Tax Concessions for Family-owned Investment Holding Vehicles – Charitable Exemptions
Growing numbers of global family offices are putting philanthropic efforts to create a social impact and leave lasting legacies. In this chapter, we will focus our discussion on the charitable exemption under the Family-owned Investment Holding Vehicles (FIHVs) tax concession regime and explore how the new procedures for obtaining a charity tax exemption status under section 88 of the Inland Revenue Ordinance of Hong Kong will facilitate the global family offices to make a philanthropic presence in Hong Kong while enjoying the tax concessions.
For a full overview of the tax concession for FIHVs, please refer to our recent alert available at this link.
Under the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023 (the Amended Ordinance), profits tax concessions will be provided for eligible FIHVs managed by eligible Single Family Offices in Hong Kong (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%.
To qualify as an eligible FIHV, where a Charitable Entity is not involved, 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.
Where a 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, subject to the following conditions:
- 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” 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 therefore provides flexibility to FIHVs currently owned by Charitable Entities to keep its existing structure. It also encourages FIHVs to set aside given percentage of its ownership in the FIHV and to benefit the society at large.
What is a Charitable Entity
Charitable Entity refers to charitable institutions and trusts of a public character which are granted tax exemption under section 88 of the Inland Revenue Ordinance (Section 88 Tax Exemption). To qualify, one of the key criteria is that the Charitable institution must fulfill one or more of the following charitable purposes:
- relief of poverty;
- advancement of education;
- advancement of religion; and
- other purposes of a charitable nature beneficial to the Hong Kong community not falling under any of the preceding heads.
While the purposes under the first three heads may be in relation to activities carried on in any part of the world, those under head (d) will only be regarded as charitable if they are of benefit to the Hong Kong community.
The New Procedures
The Inland Revenue Department (IRD) has recently formalized the application procedures for Section 88 Tax Exemption by requiring applicants to submit application form in specified form (Application Form). Prior to this, applicants make submission by sending a letter to the IRD.
Under the new procedures, applicants will be required to provide brief description of the charitable purpose of the entity and fill in a standard table listing out crucial clauses in its governing instrument to demonstrate that its governing instrument is in line with the “Tax guide for charitable institutions and trusts of a public character” issued by the IRD.
In addition, applicants are now required to submit activities lists in standard form to demonstrate that its activities are in line with its charitable objects. The IRD has also clarified the requirements for financial statements. Audited financial statements should be provided if the entity is a company incorporated under the Companies Ordinance (Cap. 622 of the laws of Hong Kong) or the entity’s governing instrument contains provisions requiring the preparation of audited financial statements. If the entity has been established for less than 18 months but has in fact prepared financial statements, such financial statements should also be submitted to the IRD.
The new procedures and guidance provide more clarity and certainty on the requirements of the IRD in reviewing the Section 88 Tax Exemption application. The formalization of the Section 88 Tax Exemption application process also echoes the Hong Kong government’s efforts to foster philanthropy initiatives in the city and to promote Hong Kong as a destination for family offices in light of the latest tax concessions regime for FIHVs in Hong Kong. It is expected that the new procedures will streamline the application process and encourage more family offices to consider incorporating philanthropy initiatives in its set-up.