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Proposed tax concession for family offices in Hong Kong SAR

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Lewis Lu and John Timpany of KPMG China discuss the draft legislation for implementing the concessionary tax regime for family-owned investment holding vehicles managed by a single family office in Hong Kong SAR.

Further to the Hong Kong SAR government’s consultation on the proposed family-owned investment holding vehicles (FIHVs) tax regime in March 2022 (see KPMG’s previous tax alert), the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 (the Bill) was gazetted on December 9 2022 and set out the draft legislation for the regime.

The tax concession

Under the concessionary regime, assessable profits derived by an FIHV from qualifying transactions and incidental transactions (subject to a 5% threshold) will be taxed at a 0% profits tax rate if the specified conditions are met. The tax concession will apply retrospectively from the year of assessment (YOA) 2022/23 upon enactment of the Bill into law.

The key requirements for an FIHV are that:

  • It must be an entity with its central management and control (CMC) exercised in Hong Kong;

  • At least 95% of its beneficial interest is held by one or more members of a family (the broad definition of “a member of the family” can be referred to Appendix 1 of this publication); and

  • It must not be a business undertaking for general commercial or industrial purposes.

The concession extends to cover special purpose vehicles held by an FIHV which are set up solely for holding and administering specified assets (i.e., Schedule 16C assets) and/or investee private companies (i.e., a family-owned special purpose entity, or FSPE).

The key requirements for an eligible single family office (an ESF office) are that:

  • It must be a private company with its CMC exercised in Hong Kong;

  • It must provide services to an FIHV (and its FSPEs and IFSPEs (a special purpose entity that is indirectly held by an FIHV and interposed between an FSPE and an investee private company)) and/or member(s) of the family (specified persons) and the related service fees must be chargeable to Hong Kong profits tax;

  • At least 95% of its beneficial interest is held by one or more members of the relevant family; and

  • It must satisfy the safe harbour rules.

Transactions eligible for the tax exemption

An FIHV may enjoy a tax exemption for profits derived from the following transactions:

  • Transactions in Schedule 16C assets (qualifying transactions); and

  • Transactions incidental to the carrying out of qualifying transactions (incidental transactions), subject to a 5% threshold.

The qualifying transactions must be carried out or arranged in Hong Kong by or through an ESF office.

The tax exemption for an FSPE also covers profits from transactions in:

  • Specified securities of, or issued by, an investee private company or an IFSPE;

  • Rights, options or interests in respect of the specified securities; and

  • Certificates of interest or warrants to subscribe for, or for the purchase of, the specified securities.

If an FIHV or an FSPE has derived assessable profits from both (i) transactions eligible for a tax exemption and (ii) non-qualifying transactions during a YOA, only those assessable profits derived from non-qualifying transactions will be subject to profits tax.

Minimum asset threshold

The aggregate net asset value (NAV) of Schedule 16C assets held by one or multiple relevant FIHVs managed by the ESF office must be not less than HK$240 million (about $31 million) as at the end of the basis period of a YOA.

In computing the aggregate NAV, (i) the NAV of Schedule 16C assets of the FSPEs held by the relevant FIHVs will count and (ii) a maximum of 50 relevant FIHVs that are managed by that office can also be included upon an irrecoverable election.

Substantial activity requirements

During the basis period of a YOA, each FIHV must meet the minimum economic substance requirements and the adequacy test.

For more details on these requirements, as well as other features of the regime – such as exceptions to the tax exemption, anti-round tripping and anti-avoidance provisions, etc. – please refer to KPMG’s publication here.

KPMG observations

KPMG welcomes the adoption of numerous refinements to the FIHV tax regime by the government based on the feedback received during the consultation exercise. However, there are still issues that have not been addressed and that may impact the attractiveness of the regime (detailed discussion on the key features of the regime can be accessed via this link).

It is understood that the FIHV tax regime will be regarded as a preferential tax regime in Hong Kong for the purpose of the specified income exclusion under the revised foreign-sourced income exemption (FSIE) regime. As such, foreign-sourced dividends, equity disposal gains and interest income derived by an FIHV or FSPE, though it may not be tax exempt under the FIHV tax regime, may be excluded from the FSIE regime and continue to be non-taxable.

Given that the draft legislation of the FIHV regime is complex, family offices which currently operate in Hong Kong or plan to be set up in Hong Kong should evaluate how the specified conditions in the regime can be fulfilled and consider whether any changes to the investment holding structure/business models are required.

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