The Hong Kong Government has released details of a proposed tax concession for investment profits earned by single family offices managed from Hong Kong provided total assets under management is at least HK$240 million (approx. US$30 million). In this article, we outline the proposal. If you would like more information about the proposed family office tax concession or the possibility of setting up a family office in Hong Kong, please contact one of our private client lawyers.
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SPOTLIGHT ON
FAMILY OFFICES
In his 2022-23 Budget Speech on February 23, 2022, the Financial Secretary announced a proposed tax concession (“Family Office Tax Concession”) for family offices as part of an ongoing initiative to strengthen Hong Kong as an asset management hub. Following consultations in March, 2022, on April 4, 2022, the Legislative Council Panel on Financial Affairs released a discussion paper (“Family Office Tax Concession Paper”).
As proposed in the Family Office Tax Concession Paper, eligible family-owned investment holding vehicles (“FIHVs”) managed by single family offices in Hong Kong (together with special purposes entities set up by such FIHVs) may be exempt from profits tax in respect of assessable profits earned by them from “qualifying transactions” and “incidental transactions”.
Eligibility of FIHVs for Tax Relief
An FIHV may be a corporation, partnership or trust incorporated, registered or established in or outside Hong Kong. However, as proposed, to qualify for tax relief, the FIHV must satisfy a number of conditions.
Ownership of FIHVs
All the issued shares or interests of an FIHV must be exclusively and beneficially owned by one or more individuals who are “connected persons” (e.g. the individual’s spouse, lineal descendants, parents, grandparents, and siblings, as well as child of the individual’s siblings) of the same family (“Single Family”) directly or indirectly.
Management Arrangements
The central management and control of each FIHV must be exercised in Hong Kong.
The assets of each FIHV must be managed by the office of a Single Family (“Single Family Office”) which:
is private company incorporated in or outside Hong Kong but whose central management and control is exercised in Hong Kong;
is exclusively and beneficially owned directly or indirectly by the Single Family holding the FIHV; and
does not provide investment management services to any person other than the FIHV(s) exclusively and beneficially owned by the Single Family.
Tax relief is unavailable where assets are managed by a multi-family office.
Scope of FIHV Business
Each FIHV must only serve as an investment vehicle for holding and administering the assets for the Single Family and must not directly engage in activities for general commercial or industrial purposes.
FIHV Assets Under Management
The aggregate average value of “specified assets” under management of the FIHV in a family-owned structure (either a single FIHV, or multiple FIHVs owned by the Single Family and managed by the same Single Family Office) must be at least HK$240 million. For this purpose, “specified assets” includes securities, futures contracts, exchange traded commodities, foreign exchange contracts, and deposits. “Securities” may include both shares and debentures of private and non-private companies.
Ceiling on Number of FIHVs
In order to benefit from the Family Office Tax Concession, it is proposed that the number of FIHVs, which are managed by the same Single Family Office, must be capped at 50.
Qualifying Transactions
As proposed, an eligible FIHV would enjoy profits tax exemption in respect of profits earned from qualifying transactions and incidental transactions. “Qualifying transactions” are transactions in “specified assets” carried out in Hong Kong by or through a Single Family Office or arranged in Hong Kong by the Single Family Office. “Incidental transactions” are transactions incidental to the carrying out of qualifying transactions. Profits from incidental transactions are eligible for relief to the extent they comprise less than 5% of profits of the FIHV for the year of assessment.
Economic Substance
As a pre-condition to tax relief, each FIHV should employ at least 2 full-time employees in Hong Kong and incur at least HK$2 million operating expenditure each year to carry out investment research, investment management and other core income generating activities (“CIGAs”) in Hong Kong during the basis period for each year of assessment. Where an FIHV outsources CIGAs to the Single Family Office, the Single Family Office must meet these requirements.