To heighten the attractiveness for family offices to establish a presence in Hong Kong, the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023 (the “Amendment Ordinance”) came into operation in Hong Kong on 19 May 2023. The Amendment Ordinance provides profits tax concessions for (i) eligible FIHV managed by eligible single-family offices (“SFO”) in Hong Kong and (ii) family-owned special purpose entities (“FSPE”). Profits of the FIHV and FSPE arising from transactions in specified assets (“Qualifying Transactions”) and transactions incidental to the carrying out of Qualifying Transactions (“Incidental Transactions”) will be exempted from profits tax since the assessment year starting 1 April 2022.
Unlike many tax regimes around the world, the new tax concession does not require a pre-approval process or application. A simple self-declaration affirming that the conditions set out under the regime have been met is sufficient to apply for the tax exemption treatment.
Requirements for FIHV
To enjoy the tax concession, an FIHV must satisfy the following conditions:
The FIHV can be a trust, company or partnership (established in or outside Hong Kong) that is not a business undertaking for general commercial or industrial purposes.
The single family must directly or indirectly hold at least 95% of the beneficial interest in the FIHV (this percentage could be reduced to 75% if at least 20% of the remaining is held by a charitable institution that is exempt from tax under section 88 of the Inland Revenue Ordinance).
- Normal management or control
The FIHV must be normally managed or controlled in Hong Kong.
- Management of FIHV
The FIHV must be managed by an eligible SFO and meet the minimum asset threshold of HK$240 million.
- Substantial activities requirement
The FIHV must carry out its core income generating activities in Hong Kong and meet the requirements of (i) employing qualified full-time employees (i.e. at least two full-time employees in Hong Kong who carry out the activities concerned and have the qualifications necessary for doing so) and (ii) incurring operating expenditures (i.e. at least HK$2 million operating expenditure incurred in Hong Kong for carrying out the activities concerned).
To become an eligible SFO, the SFO must:
- be a private company (incorporated in or outside Hong Kong) which is normally managed or controlled in Hong Kong;
- provide services to an FIHV, an FSPE, an interposed FSPE of the FIHV or a member of the family (collectively the “specified persons”) and the fees for the provision of those services are chargeable to tax (i.e. the SFO needs to file tax returns and is subject to profits tax in Hong Kong if it derives any profit from provision of those services);
- have at least 95% of its beneficial interest being held directly or indirectly by members of the family (this percentage could be reduced to 75% if at least 20% of the remaining is held by charitable institution that is exempt from tax under section 88 of the Inland Revenue Ordinance); and
- have at least 75% of its assessable profits deriving from the services provided to specified persons.
The eligible SFO must manage the FIHV by carrying out investment activities including:
- conducting research and advising on any potential investments;
- acquiring, holding, managing or disposing of property; and
- establishing or administering an FSPE for holding and administering one or more underlying investments of the FIHV.
This wide range of activities provides flexibility to accommodate the diverse needs of the family.
Qualifying Transactions and Incidental Transactions
Transactions in the following specified assets constitute the Qualifying Transactions:
- shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company;
- futures contracts;
- foreign exchange contracts under which the parties to the contracts agree to exchange different currencies on a particular date;
- deposits other than those made by way of a money-lending business;
- deposits made with a bank;
- certificates of deposit;
- exchange-traded commodities;
- foreign currencies; and
- over-the-counter derivative products.
An FIHV may enjoy profits tax concession in respect of Qualifying Transactions and Incidental Transactions subject to a 5% threshold.
It is worth noting that Qualifying Transactions of an FIHV must be carried out in Hong Kong by or through an eligible SFO, or arranged in Hong Kong by the eligible SFO. However, the investment does not have to be located in Hong Kong. The SFO may invest worldwide.
It is common for an FIHV to set up FSPEs for holding and administering the FIHV’s assets. Thus, profits tax concessions will be provided at both the FIHV level and the FSPE level to the extent which corresponds to the percentage of beneficial interest of the FIHV in the FSPE.
Examples of a Family Office Structure
Our legal team of the Corporate & Commercial Department can provide practical assistance on matters relating to FIHV and SFO including:
- Setting up FIHV and SFO;
- Advising legal and regulatory issues relating to the establishment, operation and maintenance of FIHV and SFO; and
- Advising on the legal structure of an FIHV.
If you have any enquiries regarding this article and any other questions in relation to the new tax concession regime, our team will be happy to assist you.