Setting Up a Family Office in Hong Kong: what should I be aware of?

In our previous Q&A article, “Private Client Explained: Family Offices”, we explored the fundamental elements of forming and operating family offices in Hong Kong. The following Q&A builds on from this topic, expanding into the technicalities of tax incentives and SFC licensing aspects for family offices.

Q1: How are typical family office structures taxed under Hong Kong law?

Family offices take different forms to operate, depending on the nature of the activities the family office undertakes, investments the family has as well as how structured/matured the family office is. In most cases, family offices are operated via a corporate entity, which may or may not be in the same groups of the investment vehicles of the family. The family office entity itself is taxed in the same way as other corporates in Hong Kong.

Q2: Are there any tax incentives in Hong Kong that a family office should be aware of?

Hong Kong does not tax capital gain or offshore profits. In addition, dividend income is generally not taxable in Hong Kong.

A new profits tax exemption ordinance (“the Bill”) came into operation on 1 April 2019. Under the Bill, all privately offered onshore and offshore funds operating in Hong Kong, regardless of their structure, their size or the purpose that they serve, can enjoy profits tax exemption for their transactions in specified assets subject to meeting certain conditions. An eligible fund can also enjoy profits tax exemption from its investment in both overseas and local private companies.

The Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023 came into operation on 19 May 2023 and provides tax concessions for family-owned investment holding vehicles (also known as “FIHVs”) managed by single-family offices (“SFOs”) in Hong Kong. The tax concessions apply retrospectively for years of assessment commencing on or after 1 April 2022. The new regime provides tax certainty to high-net-worth individuals and families and encourages family offices to establish a presence in Hong Kong, reaffirming Hong Kong’s position as an important wealth management hub.

Family offices can rely on the above favourable tax regime to manage the families’ investments in Hong Kong in a tax efficient manner.

Q3: Under what circumstances may a family office need or wish to be licensed with the Securities and Futures Commission? And if a license if required, what are the application procedures and relevant forms to be filed?

In Hong Kong, there is no specific licensing regime for family offices. However, family offices may be subject to the licensing regime under the Securities and Futures Ordinance (“SFO”) which is activity-based. Thus, a family office is not required to be licensed under the SFO if its services do not constitute any regulated activity or they fall within any of the available carve-outs. The licensing implications in Hong Kong do not hinge on whether clients are families.

Here are some examples where a single family office will not need a licence:

1. A family appoints a trustee to hold its assets of a family trust, and the trustee operates a family office as an internal unit to manage the trust assets. A licence will not be required as the family office is not providing asset management services to a third party.
2. The family office is established as a separate legal entity which is wholly owned by a trustee or a company that holds the assets of the family. A licence for Type 9 regulated activity (asset management) will not be required as the family office will qualify for the intra-group carve-out as full discretionary investment manager.

A multi-family office that provides services to more than one high net worth family will be required to be licensed; and the type of licence required depends on the services to be provided in Hong Kong.

A family office seeking to be licensed will be subject to the same licensing requirements as any other licence applicants. Parts II and III of the Licensing Handbook provides more details on the licensing requirements and application procedures.

Q4: Is there a definition for “family” or “family office” under the licensing regime?

No, the Ordinance does not define “family” or “family office”. It is noteworthy that the licensing regime does not hinge on whether an entity is called a family office or whether its clients are families. A family office operator will have more flexibility to determine its legal form and operational structure with respect to its services to be provided.

Q5: What constitutes a single family office for the purposes of the SFC’s circular dated 7 January 2020?

It typically refers to an arrangement (often structured through a corporate vehicle owned or controlled by the family) under which the assets, investments and long-term interests of members of a single family are managed. The SFC has not sought to define what relationships of blood or of law would constitute family membership because the licensing obligations under the Ordinance do not hinge on whether the clients of a family office are family members or not.

Q6: Is a single family office required to be licensed under the Ordinance?

The issue of whether a single family office is required to be licensed under the Ordinance is determined by reference to three key factors, all of which must be present in order to give rise to a licensing obligation: firstly, the services provided by the family office constitute one or more regulated activity as defined under the Ordinance; secondly, the family office is carrying on a business in the provision of such services; and thirdly, the business is carried on in Hong Kong.

