Hong Kong’s Profits Tax Exemption for Family Offices: Eligibility and Optimization

Hong Kong has positioned itself as a premier destination for family offices through its comprehensive Family-Owned Investment Holding Vehicle (FIHV) tax exemption regime. This guide provides an expert analysis of the eligibility requirements, compliance framework, and strategic optimization opportunities for ultra-high-net-worth families seeking tax-efficient wealth management structures in Asia’s leading financial hub.

Understanding the FIHV Tax Exemption Regime

The Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023, which came into operation on 19 May 2023, represents Hong Kong’s strategic initiative to attract and retain family offices in the region. The regime offers a complete profits tax exemption—effectively a 0% tax rate—on assessable profits derived from qualifying transactions and incidental transactions carried out by eligible FIHVs managed by eligible Single Family Offices (ESF Offices).

What makes this regime particularly attractive is its retroactive application to any year of assessment commencing on or after 1 April 2022, allowing families who established their structures in good faith before the formal legislation to benefit from the tax concessions. Furthermore, Hong Kong’s FIHV regime received a critical endorsement when the OECD assessed it as “not harmful” in its February 2024 report, providing international legitimacy and comfort to families concerned about compliance with global tax standards.

Legislative Background and Policy Objectives

Hong Kong’s family office tax regime was developed in direct response to the competitive landscape in Asia, particularly Singapore’s well-established Variable Capital Company (VCC) framework and Section 13O/13U tax incentive schemes. The Hong Kong government recognized that without a comparable tax incentive structure, the city risked losing its position as the region’s wealth management center.

The policy objectives are threefold: (1) attract ultra-high-net-worth families to establish or relocate their family offices to Hong Kong; (2) create high-value employment opportunities in the asset and wealth management sector; and (3) deepen Hong Kong’s capital markets by channeling family office assets into the local investment ecosystem. These objectives are reflected in the regime’s structural requirements, which balance tax incentives with substance requirements designed to ensure genuine economic activity in Hong Kong.

Core Eligibility Requirements for FIHV Status

Achieving and maintaining FIHV status requires satisfying multiple interconnected requirements across ownership, asset thresholds, management structure, and economic substance. Understanding these requirements holistically is essential for effective tax planning and compliance.

1. Minimum Asset Under Management (AUM) Threshold

The FIHV regime establishes a minimum asset value of HK$240 million (approximately US$30 million) in specified assets. This threshold applies to the aggregate value of specified assets managed by the Single Family Office on behalf of the FIHV or multiple FIHVs at the end of each tax year.

The HK$240 million threshold is calculated based on the total net asset value (NAV) of Schedule 16C assets held by the FIHVs and their underlying entities under the SFO’s management. While the Inland Revenue Department (IRD) has indicated that a Departmental Interpretation and Practice Note (DIPN) will clarify NAV calculation methodologies and investment valuation approaches, current practice suggests that market value or fair value accounting principles should be applied consistently.

Importantly, the asset threshold is assessed at year-end, not as an average throughout the year. This provides planning flexibility—families can strategically time large investments or divestments around reporting dates, though such timing strategies should be balanced against the commercial objectives of the investment portfolio.

2. Family Ownership Requirements

The FIHV must maintain at least 95% beneficial ownership by members of a single family throughout the entire basis period. This ownership can be held directly or indirectly through intervening entities. The 95% threshold reflects a strict interpretation of “family-owned,” ensuring that the regime benefits genuine family wealth structures rather than quasi-institutional investment vehicles.

An alternative pathway exists: families can qualify with 75% family ownership if tax-exempt charities hold the remaining 25%. This provision accommodates philanthropic family structures where charitable foundations or trusts hold significant stakes alongside commercial family investments.

The definition of “family” extends beyond immediate relatives to include a “relevant family,” which encompasses: the individual founder, their spouse or surviving spouse, lineal descendants of the founder or spouse (children, grandchildren, great-grandchildren), spouses of such descendants, and former spouses of family members. This broad definition enables multi-generational planning while maintaining the family character of the investment vehicle.

