Hong Kong is a global hub that offers ultra high net worth families the ability to centralize the administration of trust assets from around the world in a comprehensive and tax friendly private wealth management centre that is open to business from families regardless of family member residency or nationality. If you would like more information on Hong Kong trusts or trustee services, please contact one of our Private Client lawyers.
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A Hong Kong trust is a trust where the governing law of the trust is Hong Kong law. In the case of a typical discretionary family trust, the trust deed will state the proper law of the trust. Commonly, the trustee of a Hong Kong trust will be based in Hong Kong as such a trustee will be familiar with Hong Kong law and will have easier access to Hong Kong legal advice and to the Hong Kong courts should directions or other trust related proceedings be necessary.
Friendly Business Environment
Hong Kong is a global hub which exists to connect different parts of the world together. As such, it is a business focused jurisdiction where neither the legal system nor the trust and related private wealth management ecosystem discriminate based on a family’s residence or place of business.
Though Hong Kong complies in full with global anti-money laundering protocols to combat crime, as a general proposition, Hong Kong welcomes businesses and individuals from all jurisdictions and neither favours nor disfavours business from specific jurisdictions. Hong Kong does not discriminate against businesses or individuals from certain jurisdictions as may be the case with some offshore tax havens.
Confidentiality
Hong Kong offers a discreet trust and related private wealth management regime. There are no government formalities to register a trust. This means that Hong Kong has no requirements to file the trust deed or any trust related documents with any government authority when the trust is established.
At the same time, there are no obligations to make regular filings to maintain the trust. This means that Hong Kong has no requirements for trusts to file annual accounts with any government authority through the life of a trust. However, if a trust is subject to Hong Kong profits tax, it must file an annual profits tax return.
Except in connection with law enforcement activities, the identity of beneficiaries to a Hong Kong trust are private and confidential.
Friendly Tax Regime
Like offshore tax haven jurisdictions, Hong Kong offers a preferential tax regime that often results in no tax liabilities to a trust.
A Hong Kong trust is not a person for the purpose of the Inland Revenue Ordinance and thus, cannot be subject to profits tax.
If the trustee of a Hong Kong trust carries on a business for the trust in Hong Kong, the trustee may be subject to profits tax in respect of the profits arising from that business. However, trustees typically do not carry on a business in their own name as trustee. Instead, they hold companies which carry on the business of the trust.
In this regard, Hong Kong has no taxes on dividends and other distributions from these companies. As a result, a Hong Kong trust will not be subject to profits tax in respect of income flowing upstream from these companies to the trust.
Equally, Hong Kong has no taxes on capital gains. Thus, so long as companies held by a trustee for the trust are held otherwise than for trading purposes (i.e. without the intention that these companies were to be sold when they were bought or established), income from the sale of such companies is likely to be treated as a capital gain exempt from profits tax.
Companies held by a trust, whether a Hong Kong trust or otherwise, may be subject to profits tax if they carry on a business or trade in Hong Kong and they earn (or are deemed to earn) profits arising in or derived from Hong Kong from that business or trade. The rate of tax is 8.25% on the first HK$2mn of profits and thereafter, the rate is 16.5%.
Distributions to beneficiaries generally fall outside the heads of tax in Hong Kong (e.g. profits, salaries and property). As the Hong Kong tax system only imposes taxes on specific heads of tax and has no general income tax, distributions to beneficiaries who might otherwise be subject to Hong Kong tax (e.g. because the beneficiary is resident in Hong Kong) are normally exempt from any tax or withholding in Hong Kong.
Eligible family offices managing trust assets may benefit from tax exemptions under a concessionary tax regime.
Reputation
In contrast to tax haven jurisdictions which have some historical connotations of illicit activities in the shadows, Hong Kong has a well established reputation as an active and robust world leading international business and financial center. There are no adverse reputational risks associated with Hong Kong trusts as there are with offshore tax haven based trusts.
Protection Against Forced Heirship
Under the Trustee Ordinance, a trust which is expressly stated to be governed by Hong Kong law and the trustee of which is a Hong Kong company (or a non-Hong Kong company whose central management and control is in Hong Kong) is protected from forced heirship laws in respect of movable property. This means that the validity of the transfer of movable property into the trust by a person (typically, the settlor) with legal capacity cannot be challenged on the basis of any foreign law relating to inheritance or succession.
Such foreign laws, known as forced heirship laws, might, for example, otherwise require a settlor of a trust to transfer the property to a child or other dependent instead of into the trust so that the dependent receives a minimum proportion of the settlor’s estate. These foreign laws are typically designed to ensure that the individuals designated by these laws as the settlor’s heirs participate to a prescribed degree in the settlor’s estate, thus denying the settlor the freedom to dispose of his assets in the way that he or she chooses.
By refusing to recognize forced heirship laws which might be used to invalidate transfers of property, Hong Kong protects assets placed into a trust from being clawed back under these forced heirship laws by enabling Hong Kong courts to deny recognition of the right of claw back.
Note that the protection under the Trustee Ordinance only extends to movable property. Immovable property (i.e. real estate) falls outside the protection because principles of international law generally recognize that the law of the place where such property is located will govern the validity of its transfer. Thus, for example, if a French settlor places French real estate into a Hong Kong trust, French forced heirship laws can refuse to recognize the transfer of the French property into the trust and the French courts can fully control who owns the property.
Settlor Control Over Trust
A settlor may wish to retain a degree of control over how trust assets are invested and how they are distributed. A Hong Kong trust can offer both.
In the former regard, the Trustee Ordinance provides that a Hong Kong trust is not invalid only because the settlor reserves to himself any or all powers of investment or asset management functions. The inclusion of this provision in the Trustee Ordinance protects the validity of the trust from being challenged on the basis that the trust is a sham because instead of placing assets into the trust, the settlor continues to hold these assets.
In addition to the ability to reserve investment management functions to the settlor, Hong Kong permits the appointment of a protector or enforcer over a trust. The settlor may himself be the protector or enforcer.
An appointment of a protector or enforcer is commonly done in conjunction with a letter or memoranda of wishes in which the settlor sets out how he wishes the trustee to exercise its discretion.
The role of the protector or enforcer is to ensure that the trustee discharges his duties in accordance with the trust deed and, where appropriate, the settlor’s wishes. Some of the more common powers of a protector or enforcer include the power to replace the trustee, the power to appoint new, additional or successor protectors or enforcers, the power to veto the trustee’s exercise of certain rights or the right to receive notice of the trustee’s proposed exercise of certain rights, and the power to approve the trustee’s remuneration.