices bring—including job creation, asset management growth, and ancillary professional services development—the Hong Kong government identified family office attraction as a strategic priority in its efforts to maintain and enhance the territory's position as a premier financial centre. Family offices represent a significant opportunity, as global private wealth has expanded dramatically over the past decade, particularly in Asia where unprecedented wealth creation has produced a new generation of billionaires seeking sophisticated wealth management solutions.
The government's initiative gained additional urgency following political uncertainties and pandemic disruptions that challenged Hong Kong's traditional advantages. In response, authorities developed a comprehensive strategy to transform Hong Kong into a leading family office hub, encompassing tax incentives, regulatory clarity, and talent development programs.
The family office initiative aligns with Hong Kong's broader diversification strategy to expand beyond its traditional strengths in banking and capital markets toward comprehensive wealth and asset management services.
The Hong Kong Tax Concession Regime
At the heart of Hong Kong's family office strategy is the dedicated tax concession regime introduced in 2020 and enacted through the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2022, designed specifically for family-owned investment holding vehicles (FIHVs) managed by eligible single family offices (ESFOs). This regime offers substantial tax advantages through exemption from profits tax on qualifying transactions, making Hong Kong competitive with other jurisdictions vying for family office establishments.
Structure and Eligibility Requirements
The tax concession operates by exempting qualifying FIHVs from profits tax on transactions involving specified assets (Schedule 16C assets) such as securities, futures contracts, and foreign currencies. The concession extends to incidental transactions related to these qualifying transactions, subject to a 5% threshold limitation.
For an entity to qualify as an FIHV under the concession regime, it must satisfy several conditions throughout the assessment year:
| Legal Formation | It must be constituted as a corporation, partnership, trust, or other legal arrangement |
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| Non-Commercial Nature | It must not operate as a general commercial or industrial enterprise |
| Family Ownership | At least 95% of its direct and indirect beneficial interest must be held by members of a defined family |
| Local Management | Its central management and control must be exercised in Hong Kong |
| ESFO Management | It must be managed by an eligible single family office |
| Minimum Asset Size | A critical threshold requirement is that the FIHV must have assets under management (AUM) of at least HKD240 million (approximately USD30.8 million) throughout the year of assessment. This substantial threshold ensures the regime targets genuine family offices of significant scale rather than smaller investment vehicles. |
The ESFO itself must meet specific criteria:
| Its central management and control must be exercised in Hong Kong. | It must provide services to specified family persons with resulting income taxable in Hong Kong. | At least 95% of its beneficial ownership must be held by family members. |
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At least 75% of its assessable profits must derive from services provided to family members. |
The ESFO must incur a minimum annual operating expenditure of HKD2 million (approximately USD257,000) in Hong Kong. |
The ESFO must employ at least two full-time employees in Hong Kong who substantially undertake the investment management or related activities. These employment and expenditure requirements ensure that the tax concession generates genuine economic activity in Hong Kong rather than merely shell operations. |
The concession defines "family" broadly to include:
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A designated individual |
Their spouse or former spouse | Lineal ancestors and descendants of both the individual and their spouse | Siblings of the individual, their spouse, and their lineal ancestors | Spouses of any of these family members |
This definition provides substantial flexibility in accommodating complex family structures while maintaining appropriate boundaries for tax concession purposes.
Scope of Tax Benefits
Qualifying FIHVs enjoy full exemption from profits tax on:
- Qualifying Transactions: These include trading in securities, futures contracts, foreign exchange contracts, deposits, certificates of deposit, exchange-traded commodities, and other specified financial assets.
- Incidental Income: Income incidental to qualifying transactions, such as dividend income or interest income, is also exempt, provided it does not exceed 5% of total income.
The tax concession applies retroactively to the 2022/2023 tax year, enabling both newly established and existing family offices to benefit immediately, provided they meet the qualifying criteria.
Advantages Over Other Tax Regimes
While Hong Kong has historically offered tax incentives for funds and investment vehicles, the FIHV concession stands out for its targeted approach to family office operations. For one thing, the regime is purpose-built for family offices, addressing their unique operational and structural needs. The qualification criteria are also clearly defined and align well with typical family office arrangements – which allows for administrative simplicity. In addition, the regime accommodates diverse investment strategies and asset classes without imposing unnecessary restrictions, which promotes operational flexibility. Finally, the regime’s statutory basis provides a level of predictability and confidence that discretionary regimes often lack (compare the exemptions based system in Singapore, for example).
These features position Hong Kong’s tax concession regime as one of the most attractive globally for family office operations, placing it on par with or ahead of competing jurisdictions.
Regulatory Considerations for Family Offices
Under the SFO, many activities conducted by family offices—particularly discretionary asset management—would be caught as regulated activities. Specifically, Type 9 regulated activity applies to the discretionary management of securities portfolios, which is a core function of many family offices. Consequently, a family office that qualifies for tax concessions under the FIHV regime may still face licensing obligations under the SFO.
The core regulatory challenge facing family offices in Hong Kong, however, stems from a fundamental disconnect between the newly established tax concession regime and the pre-existing Securities and Futures Ordinance (SFO) regulatory framework. The SFO, which governs asset management and securities-related activities in Hong Kong, does not provide specific exemptions tailored to family offices. This creates a potential disconnect between the tax regime’s ambitions to attract family offices and the regulatory framework’s focus on investor protection.
