New tax concessionary regime for family-owned investment holding vehicles managed by single family offices in Hong Kong
On 10 May 2023, the Legislative Council passed the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 (as amended) (“Bill”), which introduces a new tax concessionary regime for eligible family-owned investment holding vehicles (“FIHVs”) managed by single family offices (“SFOs”) in Hong Kong.
The Hong Kong government has announced a series of policy measures to draw family offices into the city with a view to strengthening its position as an international asset and wealth management centre and fostering the city as Asia’s premier family office hub. The new tax concessionary regime is one of the policy measures for eligible FIHVs managed by SFOs in Hong Kong.
At present, all funds operating in Hong Kong can enjoy profits tax exemption on certain transactions subject to meeting specified conditions under the unified tax exemption regime for funds under sections 20AM to 20AY of the Inland Revenue Ordinance (Cap. 112) (“IRO”). However, some FIHVs may not be able to enjoy such tax exemption because they do not meet the definition of “fund” within the meaning thereof. The new regime will apply a similar concessionary tax treatment currently enjoyed by funds to FIHVs, so that the assessable profits of FIHVs arising from qualifying transactions and incidental transactions would be eligible for profits tax exemption.
Profits tax concessions will apply retrospectively to the year of assessment commencing on or after 1 April 2022. FIHVs can then elect for profits tax concession through a formal election in writing. The Bill will take effect upon publication in the gazette on 19 May 2023.
We summarise below key provisions of the new tax concessionary regime for FIHVs.
Requirements for FIHVs
To take advantage of the 0% concessionary profits tax rate for its assessable profits, an FIHV must meet the following conditions:
The FIHV must be an “entity” (established or created in or outside Hong Kong) that is not a business undertaking for general commercial or industrial purposes.
“Entity” is defined as a body of persons (corporate or unincorporate) or a legal arrangement and includes a corporation, partnership and trust (including a discretionary trust).
At all times during the basis period for the year of assessment, the FIHV must relate to one or more than one member of a single family and fulfil the ownership requirements as follows.
Except where a charitable entity (i.e. a charitable institution or trust of a public character that is exempt from tax under section 88 of the IRO) is involved, one or more than one member of the family must be directly or indirectly holding at least 95% of the beneficial interest in the FIHV. However, it is permissible for a charitable entity to hold up to 25% of beneficial interest in the FIHV as long as (i) at least 75% of the beneficial interest is held by family members; and (ii) no more than 5% of the beneficial interest is held by unrelated person(s). An “unrelated person” in respect of a particular family means (a) an entity (excluding a charitable entity) in which no member of the family has a direct or indirect beneficial interest; or (b) a natural person who is not a member of the family.
In brief, members of a single family include (whether alive or deceased) (i) the member concerned who must be a natural person; (ii) his or her spouse; (iii) their lineal ancestors; (iv) siblings of the member concerned, his or her spouse and their lineal ancestors; (v) lineal descendants of the member concerned and the aforementioned siblings (including adopted children, stepchildren and children born out of wedlock); and (vi) a spouse of the aforementioned siblings and lineal descendants.
- Normal management or control
The FIHV must, at all times during the basis period for the year of assessment, be normally managed or controlled in Hong Kong. Such requirement deviates from the original proposed requirement of “central management and control” and it now offers more flexibility to overseas families who can opt for engaging adequate professionals to manage the investment activities in Hong Kong while those in control can remain overseas.
The FIHV must be managed by an eligible SFO. To qualify as an eligible SFO, the SFO must (i) be a private company (incorporated in or outside Hong Kong) which is normally managed or controlled in Hong Kong; (ii) have at least 95% of its beneficial interest being held (directly or indirectly), in aggregate, by one or more members of the family (except where a charitable entity is involved); (iii) provide services to specified persons of the family during the basis period for the year of assessment and the fees for the provision of those services are chargeable to Hong Kong profits tax; and (iv) fulfil the safe harbour rule whereby at least 75% of the eligible SFO’s assessable profits are derived from the services provided to “specified persons” of the family. A “specified person” in this context means (a) an FIHV that is related to the family; (b) a family-owned special purpose entity (“FSPE”) in which the FIHV has a (direct or indirect) beneficial interest; (c) an interposed FSPE of the FIHV; and (d) a member of the family. The maximum number of FIHVs managed by the same eligible SFO that can benefit from the new regime is limited to 50.
