Hong Kong: Proposed family office tax exemption regime

The Hong Kong government has commenced the formal consultation process on the proposed profits tax exemption for family office business in Hong Kong.

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. The new tax exemption is expected to apply from year of assessment 2022/2023.

Subject to certain conditions, a family-owned investment holding vehicle (FIHV) managed by a single family office in Hong Kong would be exempt from Hong Kong profits tax for its profits derived from certain qualifying transactions and incidental transactions (subject to the 5% trading receipts threshold). The tax exemption may also apply to family-owned special purpose entities set up by an FIHV. An election to benefit from the tax exemption is required and once made, the election is irrevocable.

The proposed tax exemption regime for FIHVs is modeled on the existing unified tax exemption for funds and includes the following key features:

Requirements for an FIHV

• The FIHV must be a corporation, partnership, or trust set up in or outside Hong Kong with the central management and control in Hong Kong.
• The FIHV must be exclusively and beneficially owned by one or more individuals who are “connected persons” of the same family (“single family”). There is a broad definition of “connected persons” that covers multiple generations.
• The FIHV is allowed to set up special purpose entities to hold and administer the specified assets.
• The assets of the FIHV must be managed by a single family office in Hong Kong.
• The aggregate average value of assets under management for a family-owned structure (either a single FIHV or multiple FIHVs) needs to be at least be HKD240 million.
• 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.

Requirements for a single family office

• The single family office must be a private company with central management and control in Hong Kong.
• It must be exclusively and beneficially owned by the single family.
• 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 is to be broad enough to cover the typical types of assets that family offices are investing in.
• For investment in private companies that hold Hong Kong immovable property and short-term assets, the same tests that are currently applicable to funds would be applied to determine whether such investment qualifies for the tax exemption.

Substantial activities requirements

• The core income generating activities in relation to the asset management must be performed in Hong Kong.
• Each FIHV or the single family office (if the FIHV outsources the core income generating activities to the single family office) needs to employ at least two full-time qualifying employees in Hong Kong and incur at least HKD2 million operating expenditure in Hong Kong for carrying out the core income generating activities.

Anti-avoidance provisions

• The number of FIHVs managed by the same single family office cannot exceed 50.
• The modified anti-round tripping provisions are modelled on the existing ones applicable to funds, with two carve-outs—i.e., for (1) Hong Kong resident individuals and (2) Hong Kong resident entities, subject to certain anti-abuse measures including there cannot be any arrangement of shifting taxable income from the single family to an FIHV for obtaining a tax benefit.
   

For more information contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com