A guide to establishing a single-family office in Asia: Hong Kong
If you are interested in incorporating a family office or looking for an all-around jurisdiction to base the family office, this guide will provide you some insight of the benefits of establishing a single-family office in Hong Kong and why it is a well-placed financial centre.
According to Credit Suisse’s Global Wealth Report 2022, there were over 84,000 individuals in the world with wealth exceeding USD100million at the end of 2021. 7,070 of these people were worth more than USD500million. In total there were more than 264,000 individuals that could be defined as ‘ultra-high net worth’ (UHNW) – i.e. those whose net worth was over USD50million.
What is surprising about these figures is that even during the pandemic in 2021, more than 46,000 individuals ascended to the ranks of the UHNWs.
At this moment, the world is still tackling rising inflation while the Russia/ Ukraine war has no end in sight. Worldwide recession fears grow every day. While these global developments may well keep wealth creation in check in the near term, Credit Suisse still forecasts the UHNW population to reach 385,000 by 2026 and UHNWIs in the Asia-Pacific region are expected to almost double.
Given the large amount of wealth to be invested, UHNWIs tend to need more dedicated support to maintain and grow that wealth. This is where single or multi-family offices can provide fully tailored and dedicated support that private banks may not necessarily be able to provide.
The functions of a family office
The main functions of a family office are investment and financial management services; succession planning; legal, tax and family governance services. In addition, support is also offered relating to the management of any philanthropic activities as well as overall administrative or ‘concierge’ services.
In determining where to establish the family office, the UHNW client typically chooses a location that is close to where they reside. Prerequisites tend to be ease of access to various investment opportunities, efficient and sophisticated financial services as well as a legal and (ideally low) tax system that is supportive of family offices and wealth management in general. A strong talent pool of investment, legal and tax professionals available to insource such services will also be desirable.
Against this backdrop, it is interesting to see how jurisdictions vie for the attention of UHNW families looking to set up their very first office or for existing European and US family offices seeking to branch out to Asia or the Middle East. Hong Kong, Singapore, and the UAE have all created strong regulatory frameworks and in the case of Singapore and Hong Kong (coming soon) have also implemented tax incentives to attract family offices to establish operations within their borders.
In this guide, we will describe the attractiveness of Hong Kong and the latest efforts by its government to make itself the preferred choice.
Why choose Hong Kong
Hong Kong is probably the most mature and sophisticated financial centre in Asia, it has several advantages to establishing a family office and we will start with the most important one – China.
Hong Kong is part of Mainland China and as such, has excellent ties to it allowing Hong Kong to be a two-way gateway, either as a gateway for Mainland Chinese firms seeking foreign capital or for Mainland Chinese investors looking for investment opportunities abroad. At the same time, it is also a gateway for foreign investors to find investment or business opportunities in China.
The development of the Greater Bay Area (GBA) with its financial de-regulation initiatives and closer cooperation to create a large single market will only further enable those investors based in Hong Kong to have easier access to deals and opportunities other than bankable assets.
With the Covid restrictions in Hong Kong and Mainland China now ending, as well as indications from China to allow more companies to list on the Hong Kong Stock Exchange, family offices can easily exit their venture capital or private equity investments through initial public offerings (IPOs).
As a mature financial centre, Hong Kong has a deep pool of skilled investment management, legal and tax professionals (both local and expat) from whom a family office could retain services. UHNW families with diaspora in Australia, Canada, the UK, and the USA that need to deal with legal and tax issues associated with those countries are fully supported because a diverse group of professionals is readily available in the city.
Homegrown Hong Kong family offices and foreign family offices looking for access to Mainland China have historically been operating in Hong Kong for its stable legal and tax environment and benign territorial tax system. Under this tax system, capital gains and foreign-sourced dividends were not taxable, and the tax rate is relatively low even if taxable. Similarly, the low personal income tax rates also attract expatriate talents. However, there was still a ‘grey area’ on what constitutes a capital gain and a trade, both of which profits would be subject to tax.
Seeing the success of family office tax exemption schemes under the Singapore Income Tax Act (Sections 13O and 13U), Hong Kong has realised that it needs to create tax certainty for single family offices (SFOs) and introduced the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 last December.
The published draft bill will exempt the qualifying income of a Family-owned Investment Holding Vehicle (FIHV). This legislation is expected to pass before the end of Q1 this year, providing tax certainty for SFOs.
Basically, gains from trading of almost all types of bankable assets (“qualifying transactions”) will not be subject to Hong Kong Profits Tax if a few key conditions are fulfilled. The conditions are considered easy to fulfil by SFOs and are as follows:
- The single-family office is only offering services to one family
- Both the SFO and the FIHV - which owns the assets – must be 95% or more beneficially owned by the family
- Both the SFO vehicle and the FIHV(s) must be centrally managed and controlled in Hong Kong (these vehicles need not be incorporated in Hong Kong)
- The (qualifying) assets under management must exceed HKD240million
- For each FIHV that the family office manages, it must employ at least two qualifying investment professionals (can both be family members) and have a minimum annual operating expenditure of HKD2million
- Asset holding vehicles held by a FIHV also enjoy this tax exemption subject to the above conditions
It is important to note that SFOs do not typically provide investment advice or asset management services to third parties, so there is no need to obtain any regulatory approval from the Securities & Futures Commission of Hong Kong (SFC) for its operation in Hong Kong. There is no special application/ registration needed to apply for this FIHV tax exemption either.
The Hong Kong government aims to attract more family offices to strengthen its position as a top-spot asset management hub in Asia. To enhance the momentum of allowing more business and investment opportunities from these affluent family offices, FamilyOfficeHK, a subsidiary of the Financial Services and the Treasury Bureau, invested in a team of specialists based in several overseas locations to support interested UHNW families in bringing their family office to the city.
How can Equiom support your private wealth needs in Asia?
With well-established offices in Hong Kong, Singapore and the UAE, and 45 years’ experience as a leading provider of asset protection and succession planning services, Equiom is ideally placed to help support UHNWIs and their families set up in Asia.
If you would like to find out more about how Equiom Hong Kong can help you meet your own specific needs, please contact Joe Cheung or James Ho.
Get in touch
If you have any questions, or would like to learn more about taking the next steps with Equiom, please select one of the options below.Choose a location and contact the team Use our website form