Additionally, the aggregate value of specified assets under Schedule 16C to the IRO (such as securities, shares, stocks, debentures, futures contracts, deposits, exchange-traded commodities, foreign currencies, OTC derivate products, etc.) managed by an eligible SFO for the FIHV(s) of a family must be at least HK$240 million. This corresponds to a common definition of ultra-high-net-worth individual, namely, people with a net worth of at least US$30 million in investable assets.
When determining whether this minimum asset threshold is met, the aggregate amount of the net asset value of the specified assets of each relevant FIHV managed by the eligible SFO (“Aggregate NAV”) at the end of the FIHV’s basis period for the year of assessment (“subject year”) will be taken into consideration. Notwithstanding the Aggregate NAV falling short of HK$240 million for a particular subject year, the threshold can still be met if the Aggregate NAV is at least HK$240 million: (i) at the end of the FIHV’s basis period for the year of assessment immediately preceding the subject year (“1st preceding year”); or (ii) at the end of the FIHV’s basis period for the year of assessment immediately preceding the 1st preceding year.
- Substantial activities
In line with the prevailing international tax standards of economic substance, the FIHV must carry out its investments activities in Hong Kong, including (i) conducting research and advising on any potential investments to be made by the FIHV; (ii) acquiring, holding, managing or disposing of property for the FIHV; and (iii) establishing or administering an FSPE for holding and administering one or more underlying investments of the FIHV.
The new regime also imposes an adequacy test which requires the FIHV to (i) have not less than two full-time employees in Hong Kong to carry out the investment activities and possess the necessary qualifications for doing so; and (ii) incur not less than HK$2 million annual operating expenditure in Hong Kong for carrying out the investment activities.
Outsourcing investment activities to an eligible SFO would not automatically disqualify a FIHV or FSPE from tax concession as long as the use of outsourcing is not for circumventing the substantial activities requirement.
Qualifying transactions and incidental transactions
Under the new regime, only the assessable profits of FIHVs and FSPEs arising from qualifying transactions and incidental transactions would be eligible for profits tax concession. Qualifying transactions refer to transactions in specified assets and must be carried out in Hong Kong by or through an eligible SFO of the relevant family, or arranged in Hong Kong by the eligible SFO. Incidental transactions are those that are incidental to the carrying out of qualifying transactions, subject to a 5% threshold.
The new regime for FIHVs contain similar anti-avoidance provisions under the unified tax exemption regime for funds but some provisions have been modified to accommodate common diverse holding structures of FIHVs and family office arrangement. For instance, anti-round tripping provisions under the new regime for FIHVs will not apply to: (i) resident individuals; and (ii) certain resident non-individual entities (i.e. an eligible SFO of the relevant family and an entity that fulfils certain anti-abuse conditions).
Anti-avoidance provisions are also put into place to prevent tax abuse. If either (i) the main purpose, or one of the main purposes of an FIHV or FSPE in entering into an arrangement, or (ii) the main purpose, or one of the main purposes of a person making a transfer of any asset or business to the FIHV or FSPE is to obtain a tax benefit, the profits tax concession will not apply. However, for a transfer of assets or business to the FIHV or FSPE, the profits tax concession will still apply if it can be demonstrated that the transfer was carried out on an arm’s length basis and the transferor is chargeable to tax in respect of the profits arising from the transfer.
The new regime embodies the government’s commitment to enhance the city’s tax competitiveness for family offices and to foster Hong Kong as a leading family office hub in Asia. With more family offices being expected to set foot in the city, we anticipate more opportunities for financial and other professional services. Family offices in Hong Kong, investment managers and advisers should take note of the new regime for FIHVs and consider if they can take advantage of the new opportunities and profits tax concessions.
Pan Tsang and Juno Guo
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.