On 24 March 2023, the Hong Kong Government (the “Government”) issued the Policy Statement on Developing Family Office Businesses in Hong Kong (“Policy Statement”) [1], to attract global family offices to bring their wealth to Hong Kong. As the Financial Secretary, Mr Paul Chan said, developing family office business will be conducive to pool capital from around the world in Hong Kong, bolster Hong Kong’s financial market as well as asset and wealth management industry. It will also promote the sustainable development of Hong Kong’s financial and professional services, innovation and technology, green and sustainability, arts and culture and philanthropy, creating strong impetus for Hong Kong’s growth[2].
With the Government’s strong efforts to introduce and implement the relevant policies on the wealth and asset management in recent years, Hong Kong had become Asia’s largest cross-border financial centre with US$2.3 trillion wealth in 2021[3]. In the wealth management sector, the rapid growth of family office business in Asia has received much attention over the past few years. According to the Financial Services and the Treasury Bureau report[4], in 2021, there were 27% of the world’s ultra-high-net-worth individuals in Asia. With the increase in number of ultra-high-net-worth individuals, family office business has become a key part of the private wealth management business in Asia. According to statistics, there were over 15,000 ultra-high-net-worth individuals in Hong Kong in the 1st half of 2022, the highest among global cities[5].
In addition, Hong Kong’s uniqueness in bridging the Chinese Mainland and global market, as well as the availability of diversified investment choices are among various advantages that Hong Kong has in attracting family offices to Hong Kong. Last year, Hong Kong Chief Executive Mr John Lee mentioned in his first policy address that family office is a key growth segment of the asset and wealth management industry. He set the target of facilitating no less than 200 family offices to establish or expand their operations in Hong Kong by the end of 2025[6]. The release of the Policy Statement clearly demonstrates the Government’s commitment to developing the family office business, and its determination to develop Hong Kong into the leading global family office hub, which would further enhance Hong Kong’s position as an international financial centre.
What is a family office?
In recent years, more and more ultra-high-net-worth families have chosen to establish family offices to manage their family wealth, with an aim to achieve the objectives of wealth management, inheritance and added value for families. The most obvious difference distinguishing a family office from the asset management in a general sense/a fund is that its service scope includes not only investment portfolio management, but also tax planning, trust and insurance, legal and accounting (and even philanthropy planning, and wealth management consultancy and education-related) services specific to the clients. Furthermore, in addition to providing tailored services based on the family’s specific needs and goals to realize the assets’ long-term development that meets the expectations of the family, a family office is established to further enhance the cohesion among family members, and promote the construction of family traditions to ensure that the intergenerational wealth transfer can be completed in an orderly manner and that the value of family assets can be preserved and increased.
Family offices can be divided into two categories as follows:
- Single family office: It refers to the office independently established by and for a single ultra-high-net-worth family. The single family office controlled by the members of the single family is set up to manage the family wealth by employing professional members; and
- Multifamily office: It refers to the office serving more than one ultra-high-net-worth family. A multifamily office is usually owned by an independent third party, and operates in a mode of concurrently serving multiple families which is able to lower the participation threshold and operating costs of the families, but on the other hand, the families cannot have full ownership and control of their multifamily office. There are also shortcomings on wealth management services performed by the multifamily office, e.g., an inability to solely act in the interests of any single family and a relatively lack of privacy.
