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 (SFO) 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 (SFOs / MFOs) 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 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 and introduced the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 last December. This legislation has become effective on 19 May 2023 with some minor amendments to the original bill.
The new law will exempt the qualifying income of a Family-owned Investment Holding Vehicle (FIHV), providing tax certainty for existing SFOs and families contemplating establishing a SFO in Hong Kong.
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
- This 95% family ownership threshold may be reduced to 75% if the remaining 25% beneficial interest is owned by HK Inland Revenue Ordinance Section 88 tax exempted charities
- Both the SFO vehicle and the FIHV(s) must be normally 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 Hong Kong?
The SFO corporate structure
This would typically take the form of a Hong Kong private limited company. It may also be a foreign entity and registered under Part 16 of the Hong Kong Companies Ordinance. Our services would include the incorporation and subsequent provision of corporate services to this SFO company to include company secretarial services, bookkeeping, pay roll and tax filing services.
As per the requirements in the law, a SFO is required to employ at least two individuals, whether they are family members or non-related professionals. Hong Kong has a deep talent pool, but where the SFO wish to proceed with a visa application for an international talent or a family member, Equiom may guide the client and handle the application processing. We are experienced to handle payroll, mandatory provident fund obligations and local tax filings.
The FIHV holding structure
Under this new tax regime the FIHV can be registered in Hong Kong or overseas, be incorporated as a company, fund, partnership or take the trust form. Equiom has a strong international presence across many of the world’s financial centres, resulting in extensive experience in establishing a broad range of vehicles in various jurisdictions.
Succession planning structure
As part of the SFO structuring, most clients would also take this opportunity to plan for wealth transfer to the next generation. Often the resulting ownership structure will include one or more trusts as this allows for flexibility compared to wills. Equiom has more than 40 years’ experience in assisting clients with the set up and administration of trusts.
Whether you are exploring the benefits of an SFO or FIHV for the first time or are ready to take the next steps in your investment journey, our experienced and multidisciplined team can support all of your needs. Equiom Hong Kong can be your trusted partner. Please contact Joe Cheung or Gianmarco Mizzi to learn more.
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