Executive summary

On 8 March 2022, Hong Kong published a consultation proposal to introduce a tax concession regime (the proposed regime) for family-owned investment holding vehicles (FIHVs) managed by single-family offices (SFOs) in Hong Kong. It is anticipated that the proposed regime will apply retrospectively to any financial year ending on or after 1 April 2022.

This Alert summarizes the key provisions of the proposed regime.

Detailed discussion

Under the proposed regime, an FIHV would be exempted from profits tax in respect of its taxable profits earned from qualifying transactions¹ carried out or arranged by an SFO in Hong Kong (including profits earned incidental to the qualifying transactions, subject to the 5% threshold).² The proposed regime would also cover special purpose entities (SPEs) established by a FIHV that hold and administer the specified assets.

FIHV requirements

A qualifying FIHV must fulfill the following conditions:

• Must be a corporation, partnership, or trust, which is incorporated, registered or established in or outside Hong Kong
• All the issued shares or interests of the FIHV must be exclusively and beneficially owned by one or more individuals who are "connected persons" of the same family (Single Family)³ directly or indirectly
• The assets of the FIHV must be managed by an SFO in Hong Kong
• The central management and control (CMC)⁴ of the FIHV must be exercised in Hong Kong
• 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

SFO requirements

A qualifying SFO must satisfy the following requirements:

• Must be a private company (incorporated in or outside Hong Kong) exercising CMC in Hong Kong
• Must be exclusively and beneficially owned directly or indirectly by the Single Family holding the FIHV(s)
• Must not provide investment management services to entities other than the FIHV(s) exclusively and beneficially owned by the Single Family

Minimum threshold on the assets under management

The minimum asset threshold requires that the aggregate average value of the specified assets be at least HK$240 million (US$30 million) in each of the following family-owned structure:

• A single FIHV which is managed by an SFO in Hong Kong; or
• Multiple FIHVs which are exclusively and beneficially owned by the Single Family directly or indirectly and managed by the same SFO in Hong Kong.

Substantial activities requirements for FIHVs

The FIHV should have an adequate number of full-time qualified employees and incur an adequate amount of operating expenditure for carrying out the core income generating activities (CIGAs)⁵ including:

• Employing not less than two full-time employees in Hong Kong who carry out the activities concerned and have the qualifications necessary for doing so
• Incurring not less than HK$2 million (US$260k) of operating expenditure in Hong Kong for carrying out the activities concerned

Outsourcing of CIGAs by the FIHV to the SFO is permitted, provided that the use of outsourcing is not for circumventing the substantial activities requirement.

Implications

The consultation proposal is a welcome step towards development of Hong Kong as a family office hub. The proposal provides only a high-level summary of the proposed regime. After the public consultation on the proposed regime ends on 8 April 2022, the relevant detailed legislative provisions are expected to be provided in a bill that would be introduced later.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

• David Chan | david.chan@hk.ey.com
• Paul Ho, Financial Services | paul.ho@hk.ey.com

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

• Charlotte Wong | charlotte.wong1@ey.com
• Rex Lo | rex.lo1@ey.com

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

• Chris Finnerty | chris.finnerty1@ey.com
• Gagan Malik | gagan.malik2@ey.com
• Bee-Khun Yap | bee-khun.yap@ey.com
• Dhara Sampat | dhara.sampat2@ey.com

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

• Pongpat Kitsanayothin | pongpat.kitsanayothin@ey.com

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ENDNOTES

¹ Qualifying transactions refer to transactions in assets currently specified in Schedule 16C to the Inland Revenue Ordinance for the purposes of the unified tax exemption regime for funds (specified assets), including securities, shares, stocks, debentures, loan stocks, funds, bonds, or notes of, or issued by, a private company, futures contracts, foreign exchange contracts, deposits other than those made by way of a money-lending business, bank deposits, certificates of deposit, exchange-traded commodities, foreign currencies, over-the-counter derivative products and an investee company's shares co-invested by a partner fund and Innovation and Technology Venture Fund Corporation under the Innovation and Technology Venture Scheme).

² Profits from investments in certain private companies (whether incorporated overseas or in Hong Kong) by FIHVs or SPEs will not be exempted if they fail the three tests currently applicable to funds under the unified tax exemption regime, namely: (1) immovable property test; (2) holding period test; and (3) control and short-term asset test. See EY Global Tax Alert, Hong Kong proposes to remove ring-fencing features of current exemption regime for privately-offered funds, dated 18 December 2018. Besides, the consultation proposal indicates that no more than 50 FIHVs managed by the same SFO will be eligible for the proposed regime.

³ A single family is widely defined to cover one or more individuals who are "connected persons." In relation to an individual, a "connected person" would include:

• Grandparent, parent, sibling, lineal descendant of the individual, as well as spouse of the descendant
• Spouse of the individual; grandparent, parent, sibling of the individual's spouse, as well as the spouse and child of the sibling
• Spouse and child of the individual's sibling, as well as that child's spouse
• Sibling of the individual's parent, as well as their spouse and child, and that child's spouse

Child includes the natural child, out-of-wedlock child, adopted child or stepchild of the individual or the individual's spouse or former spouse.

⁴ CMC refers to the highest level of control of the business of a company or an entity. In general, if the CMC of a company is exercised by the directors in board meetings or by the partners in partners meetings, the relevant locality is where those meetings are held.

⁵ CIGAs refer to the management of assets of an FIHV which includes: (1) researching and advising on potential investments to be made for the FIHV; (2) acquiring, holding, managing and disposing of investment for the FIHV; (3) establishment or administration of an SPE for the purpose of holding and administering one or more underlying investments; (4) leasing premises; and (5) entering into contracts, including contracts of employment and contracts for the provision of services.