Taking a single family office as an example, its basic structure is as follows:
Overview and Analysis of Policy Statement
In the Policy Statement, the Government announced eight key measures to create a conducive and competitive environment in all aspects for global family offices and asset owners to thrive in Hong Kong, which specifically include[7]:
Firstly, Offering tax concessions. Tax treatment is a vitally important factor for a family office to consider when deciding where to manage its investments. Currently, family offices are subject to the general two-tiered profits tax rates scheme applicable to corporations, under which 8.25% profits tax shall be levied on their first HK$2 million of profits generated in or derived from Hong Kong. All profits exceeding HK$2 million are subject to profits tax at the rate of 16.5%. However, the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 (“Bill”)[8] was introduced into the Legislative Council to provide profits tax concessions for Family-owned Investment Holding Vehicles (“FIHVs”) managed by single family offices in Hong Kong. Under the circumstances where certain requirements are satisfied, the FIHVs carrying out such qualifying transactions as set out in the Bill (including but not limited to the securities, shares of, or issued by, the private companies, funds and futures contracts and other general financial assets)(“Qualifying Transactions”) and incidental transactions (subject to a threshold equal to 5% of the total of the FIHV’s trading receipts) are only required to pay their profits tax at a concessionary tax rate (under the current Bill, the concessionary tax rate which will apply in respect of a year of assessment commencing on and after 1 April 2022 is 0%. It turns out that the FIHVs are fully exempt from the profits tax in effect). Given that it is quite common for an FIHV to establish a special purpose entity to hold and manage the FIHV’s assets, the family-owned special purpose entity (“FSPE”) established by the above eligible FIHV is also eligible for the profits tax concession according to the percentage of the FIHV’s beneficial interests in the FSPE. The requirements to be satisfied as mentioned above include:
- The central management and control of the single family office and the FIHV shall be exercised in Hong Kong;
- At all times during the basis period for the year of assessment, at least 95%, in aggregate, of the beneficial interest in the single family office and the FIHV shall be directly or indirectly owned by one or more than one member of the family;
- The single family office shall be a private company;
- The FIHV must be an entity (established or created in or outside Hong Kong) that is not a business undertaking for general commercial or industrial purposes. Entity refers to a body of persons (corporate or unincorporate) or a legal arrangement and includes a corporation, partnership and trust (including a discretionary trust);
- The FIHV shall have at least two full-time employees who carry out the activities concerned and have the qualifications necessary for doing so in Hong Kong; and
- The aggregate value of assets managed by a single family office for the FIHV (or multiple FIHVs) of a family must be at least HK$240 million, and in no event shall the operating expenditure incurred in Hong Kong for carrying out the investment activities concerned be lower than HK$2 million.
However, it is worth noting that while the profits tax concession will be made available for family offices in Hong Kong, the relevant anti-tax avoidance measures have been put in place to prevent tax avoidance by the FIHVs or FSPEs through their investment in private companies holding the immovable property in Hong Kong. For example, if an FIHV or an FSPE invests in a private company that holds, whether directly or indirectly, more than 10% of its assets in immovable property (excluding infrastructure) in Hong Kong (immovable property test), or if the above immovable property test is satisfied, but the holding period test is not satisfied, the profits tax may still be applicable.
We believe that the content of the Bill is quite competitive in terms of attracting more family offices to establish operations in Hong Kong:
- Firstly, as shown in the table below, the thresholds proposed under the Bill regarding the asset under management (“AUM”) and substantial activities requirement are lower than those of Singapore, and there is no minimum local investment requirement in Hong Kong. Therefore, there will be more family offices eligible under the Bill:
|
Tax concessions proposed under the Bill
|
Relevant tax arrangements of Singapore (Note 1)
|
Example
uses 2
|
|
|
Advance approval
|
not required |
required |
|
|
FIHV Structure
|
no restrictions |
no restrictions |
|
|
Asset under management (AUM)
|
HK$240 million |
S$50 million (around HK$280 million) (Note 2) |
|
|
Local investment requirement
|
not required |
10% AUM or S$10 million, whichever is the lower |
|
|
Substantial activities requirement
|
At least 2 qualified fulltime employees in Hong Kong and HK$2 million annual operating expenditure incurred in Hong Kong |
At least 3 investment professionals; S$500,000 (around HK$2.8 million) or S$1 million (around HK$5.6 million) annual business spending subject to AUM |
|
Note 1: Reference to section 13U of Singapore’s Income Tax Act.
Note 2: Separately, under section 13O of Singapore’s Income Tax Act (applicable to resident companies incorporated in Singapore), companies eligible for tax concession must have an AUM of at least S$10 million (around HK$56 million) at the time of application, and undertake to increase its AUM to S$20 million (around HK$112 million) within two years.
