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Hong Kong proposes family office tax concession regime

Overview


Following the announcement by the Financial Secretary in Hong Kong’s 2022/23 Budget in February 2022, the HKSAR Government has recently launched a consultation on a proposal to provide tax concession for family-owned investment holding vehicles (FIHVs) managed by single family offices (SFOs) in Hong Kong.

The proposed tax concession aims at attracting family offices to establish a presence in Hong Kong and providing tax certainty to investment holding vehicles owned by ultra-high-net-worth individuals and their family members. The consultation will end on 8 April 2022.



Particulars


Subject to meeting certain proposed conditions relating to the FIHV and the SFO, an FIHV would be exempt from Hong Kong profits tax on its profits derived from qualifying transactions and incidental transactions (the latter being subject to a 5% threshold).

Proposed conditions for an FIHV


1. The FIHV must be a corporation, partnership or trust which is incorporated, registered or established in or outside Hong Kong, with its central management and control (CMC) exercised in Hong Kong;

2. 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) directly or indirectly. This requirement shall be stipulated in the articles of association or constitutive documents of the FIHV;

3. The assets of the FIHV must be managed by an SFO in Hong Kong;

4. The 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; and

5. The assets under management (AUM) in a family-owned structure (i.e. either a single FIHV or multiple FIHVs managed by the same SFO in Hong Kong) shall be at least HK$240 million based on the aggregate yearly / three-year average value of the specified assets.


Proposed conditions for an SFO


1. It must be a private company incorporated in or outside Hong Kong, with its CMC exercised in Hong Kong;


2. It must be exclusively and beneficially owned directly or indirectly by the Single Family holding the FIHV; and

3. It must not provide investment management services to entities other than the FIHV(s) exclusively and beneficially owned by the Single Family.


Qualifying transactions


Subject to meeting the above conditions, the qualifying transactions and incidental transactions (the latter being subject to a 5% threshold) of an FIHV would be exempt from Hong Kong profits tax, provided that the qualifying transactions are carried out in Hong Kong by or through an SFO, or arranged in Hong Kong by the SFO.

According to the consultation paper, qualifying transactions refer to transactions in specified assets under Schedule 16C2 to the Inland Revenue Ordinance (IRO), i.e. the same classes of specified assets under the unified tax exemption regime for funds (UTE). In line with the tax treatment under the UTE, an FIHV is allowed to establish family-owned special purpose entities (SPE) to hold and administer the specified assets. Such SPEs would also be exempt from Hong Kong profits tax if the FIHV is eligible for the proposed tax concession.

To ensure effective ongoing monitoring and enforcement of the proposed tax concession, the maximum number of FIHVs which are managed by the same SFO and will benefit from the proposed tax concession shall not exceed 50. An irrevocable election is required to be made by the FIHV in order to enjoy the proposed tax concession.

Substantial activities requirements

In compliance with the latest international tax standards, it is proposed in the consultation paper that the below substantial activities requirements are required to be met in order for the tax exemption to apply:-


1. each FIHV or SFO (under an outsourcing arrangement with the FIHV) should have an adequate number of qualified full-time employees – not less than two employees in Hong Kong who have qualification to carry out the required activities; and

2. not less than HK$2 million local operating expenses incurred in Hong Kong for the year of assessment.


The above requirements are also subject to the ‘adequacy’ test, which means that the substance of the SFO should commensurate with the AUM that it manages.


Anti-avoidance provisions

Anti-avoidance provisions, which are modelled on the existing ‘deeming’ provisions under the UTE regime, will be introduced.


Having said that, two carve-outs from the deeming provisions are proposed, namely (i) Hong Kong resident individuals; and (ii) Hong Kong resident entities that are passive investment holding vehicles exclusively and beneficially owned by the Single Family, or an SFO exclusively and beneficially owned by the Single Family.


The legislative timeline

Subject to the legislative process, the proposed tax concession will take effect from the year of assessment commencing on 1 April 2022.



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