Hong Kong is ramping up efforts to put in place tax breaks and policies to attract more family offices and a greater slice of the enormous amount of new wealth that is emerging across Asia.
Over the last couple of decades, high-net-worth individuals in the region have set up family offices rather than rely on private banking services to manage their assets, handle succession planning, and give to charity.
In 2019, there were more than 1,300 family offices in Asia with average assets of US$809m, according to estimates by the Hong Kong government. A 2020 Knight Frank report suggested that Hong Kong was home to more than 9,500 ultra-high-net-worth individuals with more than US$30m in investible assets.
Targeting investors
Hong Kong’s aspirations to attract a larger slice of this wealth were highlighted by the fact that the goal was mentioned in three of the government’s policy addresses in 2020, 2021 and 2022, as well as in a spate of new regulations it has introduced.
To broaden its appeal, the Hong Kong government proposed a Family Office Tax Concession for investment profits earned by qualified single family offices
Family offices in Singapore
Singapore has also seen a rise in the number of family offices. Regulatory reforms and tax exemptions to attract high-net-worth individuals were introduced in 2002, almost two decades before Hong Kong.
The number of family offices in Singapore has multiplied by fivefold from 2017 to 2019, increasing from 400 at the end of 2020 to 700 a year later. The government also introduced a new corporate investment structure in 2020, known as the Variable Capital Company (VCC), making it more attractive for family offices to set up.
The tax exemptions for family offices include sections 13D, 13O, and 13U of the Income Tax Act, which provide breaks on specified income derived from designated investments and are similar to the tax exemption Hong Kong has proposed, says John Wong, PwC partner, and China and Hong Kong family business & private client services leader.
‘Hong Kong is comparable to Singapore. But tax is not the only consideration in practice, as the operation of a family office involves many different matters. Choosing Singapore or Hong Kong is always a personal decision.’
InvestHK, the government office that works to attract investment to Hong Kong, set up a FamilyOfficeHK team in June 2021 to ‘offer a one-stop supporting service’ to those family offices. According to a government document, the team has helped 13 family offices set up or expand their business in Hong Kong.
Tax concessions
Family offices are privately held companies of wealthy families set up to handle their financial affairs and protect their wealth. Tax treatment is one of the key considerations when a family office considers where to set up.
To broaden its appeal, the Hong Kong government proposed a Family Office Tax Concession for investment profits earned by qualified single family offices (SFOs) in early 2022, which is expected to be approved by the Hong Kong Legislative Council this year. A consultation period finished in April.
The tax concession is attractive to those who want to set up family offices in Hong Kong, says John Wong, PwC partner, and China and Hong Kong family business & private client services leader.
‘Under the tax regime, eligible Family-owned Investment Holding Vehicles (FIHVs) and their Special Purpose Entities (SPEs) managed by a SFO in Hong Kong would enjoy the profits tax exemption of qualifying transactions in specified assets listed under Schedule 16C of the Inland Revenue Ordinance (IRO), which include incidental transactions subject to a 5% threshold,’ says Wong.
The ‘specified assets’ include stocks, debentures, loans, fund holdings, bonds or notes.
Hong Kong has a unique advantage to attract wealthy families – it has no inheritance tax, gift tax or wealth tax
‘Hong Kong doesn’t have capital gains tax, but taxpayers need to pay profits tax for profits generated from carrying on a trade, profession or business in Hong Kong, unless it is capital in nature. This tax exemption offers a great deal of certainty for those wealthy families to manage their investments in Hong Kong,’ Wong says.
But to get the exemptions, SFOs have to meet certain requirements. For example, the central management and control of each FIHV must be in Hong Kong and the aggregate average value of the exempt assets should be at least HK$240m (US$30m), according to Wong.
‘The requirements are reasonable and user-friendly,’ he says.
At the same time, FIHVs must be exclusively and beneficially owned by one or more individuals that are connected to the same family and the assets must be managed by an SFO in Hong Kong. At the same time, a single SFO cannot manage more than 50 FIHVs and their SPEs.
The proposed regulations would also impose substantial activities test on FIHVs, requiring each one to have at least two full-time qualified employees and HK$2m in operating expenditures.
Hong Kong’s advantages
Tax liabilities are always a consideration for high-net-worth families and, in this regard, Hong Kong has a unique advantage to attract wealthy families – it has no inheritance tax, gift tax or wealth tax, says Wong. Adding to these benefits, the proposed tax exemption regime should boost Hong Kong’s attractiveness for family offices.
‘The family office is a tool to effectively and wisely manage the family’s assets on a global basis. As a tool, the focus is not just tax, it is involved with many other matters, which requires a large talent pool to provide services,’ adds Wong.
‘Hong Kong is naturally a good location to set up family offices if the investments are in mainland China, and also a good hub for the Asia Pacific region’
In fact, the broad talent pool is another advantage for Hong Kong.
‘In the first place, the family office might hire people with an investment background, but it might end up having a lot of talent from different backgrounds, such as family governance, succession, philanthropy and administration,’ says Wong. In this sense, Hong Kong has abundant resources.
And the proximity to investment is yet another factor that makes Hong Kong stand out as an asset management hub.
Wong adds: ‘Hong Kong is naturally a good location to set up family offices if the investments are in mainland China, and also a good hub for the Asia Pacific region, since proximity to where the investments are located is an important factor for choosing the right location for a family office.’