Source: LC Paper No. CB(1)111/2023(02)[9]
- Furthermore, although the term “Qualifying Transaction” is defined in the Bill to set a limit on the type of products available for investment, an FIHV can make any investments the family office proposes to make by acquiring the shares in private companies or funds, and the relevant transaction will be eligible for the profits tax concession accordingly. For example, if a family office which intends to invest in certain cryptocurrencies directly acquires the cryptocurrencies, no tax concession will be available under the Bill. However, if relevant cryptocurrencies are held by a private company, the tax concession will be available in respect of the transaction conducted by an FIHV to acquire the shares in such private company where such transaction satisfies the requirements under the Bill. Therefore, from a practical point of view, the Bill provides great freedom for family offices to make their selections of investment products.
Secondly, introducing a new capital investment entrant scheme. With a view to further enriching the talent pool and attracting more new capital to Hong Kong, the Government will relaunch the “Capital Investor Entrant Scheme” (the “Scheme”), which was previously suspended in 2015. An applicant shall make investments at a certain amount in the local market, to qualify himself and his spouse and unmarried dependent children to reside and seek personal development in Hong Kong. Details of the Scheme are expected to be announced within this year[10]. The current proposed scope of investment includes certain investments commonly seen in family offices’ investment portfolios, e.g., stocks listed in Hong Kong; bonds issued or fully guaranteed by Hong Kong listed companies, the Government, or entities wholly or partially owned by the Government; subordinated bonds issued by authorized institutions; and eligible collective investment schemes (including investment-linked insurance schemes).
We expect that the application qualifications and relevant details of implementation of the Scheme will be basically the same as those of the original scheme, including: Firstly, in terms of application qualifications, an applicant shall satisfy the following requirements: (1) being aged 18 or above when applying for entry; (2) having no adverse record both in Hong Kong and country/region of residence; and (3) being able to demonstrate that he is capable of supporting and accommodating himself and his dependants on his own without relying on any return on the permissible investment assets, employment or public assistance in Hong Kong; Secondly, in terms of scope of investment, the real estate will continue to be excluded to prevent excessive fluctuations in property prices; Thirdly, in terms of the investment period, it is expected that upon satisfying the investment requirements and normally residing in Hong Kong for seven consecutive years, an investor and his family members will be qualified to apply for the status of Hong Kong permanent resident. Meanwhile, we also expect that there will be certain changes to the Scheme, e.g., the investment threshold may be raised above HK$10 million (the investment threshold of the original scheme was HK$6.5 million, but was subsequently raised to HK$10 million on 14 October 2010), though we are of the view that the threshold shall not be set too high. At the same time, the Government is also considering whether to include in the Scheme assets denominated in RMB, or to require a certain portion of the capital to be invested in those industries intended to be invested, e.g., to support start-ups and innovation and technology.
Since the Policy Statement was published, there have already been family offices that expressed their welcome to the relaunch of the Scheme and hoped the Government to implement and announce the relevant details of the implementation of the Scheme as soon as possible[11]. It can be seen that the Scheme has proved to be attractive, and will be instrumental in attracting ultra-high-net-worth families to invest in Hong Kong.
Thirdly, providing market facilitation measures to family offices. The Hong Kong Securities and Futures Commission (“SFC”) recently published the Family Offices quick reference guide (“Reference Guide”) [12] specifically catered for family offices, in which the SFC reaffirmed that a single family office is not required to apply for a licence under the Securities and Futures Ordinance if it does not carry on a business of regulated activity in Hong Kong. To eliminate market concerns, the SFC also stressed that it is not the SFC’s intent to extend its regulatory oversight to these single family offices.
