Hong Kong Trusts: Advantages of Hong Kong for Private Trusts
Hong Kong private trusts enjoy many advantages, most notably a low tax regime, well-established laws and regulations and world class business and financial infrastructure. Especially since 2013 when its trust legislation was updated, Hong Kong has been a favoured territory for the setup of trusts. According to survey data published by the Securities and Futures Commission ("SFC”) in July 2019, as of December 2018, assets held under trusts in Hong Kong amounted to HK$4,333 billion (US$553 billion).
In this article, we provide more information about the reasons why Hong Kong is a leading choice of jurisdiction for setting up a private trust.
Low Tax Regime
Hong Kong is a favoured tax jurisdiction for private trusts. There is no tax on income sourced outside of Hong Kong. Only profits arising in or derived from Hong Kong fall within the scope of Hong Kong profits tax, Thus, Hong Kong profits tax is unlikely to apply to profits earned by a Hong Kong trust which holds income generating assets based outside of Hong Kong.
There are no capital gains taxes in Hong Kong. Thus, for example, Hong Kong profits tax would be unlikely to apply to income generated from the sale of a rental property.
Established International Financial and Business Centre
Hong Kong operates well established international financial markets, including in banking and securities, and is a well-known international business centre. For a private trust, Hong Kong’s standing as an international finance and business center means that all trust operations can be operated conveniently from Hong Kong in a single time zone under a single legal system. Investment operations, including the trading in currencies, shares, bonds, commodities and dealings in private equity, hedge funds and other financial products benefit from access to the world’s leading banks as well as international brokerage firms and asset management firms Trust administration benefits from a deep bench of law firms and accountancy firms with expertise in trust law, tax law, investment activities.
Independent and Robust Legal System
Hong Kong has a separate legal system from the mainland of the People’s Republic of China (“PRC”). As a common law based system, it is a system that is familiar to trust practitioners and lawyers around the world. Save in respect of constitutional matters, Hong Kong operates under its own legislation. Though there have been criticisms that the National Security Law enacted in 2020 have undermined the independent of Hong Kong's legal system, there is no evidence in private law matters that Hong Kong has lost its independence.
For a private trust, Hong Kong’s legal system offers not only a high degree of certainty but also the confidence that legal issues and disputes will likely be resolved in a sensible and commercial fashion by a judiciary that is highly regarded for its competency, professionalism and independence.
Statutory Improvements to Common Law Trusts
Amendments to the Trustee Ordinance and the Perpetuities and Accumulations Ordinance in 2013 have strengthened the competitiveness of a Hong Kong based trust.
Abolition Of The Rules Against Perpetuities And Excessive Accumulations Of Income
The abolition of the rules means that a perpetuities period and accumulation period are no longer required for non-charitable trusts governed by Hong Kong law. This means that a trust can be of indefinite duration. The absence of a limit on the duration of a Hong Kong trusts enhances its appeal to settlors looking to set up ultra-high value trusts for succession planning over many decades.
Settlor’s Reserve Investment Powers
Hong Kong law now permits the settlor of a trust to reserve investment management powers without invalidating a Hong Kong trust. As a result, a family setting up a trust can maintain a high degree of control over how the trust invests its assets. In contrast, in some jurisdictions, a settlor of a trust cannot retain any control over the day-to-day operation of the trust.
Protection From Forced Heirship
Forced heirship laws in some jurisdictions, particularly civil law jurisdictions, mandate the distribution of assets to certain heirs of a deceased. Forced heirship laws deprive an individual of testamentary freedom. Hong Kong trust laws now provide that a transfer of movable property to a trust expressly governed by Hong Kong law will not be invalidated by foreign forced heirship rules. This means that when in establishing a Hong Kong trust, the settlor has full freedom to make arrangements for the division of assets. The protection from forced heirship laws makes Hong Kong a more attractive trust domicile, especially for settlors from jurisdictions which have forced heirship laws.
Removal Of Trustees
A court-free process is available for beneficiaries who are of full age and capacity and who are absolutely entitled under a trust to replace existing trustees with new ones without terminating the trust.
How We Can Help
If you are interested in learning more about whether a Hong Kong trust may be right for you, how we can help you to setup a trust or how a trust may be used for tax planning, estate planning or personal asset protection, please contact us.
The selection of a trustee is crucial when creating a trust, the choice of trustee should consider knowledge, experience, access to the assets and management abilities. Choosing a trustee is a personal decision because the trustee will be deciding how the beneficiaries will receive distributions from the trust. This can be guided by informed decision making when creating the trust. The settlor typically provides the trustees with a letter of wishes regarding their desired wishes on how they would like the trustees to execute their discretion with regard to the trust fund and distribution of the trust assets. The wishes contained will cover both the period during the settlor's lifetime and also after death. A letter of wishes is not a legal document and can be reviewed and amended from time to time but does not form part of the trust deed itself.
Often a priority for settlors is the continuation of wealth for the benefit of future generations. This can be achieved by effectively locking up the capital of the trust and specifying to whom of the family the income and capital should be paid in the years to follow. A settlor can also give the trustees the discretion to pay capital to beneficiaries if he/she think it appropriate.