Single Family Office Tax Concession in Hong Kong
Simple requirements and offers 0% Tax rate for Investment Income
Both overseas and local families can enjoy
Introduction of Single Family Office Legislation in May 2023
The legislative landscape for Single Family Offices (SFOs) in Hong Kong underwent a significant transformation with the passing of the Bill for the concessionary tax regime on 10 May 2023. This enactment not only introduced a new tax regime tailored for SFOs but also established a framework that offers certainty and clarity for investment profits to be exempted from profits tax under specific conditions. This move is a strategic effort by Hong Kong to solidify its status as a premier global hub for family offices and wealth management.
Central to the new Single Family Office Tax Regime is the provision that investment profits will be exempt from profits tax, provided certain conditions are met. This framework is designed to provide a straightforward path for family offices to benefit from the tax concessions without the need for a pre-approval process or extensive application requirements. Instead, a self-declaration that the conditions outlined under the regime have been met is sufficient to apply for the tax exemption treatment. This streamlined approach underscores Hong Kong's commitment to facilitating an efficient and user-friendly tax environment for SFOs, minimizing bureaucratic hurdles and fostering a conducive ecosystem for wealth management activities.
The new tax regime applies retrospectively from the year of assessment 2022/23, allowing SFOs to benefit from the concessions for eligible investment profits earned within that financial year and onwards.
Economic Substance Requirements [Full-time staff and Operating Expenditures in Hong Kong]
A key aspect of the Single Family Office (SFO) tax concession regime in Hong Kong is the emphasis on economic substance requirements and operating expenditures. These criteria are designed to ensure that SFOs and Family-Owned Investment Holding Vehicles (FIHVs) establish a substantial presence in Hong Kong, contributing to the local economy and adhering to global tax compliance standards.
Economic Substance Requirements
The economic substance requirements for SFOs and FIHVs are centered around demonstrating a significant operational presence in Hong Kong. This involves having an adequate number of qualified full-time employees in the city and incurring sufficient operating expenditures for carrying out core income-generating activities (CIGAs). The Inland Revenue Department (IRD) has set minimum thresholds for these criteria, which include having at least two qualified full-time employees and operating expenditures of HKD2 million. These requirements are pivotal in ensuring that SFOs and FIHVs are conducting meaningful economic activities in Hong Kong, rather than merely being paper entities.
The IRD's approach to evaluating economic substance does not rely on a rigid formula but considers the totality of facts and circumstances of each case. This flexible assessment framework allows the IRD to account for the varying scales and complexities of investment activities undertaken by different SFOs and FIHVs. It also accommodates the possibility of outsourcing CIGAs to external service providers, provided that the core activities are still effectively controlled and overseen by the SFO or FIHV.
Operating Expenditures in Hong Kong
Operating expenditures incurred in Hong Kong play a crucial role in meeting the economic substance requirements. These expenditures include office rental, employee salaries, and other expenses associated with conducting the SFO's or FIHV's business activities within the city. The requirement to incur a minimum of HKD2 million in operating expenditures ensures that SFOs and FIHVs are making a tangible economic contribution to Hong Kong's ecosystem. It also reflects the commitment of these entities to maintaining a physical presence and operational base in Hong Kong.
This focus on economic substance and operating expenditures aligns with global efforts to combat tax evasion and ensure that entities claiming tax benefits are engaged in substantive economic activities. For SFOs and FIHVs, adhering to these requirements not only facilitates eligibility for tax concessions but also strengthens Hong Kong's reputation as a transparent and compliant financial hub.
Removing the hurdles for tax concession requirements – More friendly to overseas wealthy family
The landscape for Single Family Offices (SFOs) in Hong Kong saw a significant shift with the introduction of the concessionary tax regime for family-owned investment holding vehicles (FIHVs) managed by eligible single-family offices (ESFOs). This development, as outlined in the legislative amendments proposed by the Hong Kong SAR Government, aims to refine and enhance the city's attractiveness as a global hub for family offices and wealth management.
One of the pivotal changes introduced is the replacement of the "central management and control" requirement with a "normally managed or controlled" criterion. Specifically, it accommodates wealthy families based outside Hong Kong, allowing them to meet the management or control requirements without having to centralize all decision-making processes in Hong Kong. The NMC requirement is a strategic move to make Hong Kong's tax concession regime more accessible to a broader array of family offices, promoting the city as an inclusive and flexible financial hub.
Furthermore, the legislative amendments seek to relax the beneficial interest requirement for Eligible SFOs and FIHVs. Previously, the law mandated that at least 95% of the beneficial interest in an Eligible SFO and FIHV must be held directly or indirectly by family members, with a small allowance for non-family members, including charitable organizations. The revised provisions permit up to 25% of the beneficial interest to be held by one or more charitable entities, thus increasing the portion that can be allocated to non-family members without jeopardizing the eligibility for tax concessions. This adjustment reflects a nuanced understanding of the diverse structures and philanthropic goals that many family offices embody.