Further to issuing the Circular on the Licensing Obligations of Family Offices (the “Circular”)[13] on 7 January 2020 and the family office FAQs (“FAQs”) [14] in the same year, the SFC once again provided a more straightforward explanation on the conditions and circumstances for family offices to apply for licences in the Reference Guide. The Reference Guide not only provided a summary of the Circular and the FAQs, but also from a practical point of view set out the common structures not required to apply for a licence, including: (1) the family office wholly owned by a company which is held by family (and non-family) members to provide asset management services to another company holding family assets in the group and (2) the family office wholly owned by a company which is wholly owned by a family trust to provide asset management services to another company holding assets of family trust in the group. As such, by clarifying the requirements for applying for a license from a practical point of view, and explaining the exempt circumstances in a more straightforward and direct manner as well, the Reference Guide will be instrumental in attracting more attention from family offices and relevant professionals.
In addition, the SFC has also set up a dedicated communication channel to handle the inquiries made by family offices via phone call or email, and answer questions about licensing requirements from potential ultra-high-net-worth families, family offices and other professional groups.
Fourthly, establishing the Hong Kong Academy for Wealth Legacy. The ongoing training, knowledge exchange and other events will also be held for next-generation wealth owners and industry practitioners at the same time. Although the Government has been consistently investing substantial resources in training human resources in the financial industry, including for implementation and funding of the “Pilot Programme to Enhance Talent Training for the Insurance Sector and the Asset and Wealth Management Sector” and the “Financial Industry Recruitment Scheme for Tomorrow”, it seems that establishment of a new academy is a more salient strategy. Besides offering training in relation to wealth management, e.g. capital preservation and inheritance, the academy will also cover topics around arts and culture, green and sustainable investments, and philanthropy, so as to match the multiple new aspirations of global wealth owners. We believe that the Government understands talent cultivation has a significant impact on the sustainable operations of the family offices. In an era of ever-changing investment products, the new academy can provide training to next-generation wealth owners and industry practitioners in a targeted manner and effectively increase the strength of the family office and the family’s human resources, which will be especially attractive to those families who are making plan on inter-generation wealth transfer.
Fifthly, promoting art storage facilities in Hong Kong. The Government is actively planning to establish storage, display and appreciation facilities for art and treasures. Benefiting from its position as an important global aviation hub and its close connection with other cities in the vibrant Greater Bay Area, Hong Kong boasting its thriving art ecosystem is believed to be able to attract more global family offices investing in art to set up in Hong Kong. We believe that the Government’s policies will play a particularly important role in the promotion of goods and culture. For example, since the Government abolished duties and taxes on wine in 2008, Hong Kong’s wine import and export trading has continued to grow rapidly. With wine imports value growing from HK$2.86 billion in 2008 to HK$11.95 billion in 2017 by 318%, Hong Kong has turned into the regional wine trading and distribution hub in Asia[15]. Now that the Government is putting in great efforts in promoting art trading to achieve similar positive results, art trading business is likely to become another business which will achieve a huge growth after wine trading business.
Sixthly, developing Hong Kong into a philanthropic centre. The Government will enhance the processing of application for being recognized as charity and provide further guidance in this regard to facilitate the application process. This policy is helpful for philanthropists to manage and grow their wealth, and channel their resources to the most effective and impactful social initiatives, which will enable Hong Kong to serve as a base for global family offices and philanthropists to deploy charitable capital. We believe that the Government understands the difference distinguishing family offices from general high-net-worth investors is that since family offices need to manage the family’s social capital (e.g. family reputation), philanthropic affair management forms part of their consideration.
Seventhly, further expanding the role of the dedicated FamilyOfficeHK team. In order to attract more family offices to Hong Kong, the Government will inject more resources into expanding the role of the dedicated team (FamilyOfficeHK) established by Invest Hong Kong in June 2021, to provide a more comprehensive “one-stop” service by facilitating the philanthropic initiatives conducted by wealth owners and assisting family members to meet their education needs.
Eighthly, launching a new network of family office service providers. The dedicated team under InvestHK will convene and launch a new Network of Family Office Service Providers, covering private banks, accounting and legal firms, trusts and other professional services firms, which provide comprehensive services to family offices. This helps not only promote the collaboration and communication between the Government and the industry, but also mobilise the industry’s global network to advocate and promote the opportunities in Hong Kong for family offices. More importantly, we believe that the Government recognizes the importance of personal network for family offices. Particularly, this policy will be helpful in alleviating the concerns from some family offices established outside Hong Kong may have for the reason that they are unfamiliar with the business environment and network in Hong Kong.
