Hong Kong's new law providing a tax concession for family investment vehicles has finally passed!

11 May 2023 | Applicable law: Hong Kong | 7 minute read

The Legislative Council of Hong Kong has just, on 10 May 2023, passed the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 (the 'Bill')1 adopting the amendments put forward by the Financial Services and Treasury Bureau ('FSTB')2. This article refers to the provisions of the Bill as passed and we will refer to the same as the 'Ordinance', even though the Bill is still subject to the final approval of the Chief Executive of Hong Kong which is scheduled for 19 May 2023.


As set out in our article published on 24 March 2023, Family Investment Holding Vehicles ('FIHVs') are at risk of being subject to Profits Tax in Hong Kong with respect to both their Hong Kong sourced and foreign sourced investment income. The Ordinance aims to offer certainty so that profits derived by an FIHV from 'Qualifying Transactions' will be charged at a concessionary tax rate (which will be 0% for the tax year 2022-23) with retrospective effect from 1 April 2022, provided that certain conditions are met.

In addition, our understanding is that an FIHV which fulfils the conditions of the Ordinance should not be subject to Profits Tax on its foreign sourced investment income which is derived from or is incidental to its Qualifying Transactions.3

The Conditions 

Relationship between the FIHV and the family office

The Ordinance provides a tax concession for an eligible FIHV which holds the investments and which is managed by an eligible single-family office (the 'ESF Office').

Main requirements for the FIHV and the ESF Office

The FIHV can be any entity, including any legal arrangement; corporation; partnership; or trust, established in or outside Hong Kong. 

The FIHV can be any entity, including any legal arrangement; corporation; partnership; or trust, established in or outside Hong Kong. On the other hand, the ESF Office must be a private company.

Both the FIHV and the ESF Office are required to be 'normally managed or controlled' in Hong Kong.4 Thus if an overseas family has hired sufficient professionals to manage the investment activities of the FIHV in Hong Kong, this requirement should generally be met even if the key or strategic decisions makers are abroad.

Additionally, there is a minimum threshold for ownership of the FIVH and ESF Office by family members:

  • If a percentage of the FIHV or ESF Office is owned by a charitable entity that is exempt from tax under section 88 of the Inland Revenue Ordinance ('IRO'), then the beneficial ownership of the FIHV and ESF Office held by one or more members of the 'family' shall not be less than 75%5
  • If any percentage of the FIHV or ESF Office is owned by 'unrelated persons'6  to the family other than a charitable entity, such ownership may not be more than 5% - which means that if no charitable entity holds any portion of the FIHV or ESF Office, then the family members must cumulatively hold at least 95% of the beneficial interest in both the FIHV and the ESF Office7.

Any interest held by parents, spouse, descendants, siblings, niece, nephews, cousins, and their in-laws can be included in calculating the beneficial interest of the family.8

The Ordinance includes elaborate provisions which attribute ownership of the FIHV and ESF Office to the family members via complex trust structures. If the FIHV (or ESF Office) is an underlying company held by a discretionary trust where one or more members of the family are named as a beneficiary (or a class of beneficiaries), the ownership requirement should be met9. Further if certain conditions are met to demonstrate that a family member has 'connections' with a trust structure, then the Commissioner of Inland Revenue ('CIR') is empowered to treat the family ownership requirement as fulfilled if he is satisfied that it is 'highly probable' that the family members have sufficient interest in the FIHV and ESF Office via the trust structure10. This may be the case for example if the FIHV and ESF Office are underlying companies held by a master family trust, and the family members are 'connected' to the master trust by being beneficiaries of 'baby trusts' which in turn are beneficiaries of the master trust.

Key financial parameters

The key financial parameter is that the total net asset value ('NAV') of the 'Schedule 16C' assets11 held by the FIHVs (and by any family special purpose entity ('FSPE') owned by the FIHV12) shall not be less than HK$240 million at the end of each tax year. It is anticipated a Department Interpretation and Practice Note ('DIPN') will be published to clarify how the NAV will be calculated and investments valued.

In addition, the minimum average number of qualified employees13 of the FIHV must be adequate in the opinion of the Commissioner for Inland Revenue ('CIR') and in any event not less than two. The total amount of operating expenditure incurred by the FIHV to carry out its investment activities in Hong Kong each tax year should also be adequate and in any event not less than HK$2 million.14 It is also expected that there will be further guidance on the substance requirement in a DIPN.

The profits received by the ESF Office (as opposed to by the FIHV) from providing family office management service should be at least 75% of the total profits of the ESF Office each year, and such profits will be  subject to Profits Tax. The 75% safe harbour rule allows the ESF Office to derive income from third parties, though it is not the intention of this tax concession to benefit multi-family offices.

Qualifying Transactions

Trading profits of an FIHV (and its FSPE) which arise from its Qualifying Transactions, meaning the income arising from the disposal of its assets which are listed under Schedule 16C, will be taxed at the concessionary rate. Such assets could include 'real estate investment trusts' and 'virtual assets exchange traded funds'.15

Trading profits of the FIHV (or its FSPE) when it invests in immovable properties outside Hong Kong or in virtual assets, may also benefit from the concessionary regime, even though these assets are not Schedule 16C assets, provided that the investment is made via private investment companies.16 The disposal income from the sale of shares in these private investment companies will benefit from the tax concession as long as certain tests17 concerning their disposal are met. Even if these tests are not met, only the trading profits from the disposal of such private companies may be subject to Profits Tax under the normal principles (as set out in the IRO), but not the trading profits with respect to the other Qualifying Transactions of the FIHV (of its FSPE).