The disconnect arises from several factors:
| Definitional Mismatch | The tax regime's broad definition of "family members" has no equivalent in the regulatory framework. While the tax concession recognises a wide range of family relationships, the SFO's exemptions apply to narrowly defined "related entities" rather than family relationships. |
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| Different Policy Objectives | The tax concession aims to attract family offices to Hong Kong, while the SFO's primary objective is investor protection. These differing policy goals have not been harmonised. |
| Absence of Specific Family Office Provisions | Unlike some other jurisdictions that have created regulatory carve-outs for family offices, Hong Kong's SFO applies the same standards to family offices as to commercial asset managers. |
| Exemption Limitations | The "related entities" exemption in the SFO is significantly narrower than the family concepts in the tax regime, typically applying only to corporate groups with direct ownership relationships, not family relationships. |
| Ambiguous Guidance | Recent regulatory communications have created uncertainty rather than clarity about how the SFO applies to family offices. |
SFC Guidance
The SFC has issued guidance on family offices through various channels. While this demonstrates its awareness of the need for clarity, it appears that these publications have fallen short of providing any definitive framework or regulatory solution to the issue of licensing under the SFO regime.
In its Circular published 7 January 2020, the SFC first clarified licensing obligations for family offices, confirming the activity-based approach and acknowledging that some family office activities might fall outside the scope of regulated activities.
On 21 March 2023, in a “Quick Reference Guide”. the SFC published "Licensing Requirements of Family Offices," stating that "a single-family office may serve non-family members without the need to be licensed"—a position that appears to diverge from the SFC's traditionally conservative interpretation of the exemptions from needing a regulatory licence (where “third party” moneys are essentially being managed). In that guidance, the SFC also referenced FIHV structures where the investors comprise family as well as non-family members. It is unfortunate, however, that the guidance makes no mention of the intra-group exemption, nor does it refer to the SFC’s position as set out in its Licensing Handbook (in relation to managing third party moneys and the need for licensing in that situation). The guidance also , crucially, provides no authoritative definition of concepts such as “family” or “family members”.
The regulator’s position reflects the tension between the government's desire to attract family offices and the SFC's mandate to ensure proper regulatory oversight. The seemingly contradictory positions create uncertainty about the SFC's current interpretation of the regulations as they apply to family offices.
This regulatory ambiguity can create practical challenges for family offices seeking to establish operations in Hong Kong. A family office structure that perfectly satisfies the tax concession criteria may still find itself in violation of the SFO if it conducts regulated activities without proper licensing or valid exemptions. It goes without saying that it is essential for family offices to address regulatory compliance proactively. Under Section 114 of the SFO, conducting regulated activities without the appropriate licenses constitutes a criminal offense, punishable by fines, imprisonment, or civil liabilities. Non-compliance can also compromise access to tax benefits and damage the reputation of the family office.
While the penalties for non-compliance are severe, the focus should be on structuring operations in a way that preserves both tax benefits and regulatory compliance. Given the sophisticated nature of family office activities and the substantial assets involved, careful planning and professional guidance are critical.
Strategic Approaches to Regulatory Compliance
For family offices seeking to operate in Hong Kong, thoughtful structuring and compliance strategies are essential. Key approaches include:
These approaches require careful design to ensure they don't inadvertently trigger other regulatory concerns or compromise tax benefits.
Operational Approaches
Beyond structural considerations, operational aspects can influence regulatory treatment:
| Non-Commercial Characterisation | Establishing operations in a manner that supports arguments against "carrying on a business" in regulated activities – eg, if the ESFO is to also provide asset management services to the FIHV, it may consider whether its activities may be structured such that it avoids being characterized as “carrying on a business”. |
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| Documentation Practices | Developing appropriate documentation that clarifies relationships, services, and activities in a manner aligned with regulatory interpretations. |
| Governance Frameworks | Implementing decision-making processes that support regulatory compliance while maintaining family control. |
| Investment Process Delineation | Clearly separating activities that could be deemed regulated from those that fall outside regulatory scope, eg administrative and accounting tasks vs regulated activity caught under Schedule 5 of the SFO. |
Given these challenges, family offices considering Hong Kong must adopt thoughtful strategies to address regulatory concerns while maintaining access to tax benefits. While definitive solutions require professional advice tailored to specific circumstances, several approaches warrant consideration.
Multi-Family Office Considerations
Multi-family offices (“MFO”) serving multiple unrelated families generally cannot benefit from the regulatory exemptions discussed above. An MFO providing regulated services in Hong Kong will typically require appropriate SFC licensing. However, this regulatory burden is offset by greater flexibility in structuring and potentially broader access to tax exemptions under the unified fund tax exemption regime established by the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019.
Conclusion
Hong Kong's family office tax concession regime represents a significant advancement in the territory's efforts to attract and retain wealth management operations. While the tax benefits are substantial and clearly defined, regulatory considerations remain a critical area requiring careful navigation. The disconnect between the tax incentive framework and existing securities regulations creates challenges that necessitate thoughtful structuring and professional guidance.
For family offices evaluating Hong Kong as a potential base, addressing these regulatory considerations should be a priority in the planning process. With proper structuring and compliance strategies, family offices can successfully leverage Hong Kong's favorable tax environment while mitigating regulatory risks.
For more information, please reach out to our key contacts in the Financial Services Regulation & Funds international team: Gaven Cheong, Charlotte Hill, Racheal Muldoon, Charlie Ring and Jeremy Bell.
For the second part of the series, read more here.