In determining whether certain asset management activities amount to a regulated activity, the definition of Type 9 regulated activity contains an intra-group carve-out for a single-family office where it provides such services solely to its related entities, which are defined as its wholly owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly owned subsidiaries.

What amounts to “carrying on a business in Hong Kong” is not defined in the Ordinance and will need to be determined by reference to the facts of each case, including whether the person is performing an occupation or a duty which requires attention; the activity involves continuity; the activity is capable of making profit; and the activity was carried out for the purpose of making profit. A genuine single family office arrangement, established to serve the investment needs of members of a single family, which is not being run as a business (i.e. not receiving any income, other than reimbursement of operating expenses from the family) or have the pursuit of profit as its business objective, should not in the ordinary course be considered as carrying on a business from a licensing perspective. It is also not the SFC’s intent to extend its regulatory oversight to this type of single family office setup.

Q7: If two or more single family offices co-operate together for the purposes of sharing a common administrative infrastructure in order to reduce operating overheads, would such arrangements trigger a licensing obligation?

The discussion in the response to Q3 above on the types of factors required to be present in order to give rise to a licensing obligation under the Ordinance would apply equally in these circumstances.

The sharing of office premises and administrative infrastructure by two or more family offices would not of itself automatically trigger a licensing obligation for such single family offices. However, where two or more single family offices make arrangements for the sharing of human resources involved in investment related matters, research or the investment process, this may be regarded as a multi-family office structure (see also the response to Q3.5 below) and, where the provision of services is carried on as a business, increases the likelihood of a licensing obligation arising.

Q8: What constitutes a multi-family office for the purposes of the SFC’s circular dated 7 January 2020 and is a multi-family office required to be licensed?

As mentioned in the Circular, “a multi-family office by definition serves more than one high net worth family” and such arrangements are likely to be evident.

Multi-family offices are typically established and run as commercial ventures. The issue of whether a multi-family office is required to be licensed under the Ordinance will be primarily determined by the three key factors set out in the response to Q3.3.

Q9: What are the key elements of the Hong Kong Professional Investor regime, and how does it affect the way my family office trades in the markets?

For multi‐family offices licensed by the Securities and Futures Commission (“SFC”), they are exempt from applying various requirements under the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”) when dealing with clients which qualify as professional investors (“PIs”).

Under paragraph 15 of the Code of Conduct, there are three categories of PIs, namely Institutional PIs, Corporate PIs and Individual PIs. For details of the exemptions to be applied to different categories of PIs and the procedures to be taken by licensed corporations so as to apply the exemptions, please refer to paragraphs 15.1 to 15.4 of the Code of Conduct.

For details on the definition of professional investors, please refer to paragraph 15.2 of the Code of Conduct, Part 1 of Schedule 1 of the Securities and Futures Ordinance and also the Securities and Futures (Professional Investor) Rules.

Q10: What employment obligations should I be aware of in setting up a family office structure in Hong Kong, e.g. pension, insurance, and other benefits?

There are minimum entitlements in place for Hong Kong employees. More information on entitlements such as statutory holidays, sickness allowance, maternity leave, severance and long-service payments can be found at the Employment Ordinance.

Employers are obliged to take out employees’ compensation insurance policies for their employees under the Employees’ Compensation Ordinance. They are also required to make Mandatory Provident Fund Schemes (MPF) contributions for their employees under the Mandatory Provident Fund Schemes Ordinance.

Looking Forward

In March 2023, the Hong Kong government issued a policy statement on developing family office businesses in Hong Kong, whereby it was announced that a range of policy measures will be further introduced to create a ‘conducive and competitive environment for global family offices to operate in Hong Kong’. Besides the family office tax concessions now in place, the market can expect other measures, including a proposed reintroduction and expansion of the original Capital Investment Entrant Scheme, efforts to develop Hong Kong into a crucial centre for global family offices.

Mr. Paul Chan, the Financial Secretary of Hong Kong stated that: “The policy statement demonstrates our determination to develop Hong Kong into a leading global family office hub. Developing family office business will be conducive to pool capital from around the world in Hong Kong, bolster our 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, arts and culture and philanthropy, creating strong impetus for Hong Kong’s growth.”, a sign that the future remains bright for Hong Kong.