3. Economic Substance Requirements

Hong Kong’s FIHV regime includes robust economic substance requirements to prevent shell company structures and ensure genuine business activity. Each FIHV (or the eligible SFO if CIGAs are outsourced) must satisfy two quantitative tests:

Employment Test: The FIHV must employ at least two full-time qualifying employees in Hong Kong who carry out core income-generating activities (CIGAs). These employees must possess appropriate qualifications for their roles, which typically means professional credentials in investment management, financial analysis, or related fields. “Full-time” is interpreted consistently with Hong Kong labor standards—generally at least 35-40 hours per week.

Expenditure Test: The FIHV must incur at least HK$2 million in operating expenditure in Hong Kong annually for carrying out CIGAs. Qualifying operating expenditure includes employee salaries and benefits, office rent, professional fees (legal, accounting, compliance), technology and data services, and other direct costs of investment management activities. Notably, the HK$2 million threshold represents actual expenditure incurred, not budgeted or projected costs.

The substance requirements must be “adequate” and “commensurate” with the level of CIGAs conducted. This proportionality principle means that larger, more complex family office operations managing substantial assets or diverse portfolios may need to exceed the minimum thresholds to demonstrate adequate substance. The IRD applies a facts-and-circumstances analysis, considering factors such as portfolio size, asset complexity, investment strategy sophistication, and transaction volume.

4. Management by an Eligible Single Family Office

The FIHV must be managed by an eligible Single Family Office (ESF Office) that satisfies the safe harbor rules. The safe harbor requires that at least 75% of the SFO’s assessable profits be derived from services provided to specified persons of the relevant family during the basis period. This prevents multi-family offices or commercial asset managers from accessing the regime.

The 75% test is calculated based on assessable profits, not revenue. This profit-based calculation can create complexities when the SFO has loss-making activities or when different service lines have varying profitability margins. Families should structure their SFO operations to clearly segregate family-related services from any ancillary activities to facilitate compliance tracking.

5. Normal Management and Control in Hong Kong

The FIHV must be normally managed or controlled in Hong Kong during the basis period. This requirement aligns with general principles of corporate tax residence and ensures that strategic decision-making occurs within Hong Kong rather than merely booking transactions through Hong Kong entities.

“Normal management and control” is assessed by examining where the board of directors (or equivalent governing body) meets, where investment decisions are made, where the investment committee operates, and where key personnel are located. Families should document decision-making processes through board minutes, investment committee records, and correspondence demonstrating Hong Kong-based control.

Qualifying Transactions and Specified Assets

The profits tax exemption applies only to income derived from “qualifying transactions” in “specified assets.” Understanding the scope of qualifying transactions and the evolution of the specified assets list is critical for tax planning and portfolio construction.

Current Specified Assets Under Schedule 16C

Schedule 16C of the Inland Revenue Ordinance defines the classes of assets that qualify for profits tax exemption. The current specified assets include:

• Securities: Shares and debentures of both private and public companies, including equity interests in Hong Kong and overseas corporations
• Bonds and Notes: Government bonds, corporate bonds, and other debt securities
• Funds: Units or shares in collective investment schemes, including open-ended fund companies (OFCs), unit trusts, and limited partnership funds
• Futures Contracts: Exchange-traded derivatives and futures contracts on commodities, indices, or other underlying assets
• Foreign Exchange Contracts: Contracts under which parties agree to exchange different currencies on a particular date
• Exchange-Traded Commodities: Gold, silver, and other commodities traded on recognized exchanges
• Deposits: Bank deposits and certificates of deposit (excluding deposits made in the course of money-lending business)

Notably, Schedule 16C has not been updated since its introduction in 2019 for the Unified Fund Exemption regime, creating a misalignment with the evolving investment landscape. Private equity investments, venture capital, private credit, real assets, and digital assets were historically excluded, limiting the regime’s attractiveness to families with diversified alternative investment portfolios.