Conclusion
The Financial Secretary of Hong Kong, Mr. Paul Chan, mentioned in his blog that during the “Wealth for Good in Hong Kong” Summit themed on family office business that was recently organized by the HKSAR Government, quite a number of decision makers of family offices said that they were preparing or even had decided to establish family offices in Hong Kong[16]. In fact, as an international financial centre, Hong Kong is characterized by a diversified capital market, top-level financial infrastructure, a reliable legal system and regulatory system, and free access to funds, and has long been qualified to develop into a hub for family offices. From the policy perspective, Hong Kong has abolished the estate duty since 2006 to effectively attract ultra-high-net-worth individuals to bring their wealth to Hong Kong. With the introduction of the Policy Statement and the Bill, we can see that various government departments and regulatory agencies (e.g. the SFC, Inland Revenue Department, Immigration Department and InvestHK) have been pulled together to collaboratively provide more convenience and support to family offices. From now on, family offices establishing operations in Hong Kong can not only enjoy tax concessions, but also enable family members to obtain the residency and local training and education opportunities. These factors will further strengthen and enhance Hong Kong’s position as a family office hub, and promote the development of Hong Kong as a global wealth management centre. Therefore, we expect that with more family offices to establish in Hong Kong, a huge amount of capital will flow into Hong Kong to provide an impetus to the capital market, M&A, fund and trust business, and estate and charity industries, and further stimulate the overall economic vitality of Hong Kong!
Any reference to “Hong Kong” or “Hong Kong SAR” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
Reference
[1] Policy Statement on Developing Family Office Businesses in Hong Kong: https://gia.info.gov.hk/general/202303/24/P2023032300717_415645_1_1679627481405.pdf
[2] Government issues Policy Statement on Developing Family Office Businesses in Hong Kong - Press Release: https://www.info.gov.hk/gia/general/202303/24/P2023032300717.htm?fontSize=1
[3] Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022, LC Paper No. CB(1)111/2023(02): https://www.legco.gov.hk/yr2022/english/bc/bc07/papers/bc0720230214cb1-111-2-e.pdf
[4] Legislative Council Brief: https://www.legco.gov.hk/yr2022/english/brief/asst3182c_20221207-e.pdf
[5] Legislative Council Brief [see endnote 3]
[6] Policy Statement on Developing Family Office Businesses in Hong Kong [see endnote 1]
[7] Same as above [see endnote 1]
[8] Inland Revenue (Amendment) (Tax Concession for Family-owned Investment Holding Vehicles) Bill 2022: https://www.legco.gov.hk/yr2022/english/bills/b202212091.pdf
[9] Legislative Council Brief [see endnote 3]
[10] The 2023-2024 Budget, Budget Speech: https://www.budget.gov.hk/2023/eng/budget13.html
[11] Raffles Family Office hopes the Hong Kong Government to publish the details of Capital Investor Entrant Scheme as soon as possible, on.cc: https://hk.on.cc/hk/bkn/cnt/finance/20230324/bkn-20230324191523570-0324_00842_001.html
[12] Family Offices quick reference guide: https://www.sfc.hk/en/Regulatory-functions/Intermediaries/Licensing/Quick-licensing-guide/Family-Offices
[13] Circular on the licensing obligations of family offices: https://apps.sfc.hk/edistributionWeb/api/circular/openFile?lang=EN&refNo=20EC1
[14] Family Office FAQs: https://www.sfc.hk/en/faqs/intermediaries/licensing/Family-Offices
[15] InvestHK, Hong Kong: Asia’s Wine Hub: https://www.investhk.gov.hk/sites/default/files/2018.10-wine-en_0.pdf
[16] Blog: Wealth for Good in Hong Kong: https://www.fso.gov.hk/eng/blog/blog20230326.htm
