Update on Tax Concessions for Family-owned Investment Holding Vehicles
The Financial Secretary announced in the 2022-23 Budget Speech that the Government will provide tax concession for Family-owned Investment Holding Vehicles (FIHVs) managed by eligible Single Family Offices in Hong Kong (SFO). The aim is to provide tax certainty to FIHVs managed by SFO and attract the latter to set up a presence in Hong Kong.
Following the release of public consultation paper in March 2022 and discussion submitted to the Legislative Council Panel on Financial Affair in April 2022 (the Consultation Stage), the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023 (the Amended Ordinance) was gazetted and came into operation on 19 May 2023.
Under the Amended Ordinance, profits tax concessions will be provided for (a) eligible FIHVs managed by eligible SFO; and (b) Family-owned Special Purpose Entities (FSPEs). Accordingly, the concessionary profits tax rate for the assessable profits of an FIHV or an FSPE earned from the qualifying transactions and incidental transactions for a year of assessment commencing on or after 1 April 2022 will be 0%.
An eligible FIHV must satisfy the following conditions:
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 means a body of persons (corporate or unincorporate) or a legal arrangement and includes a corporation, partnership and trust (including a discretionary trust).
The FIHV must relate to one or more than one member of a single family and meet the ownership requirements as set out below.
General Ownership Requirement
Save for the charity exception (to be discussed below), one or more than one member of the family (Family Member) must have at least 95%, in aggregate, of the beneficial interest (whether direct or indirect) in the FIHV at all times during the basis period for the year of assessment.
Family Member is broadly defined in the Amended Ordinance. Accordingly, that includes a natural person (Person A) and all of the persons related to Person A (whether alive or deceased) which are listed as follows:
- a spouse of Person A (Person B);
- a lineal ancestor of Person A (Person C);
- a lineal ancestor of Person B (Person D);
- a lineal descendant of Person A (Person E);
- a sibling of Person A, Person B, Person C or Person D (Person F);
- a lineal descendant of Person F (Person G); and
- a spouse of Person E, Person F and Person G.
In addition, if a person ceases to be a spouse (for reason other than passing away), the spouse and those persons who are connected to the spouse and considered as Family Member before the cessation would still be regarded as Family Member for the subject year of assessment and the following year of assessment.
Also, lineal descendent includes adopted and step children of the person’s spouse (including a deceased spouse) or former spouse.
Where a charitable institution or trust of a public character that is exempt from tax under section 88 of the IRO (Charitable Entity) is involved, it may have up to 25% of beneficial interest (whether direct or indirect) in an FIHV and/or an eligible SFO. This is subject to the conditions that:
- at least 75% of the beneficial interest of the FIHV and/or eligible SFO must be held by the Family Member; and
- the percentage of beneficial interest that an unrelated person has in the FIHV and/or eligible SFO, or if there is more than one unrelated person, the total percentage of such beneficial interest, does not exceed 5%.
“Unrelated person” in relation to a particular family means an entity in which no Family Member has a beneficial interest (whether direct or indirect); or a natural person who is not a Family Member, but does not include a charitable entity.
The Charitable Exception was not introduced at the Consultation Stage. This exception provides flexibility to the FIHVs owned by charities and trusts.
The FIHV must be normally managed or controlled in Hong Kong during the basis period for the year of assessment.
Notably, at the Consultation Stage, it was proposed that the central management and control of the FIHV must be exercised in Hong Kong during the basis period for the year of assessment. The requirement has now been relaxed such that normal management or control is sufficient. Under the normal management or control requirement, it is expected that this condition might generally be met if the central management (like key personnel) is located abroad but that general decisions are executed and made in Hong Kong.
The FIHV must be managed by an eligible SFO and meet the minimum asset threshold.
To qualify as an eligible SFO, the SFO must:
- be a private company (incorporated in or outside Hong Kong) which is normally managed or controlled in Hong Kong;
- have at least 95% of its beneficial interest being held (directly or indirectly) by Family Members (save for the charitable exception);
- provide services to specified persons of the family during the basis period for the year of assessment and the fees for the provision of those services are chargeable to profits tax under section 14 of the Amended Ordinance; and
- fulfill the safe harbour rule whereby at least 75% of the eligible SFO’s assessable profits should derive from the services provided to specified persons of the family.