November 2024 Proposed Enhancements to Specified Assets

On 25 November 2024, the Financial Services and Treasury Bureau (FSTB) issued a comprehensive consultation paper proposing significant enhancements to the FIHV regime, with the consultation period closing on 3 January 2025. The proposed amendments, which are expected to be implemented in 2025 subject to Legislative Council approval, include:

• Virtual Assets: Cryptocurrencies, digital tokens, and other blockchain-based assets, aligning Hong Kong’s family office regime with its broader strategy to become a global virtual asset hub
• Loans and Private Credit: Direct lending to corporations, sponsor-backed financing, distressed debt, and other private credit strategies—addressing a major gap in the current regime
• Emission Derivatives and Carbon Credits: Environmental instruments including carbon allowances, renewable energy certificates, and sustainability-linked derivatives, supporting ESG-driven family office mandates
• Insurance-Linked Securities (ILS): Catastrophe bonds, life settlement contracts, and other insurance-linked alternative investments defined under Hong Kong’s Insurance Ordinance

These proposed expansions represent a paradigm shift for Hong Kong’s family office regime, moving from a primarily public markets-focused framework to one that accommodates the full spectrum of ultra-high-net-worth investment strategies. For families currently operating under the regime with alternative investments, these changes cannot come soon enough; for families considering Hong Kong, the enhanced scope significantly improves the regime’s value proposition.

Income Scope Reforms: Removing the 5% Incidental Threshold

Under the current regime, transactions “incidental” to carrying out qualifying transactions are subject to a strict 5% threshold—meaning the FIHV’s trading receipts from incidental transactions must not exceed 5% of total trading receipts from both qualifying and incidental transactions in the basis period. This limitation has proven problematic in practice, as many legitimate investment activities generate ancillary income streams that inadvertently breach the threshold.

The November 2024 consultation paper proposes a fundamental restructuring of income taxation under the FIHV regime:

1. Include All Income from Qualifying Transactions: Rather than limiting exemptions to capital gains, the proposal would exempt all income derived from qualifying transactions, including interest income from bonds and debt securities, dividend income, rental income from real estate investment trusts (REITs), and other recurring income streams
2. Remove the 5% Incidental Transaction Threshold: The bright-line 5% threshold would be eliminated entirely, providing greater flexibility for families whose investment strategies naturally generate diverse income types
3. Introduce an Exclusion List: To prevent abuse, certain income categories would be explicitly excluded, particularly income derived from private companies engaged in Hong Kong immovable property trading or property development—areas where Hong Kong seeks to protect its domestic tax base

These income scope reforms address one of the most significant practical limitations of the current regime and bring Hong Kong’s framework closer to international best practices in family office taxation.

Structural Flexibility and Entity Options

One of the FIHV regime’s most attractive features is its structural flexibility. Unlike some jurisdictions that prescribe specific legal forms, Hong Kong’s regime permits FIHVs to be established as:

• Companies: Hong Kong private limited companies, overseas corporations, or special purpose vehicles
• Partnerships: Limited partnerships or general partnerships, including those registered in other jurisdictions
• Trusts: Discretionary trusts, fixed-interest trusts, or purpose trusts established under Hong Kong or foreign trust law
• Other Legal Arrangements: Foundations, segregated portfolio companies, or hybrid structures recognized under applicable law

This structural neutrality enables families to select entity types that align with their succession planning, asset protection, and governance objectives without being constrained by tax considerations. For example, families concerned with multi-generational wealth transfer may prefer discretionary trust structures, while families seeking operational control may opt for company or limited partnership forms.