Incidental Transactions

'Incidental Transactions' includes interest income arising from the holding of the Schedule 16C assets by the FIHV (or its FSPE), and such income will also benefit from the tax concession provided that it amounts to not more than 5% of the total trading receipts of the FIHV (or its FSPE) from both Qualifying Transactions and Incidental Transactions.

The 5% threshold will likely only be a concern for the FIHV (or the FSPE) if it derives Hong Kong sourced interest income. If the income is sourced outside of Hong Kong and if the FIHV fulfils the concessionary treatment conditions under the Ordinance, our understanding is that such income accruing to and derived from or incidental to the 'Qualifying Transaction' of the FIHV (or its FSPE) should not be caught within the Profits Tax net in Hong Kong.18

Opt in

The FIHV can make an irrevocable election in writing to take advantage of the regime. It should fill in a specified form and make a statutory declaration to confirm that the conditions are met when submitting its Profits Tax return each year. There is no preliminary approval by the CIR required, but records of ownership and compliance should be kept by the FIHV and ESF Office which may be audited in the future. Families may apply for an advance ruling from the CIR if they wish to ensure their structures are eligible for the tax concession.

Time for action    

With the enactment of the regime, FIHVs managed by a team of asset managers sitting in Hong Kong who are effecting trades and investments for the FIHV should be able to take advantage of the concession. Many families have been waiting for the final details of the law and they may now proceed to finalise their structuring. They may also proceed to obtain an advance ruling from the Commissioner of Inland Revenue to ascertain that their structure (especially structures which involve trusts) and their income from proposed investment activities are eligible for the tax concession.

We look forward to the announcement of further measures by the government, including the enhanced capital investment scheme and greater certainty on the licensing regime. 

We look forward to the DIPNs to be issued by the IRD with more specific requirements, especially on how the financial parameters and substance requirements can be met by FIHVs.

We also look forward to the announcement of further measures by the government, including the enhanced capital investment scheme and greater certainty on the licensing regime, which would further foster a conducive and competitive environment for the businesses of global family offices and asset owners in Hong Kong.

  1. As gazetted on 9 December 2022.
  2. Please refer to our alert on 21 April regarding the amendments put forward.
  3. Based on section 3 of the Ordinance which sets out that the tax concession provisions applying to FIHV under the Ordinance should be added as 'concession provisions' under s19CA of the Inland Revenue Ordinance ('IRO') and as such, generally the foreign sourced income accruing to such FIHV should not be caught within the new foreign sourced income taxation regime in Hong Kong. Under section 15 H of the IRO, the foreign sourced interest, dividends or disposal gains accruing to the eligible FIHV and derived from or incidental to the transactions of the FIHV would be 'carved out' from the definition of 'specified foreign sourced income'.
  4. The concept of 'normally managed or controlled in Hong Kong' has a broader meaning than 'central management and control' established in common law. 'Management' refers to management of daily business operations, or implementation of the decisions made by top management, etc. 'Control', on the other hand, refers to control of the whole business at the top level, including formulating the central policy of the business, making strategic policies of the company, choosing business financing, evaluating business performance, etc. If either of these are carried out normally in Hong Kong, the requirement would be satisfied. (cf paragraph 27 of the DIPN 44).
  5. Section 2 and 5 of the new Schedule 16 E to the IRO (the 'Schedule').
  6. 'unrelated parties' include individuals or entities which no family members have any interest.
  7. If there is ownership by a charity as well as 'unrelated parties' then the maximum ownership by unrelated parties is 5%, by the charity is 20% and the minimum ownership by family members is 75%.
  8. Section 4 of the Schedule. The definition of 'children' is extensive including adopted / stepchildren / illegitimate children of either the person or his spouse.
  9. Section 8(4) and (5) of the Schedule.
  10. Sections 8 A to I of the Schedule.
  11. Schedule 16 C of the IRO, which also applies to the 'unified funds regime' under Section 20 AM of the IRO and which consists of mainly traditional financial assets.
  12. The value of the Schedule 16C assets held by an FSPE, to the extent of the percentage which the FIHV holds in the FSPE, shall be counted as the NAV of the FIHV.
  13. i.e. someone who is a full-time employee in Hong Kong who carries out investment activities in Hong Kong and has the necessary qualifications.
  14. The FIHV may still fulfil the requirements by outsourcing its core income generating activities to the ESF Office. The CIR will consider the totality of facts including the investment strategy of the FIHV, types of assets held by the FIHV etc. to determine if there is adequate substance.
  15. See paragraphs 30 and 31 of the report of the Bills Committee dated 20 April 2023.
  16. This is also expressly referred to in the report of the Bills Committee on 20 April 2022. 
  17. These include the 'immovable properties test'; the holding period test; the control test and the short-term assets test. (cf Sections 12 and 13 of the Schedule). 
  18. Cf footnote 3.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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