A specified person in relation to a family means:
- an FIHV that is related to the family;
- an FSPE in which the FIHV has a beneficial interest (whether direct or indirect);
- an interposed FSPE of the FIHV; and
- a Family Member.
Management by SFO
An FIHV is managed by an eligible SFO if the eligible SFO carries out the one of the investment activities in relation to the FIHV:
- conducting research and advising on any potential investments to be made by the FIHV;
- acquiring, holding, managing or disposing of property for the FIHV; and
- establishing or administering an FSPE for holding and administering one or more underlying investments of the FIHV.
Note however that a cap is imposed such that not more than 50 FIHVs managed by the same eligible SFO may benefit from the profits tax concession.
Minimum Asset Threshold
Specified Assets refers to assets specified under Schedule 16C to the Amended Ordinance (Specified Assets). As an example, Specified Assets include securities, shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company, futures and etc. The aggregate value of the Specified Assets managed by an eligible SFO for the FIHV (or multiple FIHVs) of a family must be at least HKD240 million.
In determining whether the minimum asset threshold is met, the aggregate amount of the net asset value (NAV) of the Specified assets of each relevant FIHV managed by the eligible SFO (Aggregate NAV) at the end of the FIHV’s basis period for the year of assessment (Subject Year) will be considered.
In case the Aggregate NAV for the Subject Year falls below HKD240 million, the minimum asset threshold is considered to be met if the Aggregate NAV during the period listed below is at least HKD240 million:
- At the end of the FIHV’s basis period for the year of assessment immediately preceding the subject year (1st Preceding Year), or
- At the end of the FIHV’s basis period for the year of assessment immediately preceding the 1st Preceding Year.
In calculating the NAV, the specified assets held by an FSPE of the FIHV will be included.
At a minimum, the FIHV is required to have:
- at least two full-time employees in Hong Kong who carry out core income generating activities (CIGAs) concerned and have the qualifications necessary for doing so; and
- at least HKD2 million operating expenditure incurred in Hong Kong for carrying out the activities concerned.
For the purpose of satisfying the substantial activities requirement, the number of qualified full-time employees employed and the amount of operating expenditure incurred by the FIHV, or by the eligible SFO on behalf of the FIHV if the CIGAs are outsourced, must be commensurate with the level of the CIGAs carried out in Hong Kong.
It is also permitted to outsource the CIGAs to eligible SFO provided that the use of outsourcing is not for circumventing the substantial activities requirement.
The Inland Revenue Department acknowledges that it is quite common for an FIHV to establish FSPEs for holding and administering the FIHV’s assets. Therefore, profits tax concessions will be provided at both the FIHV level and the FSPE level to the extent which corresponds to the percentage of beneficial interest of the FIHV in the FSPE.
Qualifying Transactions and Incidental Transactions
An FIHV may enjoy profits tax concession in respect of:
- Transactions in Specified Assets which must be carried out in Hong Kong by or through an eligible SFO of the relevant family, or arranged in Hong Kong by the eligible SFO (Qualifying Transactions). Transactions would generally cover sale, transfer and etc.; and
- Transactions incidental to the carrying out of Qualifying Transactions (Incidental Transactions) subject to a 5% threshold. Specifically, it shall not exceed 5% of the total of the FIHV’s trading receipts from Qualifying Transactions and Incidental Transactions in the basis period for the year of assessment. As an example, Incidental Transactions shall include interest income arising from the holding of the Specified Assets.
We believe that the introduction of the Amended Ordinance is a positive move to promote Hong Kong as wealth management hub. It is hope that increasingly numbers of FIHVs will consider Hong Kong as an option for running their family offices.
In our upcoming tax alert, we will provide an overview on the anti-avoidance and anti-round tripping provisions of the Amended Ordinance.