Special Purpose Entity (SPE) Pass-Through Treatment

The FIHV regime includes provisions for Family-owned Investment Holding Vehicle Special Purpose Entities (FSPEs), allowing the tax exemption to pass through to underlying investment vehicles. When an FIHV holds equity interests in an SPE, the SPE’s investment profits from specified assets are tax-exempt on a proportional basis.

For example, if an FIHV owns 60% of an SPE that generates HK$10 million in profits from specified assets, 60% of those profits (HK$6 million) receive tax-exempt treatment at the SPE level, provided the FSPE meets the relevant requirements. This pass-through mechanism is particularly valuable for families using holding company structures, master-feeder fund arrangements, or co-investment vehicles alongside institutional partners.

Optimization Strategies for Family Offices

Beyond basic compliance, sophisticated family offices can optimize their FIHV structures to maximize tax efficiency, operational effectiveness, and long-term sustainability. The following strategies represent best practices observed among leading family offices in Hong Kong.

1. Strategic Asset Allocation Planning

With the proposed expansion of specified assets to include virtual assets, private credit, and other alternatives, families should proactively restructure their portfolios to maximize FIHV-eligible assets. This may involve:

• Transferring private credit portfolios from non-FIHV structures to FIHV entities once the reforms take effect
• Segregating Hong Kong property development investments (likely to be excluded) into separate non-FIHV vehicles to avoid contamination
• Utilizing the SPE mechanism for co-investments or syndicated transactions where the family office co-invests alongside institutional investors
• Timing the acquisition or disposal of large non-qualifying assets around year-end to maintain compliance with the HK$240 million threshold

2. Substance Optimization: Building Adequate but Efficient Operations

While the minimum substance requirements are two employees and HK$2 million expenditure, the proportionality principle means that minimal compliance may be insufficient for larger family offices. Optimization strategies include:

• Outsourcing with Substance Retention: Outsourcing non-core functions (administration, compliance, reporting) to third-party service providers while retaining core investment decision-making in-house to satisfy CIGA requirements
• Shared Services Arrangements: For families with multiple FIHVs, establishing a centralized SFO that provides services across all vehicles, with appropriate transfer pricing and cost allocation to ensure each FIHV meets substance thresholds
• Talent Investment: Recruiting senior investment professionals with institutional pedigree not only satisfies substance requirements but enhances investment performance and governance—turning a compliance obligation into a competitive advantage
• Technology and Infrastructure: Investing in Hong Kong-based technology platforms, data analytics, and portfolio management systems that count toward the HK$2 million expenditure threshold while improving operational efficiency

3. Integration with Foreign-Sourced Income Exemption (FSIE) Regime

Hong Kong’s Foreign-Sourced Income Exemption regime, which became effective from 1 January 2023, interacts with the FIHV regime in important ways. The IRD’s first advance ruling on FIHV status (issued in February 2024) confirmed that foreign-sourced interest, dividends, and disposal gains qualifying for FIHV exemption will not be regarded as “specified foreign-sourced income” under the FSIE regime, provided the economic substance requirement is met.

This integration means that FIHVs satisfying the substance requirements effectively obtain both FIHV exemption and relief from FSIE economic substance requirements—a significant compliance simplification. Families should structure their FIHVs to ensure clear segregation between foreign-sourced investment income (eligible for FIHV/FSIE coordination) and other foreign-sourced income streams that may require separate FSIE analysis.

4. Advance Ruling Strategy

The IRD’s advance ruling system allows taxpayers to obtain binding confirmation of tax treatment before implementing structures or transactions. The February 2024 advance ruling on FIHV eligibility demonstrates the IRD’s willingness to provide clarity on complex family office arrangements.

Families implementing innovative structures—such as multi-tier holding companies, trust-owned FIHVs, or hybrid debt-equity instruments—should consider seeking advance rulings before finalizing arrangements. While advance rulings involve costs (professional fees, IRD filing fees) and disclosure, the certainty obtained can justify these expenses for structures involving substantial assets or novel legal arrangements.

