Tax Concessions for Family Offices in Hong Kong

The Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023.

Summary

The Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023 (Ordinance) came into operation on 19 May 2023 and provides tax concessions for family-owned investment holding vehicles (FIHVs) managed by single-family offices (SFOs) in Hong Kong. The new regime provides tax certainty to high-net-worth individuals and families and encourages family offices to establish a presence in Hong Kong, enhancing Hong Kong’s position as a prime wealth management hub.

Eligibility

The Ordinance exempts eligible FIHVs and eligible special purpose entities (FSPEs) from profits tax in relation to assessable profits derived from qualifying transactions and incidental transactions, subject to a 5% threshold, carried out by eligible SFOs in Hong Kong.  

Conditions for the tax exemption to apply are set out below. 

FIHVs

An entity (defined in the Ordinance as a body of persons (corporate or unincorporate) or a legal arrangement), whether established in or outside Hong Kong, will be considered an eligible FIHV for a year of assessment if:

• its normal management and control is exercised in Hong Kong;
• at least 95% of its beneficial interest is held by one or more members of a family (or up to 25% of its beneficial interest is held by a section 88-exempt charity, at least 75% of its beneficial interest is held by family members and less than 5% of its aggregate beneficial interest is held by one or more unrelated persons); and
• it is not a business undertaking for general commercial or industrial purposes. 

SFOs

A private company, whether incorporated in or outside Hong Kong, will be considered an eligible SFO for a year of assessment if:

• its normal management and control is exercised in Hong Kong;
• at least 95% of its beneficial interest is held by one or more members of a family (or up to 25% of its beneficial interest is held by a section 88-exempt charity, at least 75% of its beneficial interest is held by family members and less than 5% of its aggregate beneficial interest is held by one or more unrelated persons);
• it provides services to an FIHV, an FSPE in which an FIHV has a beneficial interest in, an interposed FSPE and/or a member of a family (defined in the Ordinance as specified persons) during the basis period and the fees for such services are chargeable to profits tax for that year; and
• at least 75% of its assessable profits are derived from services provided to specified persons of the family.

Extent of beneficial interest of a family member in trust structures 

A specified trust is related to a family if one or more specified beneficiaries under the trust is a member of the family or an entity in which one or more members of the family has a beneficial interest. 

The extent of the beneficial interest of a family member has in a trust is determined by the percentage in value of the trust fund in which the member is interested.

In relation to a specified trust related to a family, if the aggregate percentage in value of the trust fund is at least 95%, family members who are qualified beneficiaries of a trust and those other family members who are entitled to benefit from the trust are taken to have at least 95% in aggregate of the beneficial interest in the trust.

Qualifying and incidental transactions 

Assessable profits of FIHVs and FSPEs from the following transactions will be eligible for tax exemption:

• transactions in Schedule 16C assets, specifically shares, stocks, debentures, loan stocks, funds, bonds or notes, carried out in Hong Kong by or through eligible SFOs; and
• transactions incidental to qualifying transactions, subject to a 5% threshold. 

The aggregate net value of Schedule 16C assets must not be less than HK$240 million. 

FSPEs, in particular, may also benefit from tax exemption for profits from the following transactions:

• transactions in specified securities, specifically shares, stocks, debentures, loan stocks, funds, bonds or notes, of an investee private company or an interposed FSPE;
• transactions in rights, options or interests in specified securities; and
• transactions in certificates of interest or warrants to subscribe for or purchase of specified securities. 

Substantial activities 

The FIHV must have at least two full-time qualified employees in Hong Kong and incur at least HK$2 million of annual expenditure in Hong Kong for its investment activities for the year. 

Advance ruling 

FIHVs and FSPEs may apply to the Commissioner for advance rulings on their eligibility for the tax concession.  

For example, in relation to holding structures involving multiple specified trusts or layers of specified trusts, FIHVs and FSPEs may wish to apply to the Commissioner for advance rulings on the extent of beneficial interest of a family member. Where it is not practicable to apply Schedule 16F or 16G or other deeming provisions to determine the extent of beneficial interest of a family member, the Commissioner may rule that the extent requirement as having been complied with, and one or more family members is taken to have at least 95% in aggregate of the beneficial interest, if the Commissioner is satisfied that it is highly probable that one or more family members will have at least 95% in aggregate of the beneficial interest in the subject entity.

Profits Subject to Profits Tax

Under certain circumstances, profits derived by an FIHV or FSPE from transactions in specified securities of or issued by a private company (the relevant company) may not qualify for the tax exemption and be subject to profits tax. The following tests should be considered to determine whether the FIHV or FSPE will be taxed on its profits from such transactions: 

Immovable property test

If the relevant company:

• holds more than 10% of its assets in immovable property in Hong Kong (or share capital in another private company that holds immovable property in Hong Kong),

the FIHV or FSPE will be taxed on the profits arising from such an investment in the relevant company.

Holding period test

If the relevant company: 

• holds 10% or less of its assets in immovable property (or share capital in another private company that holds immovable property in Hong Kong); but
• the FIHV or FSPE holds the relevant company for more than two years after it is acquired before disposing it (whether or not the FIHV or FSPE has control over the relevant company), 

the FIHV or FSPE will not be taxed on the profits arising from the transaction of the relevant company.

Control test and short-term asset test

If the relevant company: 

• holds 10% or less of its assets in immovable property (or share capital in another private company that holds immovable property in Hong Kong); and
• the FIHV or FSPE disposes of the relevant company less than two years after it is acquired, and if:
  • the FIHV or FSPE has control over the relevant company; or
  • the FIHV or FSPE does not have control over the relevant company, but the aggregate value of the short-term assets held by the relevant company exceeds 50% of the value of the company’s assets,

the FIHV or FSPE will be taxed on the profits arising from the transaction of the relevant company.

In addition, if one of the main purposes of the FIHV or FSPE in entering into an arrangement or of a person transferring assets to an FIHV or FSPE is to obtain a tax benefit, the tax exemption would not apply.  

Conclusion

The tax concessions apply retrospectively for years of assessment commencing on or after 1 April 2022.    

We welcome the changes that the Ordinance brought about.  We regularly work with high-net-worth individuals and families and family offices. Please get in touch if you are interested in discussing any of the above and how we may help.