Profit Tax Concessions for Eligible Family-owned Investment Holding Vehicles and Family-owned Special Purpose Entities
Only the assessable profits of FIHVs and FSPEs arising from qualifying transactions and incidental transactions would be eligible for profits tax concessions, which would apply in respect of a year of assessment commencing on or after 1 April 2022.
Requirements for Family-owned Investment Holding Vehicle
- Not be established for general commercial purposes
- Be owned by a single family that meets ownership criteria
- Be normally managed and controlled in Hong Kong
- Be managed by an eligible single family office
- Carry out substantial activities in Hong Kong through employees and expenditures.
Ownership of Family-owned Investment Holding Vehicle
For a FIHV to enjoy the tax concessions, at least 95% of its beneficial ownership must belong to a single family at all times during the tax year.
Family members include:
- Person A: The original family member
- Person B: Person A’s spouse
- Person C: Person A’s parents
- Person D: Person B’s parents
- Person E: Person A’s children
- Person F: Person A’s siblings
- Person G: Person F’s children
- Person H: Person E’s, F’s or G’s spouse
- It also includes adopted and step children.
If a couple separates during a tax year (but does not divorce), they remain family members for that tax year and the next one for tax purposes.
Exceptions:
The 95% test does not apply if a charitable entity is involved.
Eligible Single Family Office
A FIHV must be managed in Hong Kong by an eligible Single Family Office (SFO) of the same family in order to enjoy the tax concessions.
To be an eligible SFO, the office must:
- Be a private company incorporated in or outside Hong Kong, but normally managed or controlled in Hong Kong
- Have at least 95% ownership by family members (except when a charitable entity is involved)
- Provide services to specified family members during the tax year, with fees charged taxable
- Derive at least 75% of its assessable profits from providing services to specified family members (the safe harbor rule)
Specified family members include:
- The FIHV itself
- Any FSPE in which the FIHV has an interest
- Any interposed FSPE of the FIHV
- Any family member
Beneficial Interest held by Charitable Institution or Trust in Family-owned Investment Holding Vehicle or Eligible Single Family Office
- A charitable entity can own up to 25% of a FIHV or eligible SFO
- The other 75% must belong to family members
- No unrelated person can own more than 5%
An unrelated person is defined as:
- An entity where no family member has an interest
- Or a natural person who is not part of the family
Management of Family-owned Investment Holding Vehicle by Eligible Single Family Office
A FIHV is considered managed by an eligible Single Family Office (SFO) if the SFO carries out investment activities on behalf of the FIHV. These activities can include:
- Conducting research and advising on potential investments for the FIHV
- Acquiring, holding, managing or disposing of properties for the FIHV
- Establishing or administering family-owned special purpose entities (FSPEs) to hold investments for the FIHV
There is a cap of 50 FIHVs:
- An eligible SFO can only manage up to 50 FIHVs that benefit from the tax concessions.
Election Mechanism
A FIHV can elect for the profits tax concession through an election mechanism. The key features of the election mechanism are as follows:
- the election must be made in writing;
- the election, once made, will apply to all subsequent years of assessment (i.e. no annual election is required); and
- the election made is irrevocable.
Minimum Asset Threshold
The minimum asset threshold of HK$240 million is assessed based on:
- The aggregate NAV of specified assets managed for the relevant FIHV(s) at the end of the tax year
OR
- The aggregate NAV at the end of either of the 2 previous tax years, if the current year’s NAV falls short.
The specified assets held by any FSPEs of the FIHV are also included when calculating NAV.
Specified Assets under Schedule 16C to the Inland Revenue Ordinance
- Assets specified under Schedule 16C to the IRO include the following:
- Securities;
- Shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company;
- Futures contracts;
- Foreign exchange contracts under which the parties to the contracts agree to exchange different currencies on a particular date;
- Deposits other than those made by way of a money-lending business;
- Deposits (as defined by section 2(1) of the Banking Ordinance (Cap. 155)) made with a bank (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571));
- Certificates of deposit (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571));
- Exchange-traded commodities;
- Foreign currencies;
- OTC derivative products (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571)).