5. Succession Planning and Generational Transfer

The broad definition of “relevant family” enables multi-generational planning, but families should proactively address succession issues to maintain FIHV eligibility across generations:

• Structuring governance arrangements (family councils, investment committees) that facilitate smooth transitions while maintaining Hong Kong management and control
• Using trust structures with carefully drafted letter of wishes and succession protocols to ensure continuity of FIHV status despite beneficiary changes
• Implementing family constitutions or shareholders’ agreements that preserve the 95% family ownership requirement even as the family expands through marriage and births
• Planning for liquidity events or partial exits in a manner that maintains compliance with asset thresholds and ownership requirements

Compliance, Reporting, and Documentation Requirements

Maintaining FIHV status requires rigorous ongoing compliance and documentation. The IRD expects FIHVs to maintain comprehensive records demonstrating eligibility and to report their tax treatment accurately in annual profits tax returns.

Annual Reporting Obligations

FIHVs must file profits tax returns (Form BIR51 for corporations, appropriate forms for other entities) annually, claiming the tax exemption for qualifying transactions. The return should be accompanied by:

• Audited financial statements prepared in accordance with Hong Kong Financial Reporting Standards (HKFRS) or International Financial Reporting Standards (IFRS)
• A detailed computation of assessable profits, separately identifying exempt income from qualifying transactions and taxable income (if any) from non-qualifying activities
• Evidence of asset values demonstrating compliance with the HK$240 million threshold
• Documentation of family ownership percentages and beneficial ownership structures
• Records of Hong Kong employment (employment contracts, MPF contributions, payroll records) and operating expenditure

Documentation Best Practices

Beyond formal reporting, prudent family offices maintain contemporaneous documentation evidencing compliance with all FIHV requirements:

• Investment Decision Records: Investment committee minutes, deal memos, and approval records demonstrating that investment decisions are made in Hong Kong
• Transaction Classification: Schedules categorizing each investment transaction as qualifying, incidental, or non-qualifying, with supporting analysis
• Substance Documentation: Employee qualification records, organizational charts, office lease agreements, and expenditure invoices supporting substance claims
• Family Ownership Records: Family trees, trust deeds, shareholder registers, and beneficial ownership declarations evidencing the 95% family ownership requirement
• Transfer Pricing Documentation: For families with multiple FIHVs or related party transactions, arm’s length transfer pricing documentation supporting cost allocations and service fees

Hong Kong vs. Singapore: Comparative Analysis for Family Offices

Hong Kong’s FIHV regime is frequently compared to Singapore’s family office tax incentive schemes (Section 13O and 13U). While both jurisdictions offer 0% tax rates on qualifying income, key differences influence location decisions:

Asset Threshold Comparison

Hong Kong requires HK$240 million (US$30 million) in AUM, while Singapore’s Section 13O requires S$50 million (US$37 million) for the basic scheme and Section 13U requires S$500 million (US$370 million) for the enhanced scheme. Hong Kong’s lower threshold makes the regime accessible to a broader range of affluent families, while Singapore’s higher-tier scheme targets truly dynastic wealth.

Substance Requirements

Hong Kong mandates 2 employees and HK$2 million (US$255,000) expenditure, while Singapore requires 2 investment professionals (3 for Section 13U) and S$500,000 (US$370,000) business spending for Section 13O, or S$1 million for Section 13U. Hong Kong’s higher expenditure requirement in absolute terms reflects its higher cost base, though the real difference narrows when adjusted for purchasing power parity.

Qualifying Investment Scope

Singapore’s regime includes a broader range of alternative investments from inception, including private equity, venture capital, and real estate funds. Hong Kong’s proposed 2025 reforms aim to close this gap by including private credit, virtual assets, and insurance-linked securities, potentially creating parity or even advantage once implemented.

