The Hong Kong Legislative Council has passed the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022. The bill amends the Inland Revenue Ordinance to offer tax benefits for eligible family-owned investment holding vehicles (FIHVs) in Hong Kong. These FIHVs should be managed by single family offices (SFOs).
Bringing More Family Offices in Hong Kong
The family office tax exemption aims to support the growth of global family offices in Hong Kong. The bill has been specifically designed to cater to the unique needs of family offices and asset owners.
Furthermore, the tax concession will not only enable family offices to establish and operate in Hong Kong but also create new opportunities in the asset and wealth management sector. This, in turn, will generate demand for various related professional services.
Ultimately, the bill is can bolster Hong Kong’s position as a leading hub for family offices and an international centre for asset and wealth management. It includes provisions that exempt assessable profits of a FIHV from qualifying and incidental transactions from profits tax payment.
Ground Rules Given
To attract investment management and related activities to Hong Kong, an eligible Single Family Office (SFO) must manage the Family-Owned Investment Holding Vehicle (FIHV). The FIHV must meet the minimum asset threshold of $240 million and fulfill the substantial activities requirement.
The family office tax exemption will be applicable to assessment years starting from April 1, 2022. Here’s more about the requirements:
Requirements for An FIHV:
- The FIHV must be a corporation, partnership, or trust established in or outside Hong Kong. However, its central management and control (CMC) must be in Hong Kong.
The FIHV must be exclusively and beneficially owned by one or more individuals who are “connected persons” of the same family (referred to as the Single Family), with a broad definition that includes multiple generations.
- The FIHV can establish Special Purpose Entities (SPEs) to hold and administer the specified assets.
- An SFO based in Hong Kong must manage the assets of the FIHV.
- The combined average value of assets under management for a family-owned structure, whether it involves a single FIHV or multiple FIHVs, should be at least HKD 240 million.
- The FIHV should solely serve as an investment vehicle for holding and administering the assets of the Single Family and must not engage directly in activities for general commercial or industrial purposes.
Requirements For An SFO:
- The SFO must be a private company with its central management and control (CMC) located in Hong Kong.
- It must be exclusively and beneficially owned by the Single Family.
- The SFO should not provide investment management services to other FIHVs not owned by the Single Family.
Qualifying transactions of the FIHV:
- The existing unified tax exemption for funds expects the qualified transactions in specified assets to be similar. This scope should encompass typical asset types in which family offices commonly invest.
- For investments in private companies holding Hong Kong immovable property and short-term assets, the same tests applied to funds will be used to determine if such investments qualify for tax exemption.
Substantial Activities Requirements
- There must be core income-generating activities (CIGAs) regarding asset management.
- Each FIHV or the SFO (in cases where the FIHV outsources CIGAs to the SFO) should employ a minimum of two full-time qualifying employees in Hong Kong. Similarly, they should incur at least HKD 2 million in operating expenditure for the CIGAs.
- The number of FIHVs managed by the same SFO should not exceed 50.
- The modified anti-round tripping provisions, modelled after those applicable to funds, include two exceptions:
- Hong Kong resident individuals
- Hong Kong resident entities. However, certain anti-abuse measures are in place, such as prohibiting arrangements that shift taxable income from the Single Family to a FIHV solely for obtaining a tax benefit.
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