Substantial Activities Requirement
In order to qualify for the tax concessions, a FIHV must carry out substantial core income-generating activities (CIGAs) in Hong Kong. This includes having:
- At least 2 full-time employees in Hong Kong who:
- Carry out the relevant activities
- Have the necessary qualifications
2. At least HK$2 million in operating expenditures incurred in Hong Kong for carrying out the relevant activities.
Outsourcing CIGAs to the eligible SFO is allowed, as long as it is not done to circumvent the substantial activities requirement.
When outsourcing CIGAs:
- The number of qualified employees
- And the operating expenditures
Qualifying Transactions and Incidental Transactions
A FIHV can enjoy the tax concessions for:
- Qualifying transactions – These involve specified assets
- Incidental transactions – Transactions incidental to carrying out qualifying transactions
But there is a 5% threshold for incidental transactions:
- The FIHV’s receipts from incidental transactions cannot exceed 5% of its total receipts from both qualifying and incidental transactions in the tax year.
The qualifying transactions of a FIHV must be:
- Carried out in Hong Kong by the eligible SFO
- Or through the eligible SFO
- Or arranged in Hong Kong by the eligible SFO
Family-owned Special Purpose Entities
Tax concessions apply at both the:
- FIHV level, for its own income
- FSPE level, for managing the FIHV’s assets
The extent of FSPE concessions depends on the FIHV’s ownership:
- The higher the FIHV’s stake in a FSPE
- The more tax concessions that FSPE enjoys.
- The lower the FIHV’s stake
- The less tax concessions it enjoys.
Losses Sustained by Family-owned Investment Holding Vehicles or Family-owned Special Purpose Entities
If a FIHV or FSPE is exempt from profits tax for a tax year due to qualifying/incidental transactions:
- Any losses from those transactions cannot be set off against assessable profits for:
- That tax year
- Any future tax years
Concessionary Tax Rate
For tax years beginning on or after 1 April 2022:
- The tax rate for assessable profits from qualifying/incidental transactions is 0%
- This applies to both the FIHV and any related FSPEs
Anti-avoidance Measures
FIHVs/FSPEs profit from private company investments is taxed if it fails any of three tests:
- Immovable Property Test – If the company holds >10% of its assets in HK immovable property
- Holding Period Test – If the investment has been held <2 years
- Control/Short-Term Asset Test – If the FIHV/FSPE controls the company or it holds >50% of assets in short-term assets (<3 years)
Only profits from failing investments are taxed. Other profits still qualify.
Anti-round tripping provisions exempt:
- Resident individuals
- Eligible SFOs
- Passive investment entities owned by family
The general anti-avoidance rule taxes profits if a FIHV/FSPE transaction’s main purpose is a tax benefit, unless done at arm’s length and the transferor pays tax.
Record-keeping Requirements
FIHVs and eligible SFOs must keep sufficient records to readily ascertain:
- Identity and details of FIHV/SFO beneficial owners
Responsible people for the FIHV and SFO must maintain these records.
Penalties apply if they fail to comply with record keeping requirements without reasonable excuse.
Advance Ruling
After the relevant amendment comes into force, FIHVs and FSPEs can apply for advance rulings to determine:
- Their eligibility for tax concessions
- This provides certainty around their tax position.
The Hong Kong tax concessions compared to Singapore’s
Hong Kong:
- No advance ruling needed
- No limit on family investment structures
- Asset management size: HK$240M vs SG$50M (≈HK$ 280M) in Singapore
- No local investment requirement
- Lower substance requirements: 2 full-time staff & HKD$2M operating costs.
Singapore:
- Advance ruling required.
- No limit on family investment structures.
- Local investment requirement: 10% of AUM or SG$10M
- Higher substance requirements: 3 investment advisors and operating costs of SG$ 0.5-1M (≈HK$ 2.8-5.6M).
Note 1: Section 13U of the Singapore Income Tax Act.
Note 2: Locally registered companies in Singapore must have at least SGD 10 million asset management size when applying for tax incentives and commit to expanding to SGD 20 million within 2 years, according to Section 13O of the Singapore Income Tax Act.