Strategic Considerations

Beyond tax mechanics, families choose between Hong Kong and Singapore based on lifestyle preferences, geographic proximity to source countries, time zone alignment with key markets, education and healthcare quality, and political risk perceptions. Many sophisticated families maintain presence in both jurisdictions, using each for different aspects of their wealth management ecosystem.

Recent Developments and Future Outlook

Hong Kong’s family office ecosystem is experiencing rapid growth, with government data indicating that the dedicated FamilyOfficeHK team assisted 50 family offices in setting up or expanding operations in the first five months of 2025—a 19% increase compared to the same period in 2024. Industry estimates suggest Hong Kong now hosts more than 2,700 single-family offices, surpassing Singapore’s count of just over 2,000.

Integration with Capital Investment Entrant Scheme (CIES)

Hong Kong’s new Capital Investment Entrant Scheme (CIES), which opened for applications on 1 March 2024, creates synergies with the FIHV regime. Under CIES, applicants can obtain residency by investing HK$30 million in permissible assets, with March 2025 enhancements allowing investments through eligible privately held companies entirely owned by the applicant.

Families can potentially structure their affairs to satisfy both CIES investment requirements and FIHV eligibility criteria, obtaining both residency rights and tax exemption through integrated planning. This dual benefit significantly enhances Hong Kong’s value proposition for families seeking to relocate wealth and residence simultaneously.

Anticipated DIPN Guidance

The IRD has indicated that a comprehensive Departmental Interpretation and Practice Note (DIPN) on the FIHV regime is forthcoming. This DIPN is expected to provide detailed guidance on:

• NAV calculation methodologies for different asset classes
• Investment valuation approaches for illiquid or hard-to-value assets
• Interpretation of the proportionality principle for substance requirements
• Treatment of complex ownership structures involving trusts, foundations, and multi-tier holdings
• Application of the regime to specific fact patterns and industry practices

Family offices should monitor the release of this DIPN closely and consider adjusting their compliance practices accordingly.

Common Pitfalls and Risk Management

Despite the regime’s attractive features, family offices frequently encounter implementation challenges. Common pitfalls include:

• Inadequate Substance Documentation: Failing to maintain contemporaneous records of Hong Kong-based activities, leading to challenges during IRD audits or inquiries
• Asset Threshold Breaches: Temporary drops below HK$240 million due to market volatility or large distributions, potentially disqualifying the FIHV for that year of assessment
• Family Ownership Dilution: Inadvertent breach of the 95% threshold through share issuances, trust distributions, or complex reorganizations
• Incidental Transaction Overcounting: Under the current 5% threshold regime, misclassifying transactions or failing to properly aggregate incidental income
• Management and Control Issues: Allowing key decisions to migrate offshore through remote board meetings or delegation to overseas advisors, undermining Hong Kong nexus

Proactive risk management involves implementing quarterly compliance reviews, engaging experienced Hong Kong tax advisors, maintaining compliance checklists and calendars, conducting annual “health checks” of FIHV status, and implementing early warning systems for threshold approaches.

Conclusion

Hong Kong’s FIHV tax exemption regime represents a sophisticated and competitive framework for family office taxation, offering complete profits tax exemption combined with structural flexibility and alignment with international standards. The November 2024 proposed enhancements—particularly the expansion to virtual assets, private credit, and the removal of the 5% incidental threshold—position Hong Kong to compete aggressively with Singapore and other global family office hubs.

For ultra-high-net-worth families, the FIHV regime offers not merely tax savings, but a comprehensive ecosystem encompassing world-class professional services, deep capital markets, robust legal infrastructure, and strategic geographic positioning between East and West. Success requires sophisticated planning that balances tax efficiency with substance, compliance, and commercial objectives.

As the regime matures and anticipated DIPN guidance emerges, best practices will continue to evolve. Families establishing or operating FIHVs should adopt a proactive approach—engaging qualified advisors, maintaining robust documentation, monitoring regulatory developments, and periodically reassessing their structures against changing business needs and regulatory requirements.