Hong Kong SAR: Hong Kong SAR’s proposed family office tax concession regime
Lewis Lu and John Timpany of KPMG China discuss Hong Kong SAR’s proposed family office tax concession regime.
On March 8 2022, the Hong Kong SAR government released a consultation paper on the proposed profits tax exemption for family-owned investment holding vehicles (FIHVs) managed by single family offices (SFOs) in Hong Kong SAR. Subject to legislative process, the proposed tax concession is expected to apply for any years of assessment commencing on or after April 1 2022.
The objective of the tax exemption is to provide tax certainty to investment holding vehicles owned by ultra-high-net-worth individuals and their family members, in order to attract family offices to be set up and operated in Hong Kong SAR.
Subject to meeting certain conditions, an FIHV managed by an SFO in Hong Kong SAR would be exempt from Hong Kong SAR profits tax for its profits derived from certain qualifying transactions and incidental transactions (subject to a 5% trading receipts threshold). The tax exemption may also apply to family-owned special purpose entities (SPEs) set up by an FIHV. An irrevocable election is required to be made to enjoy the tax exemption.
The proposed tax exemption regime for FHIVs is modelling on the existing unified tax exemption for funds.
Key features of the proposal
The key features of the regime, as outlined in the government’s proposal, are summarised below.
Key requirements for an FIHV
The FIHV must be a corporation, partnership, or trust set up in or outside Hong Kong SAR with the central management and control (CMC) in Hong Kong SAR;
The FIHV must be exclusively and beneficially owned by one or more individuals who are “connected persons” of the same family (the single family). There is a broad definition of “connected persons” which covers multiple generations;
The FIHV is allowed to set up SPEs to hold and administer the specified assets;
The assets of the FIHV must be managed by an SFO in Hong Kong SAR;
The aggregate average value of assets under management for a family-owned structure (either a single FIHV or multiple FIHVs) should at least be HK$240 million ($31 million); and
The FIHV must only serve as an investment vehicle for holding and administering the assets of the single family and must not directly engage in activities for general commercial or industrial purposes.
Key requirements for an SFO
The SFO must be a private company with its CMC exercised in Hong Kong SAR;
It must be exclusively and beneficially owned by the single family; and
It must not provide investment management services to other FIHVs not owned by the single family.
Qualifying transactions of the FIHV
Although not discussed in detail in the consultation paper, the scope of qualified transactions in specified assets is expected to be similar to that under the existing unified tax exemption for funds, which should be broad enough to cover the typical types of assets that family offices are investing in; and
For investment in private companies that hold Hong Kong SAR immovable property and short-term assets, the same tests that are currently applicable to funds will be applied to determine whether such investment qualifies for the tax exemption.
Substantial activities requirements
The core income generating activities (CIGAs) in relation to the asset management must be performed in Hong Kong SAR; and
Each FIHV or the SFO (if the FIHV outsources the CIGAs to the SFO) should employ at least two full-time qualifying employees in Hong Kong SAR and incur at least HK$2 million operating expenditure in Hong Kong SAR for carrying out the CIGAs.
The number of FIHVs managed by the same SFO cannot exceed 50; and
The modified anti-round tripping provisions are modelled on the existing ones applicable to funds, with two carve-outs: for Hong Kong SAR resident individuals, and for Hong Kong SAR resident entities. This is subject to certain anti-abuse measures, including that there should not be any arrangement of shifting taxable income from the single family to an FIHV for obtaining a tax benefit.
The introduction of the tax exemption regime for FIHVs in Hong Kong SAR is welcomed and represents a positive step forward to further promote Hong Kong SAR as a leading asset and wealth management hub in the region.
KPMG has been actively providing comments and suggestions to the Hong Kong SAR government on the design and key features of the regime. We look forward to the timely implementation of the regime and further guidance by the Hong Kong Inland Revenue Department on the practical interpretation and application of the regime.
Partner, KPMG China
Partner, KPMG China