The law also addresses complex holding structures involving multiple "specified trusts" by adding provisions that offer flexibility for the Commissioner of Inland Revenue (CIR) to recognize the family members' beneficial interest. This is particularly important for intricate family office setups, ensuring that they can navigate the regulatory landscape without being unduly penalized for their complexity.
Lastly, the amendments clarify that non-qualifying transactions will not taint the tax-exempt status of qualifying transactions. This means that if an FIHV or a family-owned special purpose entity (FSPE) engages in transactions that do not meet the tax exemption criteria, it can still enjoy tax exemptions on its qualifying transactions. This provision ensures that minor deviations from the qualifying criteria do not disproportionately penalize FIHVs or FSPEs, fostering a more forgiving and pragmatic approach to tax concessions.
These legislative amendments mark a significant step forward in Hong Kong's mission to establish itself as a leading destination for family offices. By lowering regulatory hurdles and introducing more flexible criteria, the city is poised to attract a wider range of family offices looking for a conducive environment to manage their wealth.
Latest Advance Ruling cases and IRD’s Guidance – The importance of economic substance in Hong Kong
In a significant development for family offices in Hong Kong, the Inland Revenue Department (IRD) recently announced an Advance Ruling case No. 73, accompanied by updated guidance on tax concessions for family-owned investment holding vehicles (FIHVs). This announcement on 9 February 2024 marks a pivotal moment for Single Family Offices (SFOs) operating within the region, aiming to streamline and clarify the tax concession process.
The advance ruling is the IRD's first on tax concessions for FIHVs, setting a precedent for future applications. It confirmed that the applicants are eligible for tax concessions, meaning their foreign-sourced interest, dividends, or disposal gains will not be considered specified foreign-sourced income under the Foreign-sourced Income Exemption (FSIE) regime. This ruling ensures such incomes will not be chargeable to profits tax, provided the economic substance requirement is met. This is particularly noteworthy as it delineates clear parameters for SFOs to qualify for tax concessions, emphasizing the necessity of meeting the economic substance requirement, which includes maintaining an adequate number of employees in Hong Kong and incurring sufficient operating expenditures within the city for carrying out their core income-generating activities (CIGAs).
Simultaneously, the IRD updated its guidance on several fronts concerning the tax concessions for FIHVs. It clarified the substantial activities requirement, indicating that outsourcing of CIGAs to external service providers is permissible under certain conditions. This flexibility is crucial for SFOs that may not have the in-house capability to manage all aspects of their CIGAs directly. The guidance also specified the minimum thresholds for qualified employees and operating expenditures necessary for meeting the substantial activities requirement, which are set at 2 qualified full-time employees and operating expenditures of HK$2 million, respectively. These thresholds provide a tangible benchmark for SFOs to assess their eligibility for tax concessions.
Moreover, the IRD detailed the information required for the application of an advance ruling on the eligibility for tax concessions for FIHVs. This includes comprehensive details about the FIHV's operational structure, the nature of its activities, and evidence of meeting the economic substance requirements. This transparency in the application process is aimed at facilitating a smoother, more predictable pathway for SFOs seeking to take advantage of the tax concessions offered by the Hong Kong government.This move by the IRD is not only a testament to Hong Kong's commitment to becoming a leading global hub for family offices but also aligns with the broader goal of enhancing the city's attractiveness as a prime destination for investment and wealth management. For SFOs, this advance ruling and the updated guidance provide a clear framework within which they can operate, plan their investments, and manage their wealth with greater certainty and efficiency.
Our Insight – Offshore companies are now re-domiciling to Hong Kong
In view of increasing pressure for economic substance requirements in offshore jurisdictions (e.g., British Virgin Islands (BVI), Cayman Islands), high net worth individuals who used to use BVI companies to make investments via Hong Kong or Singapore Private banks and Multi-family offices are now facing increasing pressure to pay tax on their investment income in Hong Kong or their local jurisdictions.
It is worthwhile to mention that, effective from 1 January 2023, every BVI companies are required to submit accounting information on their statement of financial position (balance sheet) and statement of comprehensive income (e.g., profits and loss statements) to the local authorities. In our opinion, this serves as an important move to under the business operations of each BVI company in detail, and the objective is to identify tax evasion of BVI company without reporting tax anywhere across the globe.
The single family office (SFO) tax concession is a complimentary solution to these offshore investment companies. Via the SFO tax concession, together with the additional capital gain claim and offshore claim, most of the investment income will not be subject to any Hong Kong Profits Tax even when the company is registered in Hong Kong.
To implement the Hong Kong registration of the BVI company, it is not necessary for you to set up another company and transfer its investment portfolio to the new Hong Kong company, which can cause significant amount of transaction and compliance costs. Alternatively, these companies may consider to register in Hong Kong as a non-Hong Kong company and report tax in Hong Kong.
There is no requirement for the company to be set up in Hong Kong and no requirements for local investment to enjoy the SFO tax concession. The only requirement is to build up minimal economic substance in Hong Kong to manage the investment portfolio. We can certainly advise you to go through the whole portfolio.
