HONG KONG SAR, CHINA Law and Practice Contributed by: Alfred Ip, Hugill & Ip
allows the trust to serve its protective and succession functions whilst accommodating the settlor’s desire for ongoing involvement. Other trust structures used in Hong Kong include fixed interest trusts (where beneficiaries have defined, non-discretionary entitlements), purpose trusts (used for specific commercial or charitable purposes), and charitable trusts. Bare trusts are commonly used in the context of property holding arrangements, where a nominee holds legal title to real estate on behalf of the beneficial owner, as discussed in Property Holding Trusts for Family Wealth Preservation. Hong Kong does not have a standalone foundation law. Clients seeking a foundation-like structure for philanthropic or succession purposes typically use a company limited by guarantee, which provides lim - ited liability and a familiar governance framework, or establish a foundation in a jurisdiction such as Jer - sey, the Cayman Islands or Liechtenstein. The integra - tion of trusts with single-family offices has become increasingly prevalent given the desirable tax incen - tives of the FIHV regime. For an overview of family office structures, see What Does the Future Hold for Family Offices in Hong Kong? and Setting Up a Family Office in Hong Kong. 3.2 Recognition of Trusts Trusts are fully recognised and enforced in Hong Kong, which has one of the most robust and well-developed trust law frameworks in Asia. Hong Kong’s legal sys - tem, independent from mainland China, continues to operate on the basis of English common law princi - ples, further enhancing its reliability as a trust jurisdic - tion. The Trustee Ordinance (Cap. 29) was compre - hensively modernised in 2013 to introduce, among other things, a statutory duty of care for trustees, enhanced investment powers, provisions governing the delegation of trustee functions and controls on trustee exoneration clauses. These essential reforms brought Hong Kong’s trust law in line with modern international standards and reinforced its competitive - ness as a trust domicile. The courts of Hong Kong have extensive experience in adjudicating complex trust disputes, including questions of trust validity, trustee duties, beneficiary
rights and the recognition of foreign trusts. The judici - ary’s familiarity with sophisticated trust structures and their adherence to the common law tradition provide a high degree of legal certainty for settlors, trustees, and beneficiaries alike. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Hong Kong’s territorial tax system creates a highly favourable environment for Hong Kong residents who are beneficiaries of foreign trusts. As Hong Kong only taxes income arising in or derived from Hong Kong, a Hong Kong resident beneficiary who receives dis - tributions of offshore income or capital from a foreign trust is generally not subject to Hong Kong income tax on those distributions. This significant planning advantage allows Hong Kong-resident beneficiaries to receive the benefits of global wealth structures with - out incurring a domestic tax charge. A foreign trust that conducts a trade or business in Hong Kong, or that derives income from Hong Kong sources, will be subject to Profits Tax on those Hong Kong-sourced profits. However, a passive investment trust that holds offshore assets and distributes income to Hong Kong-resident beneficiaries will not ordinarily trigger a Hong Kong Profits Tax liability. The FSIE regime is relevant for Hong Kong entities (including corporate trustees of Hong Kong trusts) that receive foreign-sourced passive income. Such entities must satisfy the applicable substance, participation exemption, or nexus requirements to maintain the tax exemption on that income. Practitioners advising on the establishment of Hong Kong trusts with offshore investment portfolios should carefully consider the FSIE implications, particularly where the trustee is a Hong Kong-incorporated trust company. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles Under Hong Kong’s territorial tax regime, the fact that a settlor or beneficiary also serves as a trustee does not, in itself, alter the tax treatment of the trust or its income. The trust is assessed to Profits Tax only on Hong Kong-sourced trading profits, and the trustee’s personal tax position is assessed separately on their own income.
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