The Tax Advantage of
Hong Kong's Family Office Regime

The Family Investment Holding Vehicle (FIHV) tax exemption was introduced under ss.13P-13Q of the Inland Revenue Ordinance (effective April 2022) to provide a comprehensive profits tax exemption for qualifying family investment holding vehicles managed by qualified family offices in Hong Kong. A FIHV is exempt from profits tax on income and gains arising from a broad range of investment activities including trading in securities, derivatives, foreign exchange, and other specified investments. To qualify, the family office must meet all of the following conditions: the FIHV must have assets under management in Hong Kong of at least HK$240 million; the qualifying family office managing the FIHV must incur a minimum of HK$2 million in operating expenditure in Hong Kong per year; the investment activities of the FIHV must remain within the scope of permissible investments defined in the legislation (certain illiquid private equity and property direct holdings require careful assessment); the FIHV must be managed exclusively for the benefit of one family; and the management entity must meet the definition of a "qualified investment manager." The exemption is applied on a year-by-year basis, and failure to meet any condition in any year retroactively removes the exemption for that entire year.

The Foreign-Sourced Income Exemption (FSIE) regime, effective from 1 January 2023, removed the blanket exemption for offshore passive income previously available to HK entities. Under the new regime, specified foreign-sourced income (dividends, interest, royalties, and disposal gains on equity interests) received by a Hong Kong entity is brought within the charge to profits tax unless the recipient can either: (1) demonstrate that it has adequate economic substance in Hong Kong (for interest and royalties) or (2) satisfy the participation exemption conditions (for dividends and equity disposal gains). For family offices receiving dividends through HK holding companies, the participation exemption is the primary avenue for maintaining tax-free treatment. The conditions for the participation exemption on dividends include: holding at least 5% of the shares (or having HK$4M acquisition cost) in the dividend-paying company, having held the shares for a minimum period, the dividend-paying company being subject to tax in its jurisdiction, and the holding not being a portfolio of short-term trading investments. We advise family offices on structuring dividend flows to satisfy the participation exemption conditions and ensure FSIE compliance documentation is maintained.

The concessionary tax treatment for carried interest — essentially 0% profits tax for qualifying HK-resident single family offices — was introduced under ss.14C-14D of the Inland Revenue Ordinance as part of the 2021 family office incentive package. Carried interest in this context refers to the performance-related profit sharing arrangement between the investment management entity of the family office and the investment fund or holding vehicle. For the 0% rate to apply, the carried interest must be received by a Hong Kong-resident entity that manages a qualifying fund, the fund must itself meet certain investment scale and activity requirements, and the carried interest arrangement must be properly documented as such rather than being a disguised service fee. In practice, this concession is most relevant to family offices that have formalised their investment management into a distinct HK-based management entity receiving carried interest from the family's investment holding vehicle — a structure that also supports the FIHV exemption qualification. We design the management entity structure and the carried interest documentation to qualify for the concessionary rate.

Hong Kong does not require the registration of trusts — there is no public register of HK trusts, making them significantly more private than trusts in many other jurisdictions (such as England, where trust registration is now mandatory). For HK tax purposes, a trust is generally not itself a taxable entity in the same way as a company — instead, the taxation depends on whether the trustee is carrying on a trade or business (in which case profits tax may apply on business income) or simply holding investment assets (in which case the FIHV exemption or FSIE framework may apply at the holding entity level). Distributions of capital gains to beneficiaries are generally not subject to HK tax, as HK has no CGT. Income distributions may be taxable in the beneficiaries' hands depending on their jurisdiction of residence and the nature of the income. However, overseas jurisdictions where beneficiaries are resident may impose tax on trust income and capital distributions regardless of the HK treatment — the UK has detailed trust income attribution rules, the US has comprehensive PFIC and passive foreign investment company rules for trusts holding foreign funds, and various other jurisdictions have their own anti-avoidance rules. An HK trust structure that achieves HK tax efficiency may inadvertently create reporting obligations and tax liabilities for overseas beneficiaries that must be planned for.

Hong Kong abolished estate duty in February 2006, removing the domestic succession tax concern for HK-domiciled individuals holding HK assets. However, this emphatically does not mean there are no succession tax concerns for UHNW HK families. The key issue is the treatment of overseas assets in the jurisdiction where those assets are located, or in the deceased's domicile jurisdiction. UK inheritance tax at 40% above the £325,000 threshold applies to: all assets of UK-domiciled or deemed-domiciled individuals worldwide, and all UK-situated assets of non-UK domiciled individuals — including UK property, UK bank accounts, and shares in UK companies. A HK family member holding a London flat worth £5 million faces UK inheritance tax of approximately £1.87 million, payable within 6 months of death, regardless of the fact that they are not UK-domiciled. US estate tax applies to all worldwide assets of US citizens and green card holders at up to 40% on estates above USD $13.6M (2024), creating enormous exposure for HK residents with US person status. Australia imposes capital gains tax on a deemed disposal at death for certain Australian assets. Planning around these exposures requires trust structures, lifetime gifting programmes, and careful domicile management — all of which we advise on as part of our cross-border succession planning service.

The Common Reporting Standard (CRS), developed by the OECD and implemented in Hong Kong through the Inland Revenue Ordinance, requires HK financial institutions — including certain family office holding structures — to identify accounts held by non-HK tax residents and report the account information to the IRD, which then automatically exchanges it with the relevant overseas tax authority. In practice, this means that a family office holding structure managed in HK is potentially a Reporting Financial Institution subject to CRS due diligence and reporting obligations. Where the FIHV, trust, or fund structure holds accounts or investments on behalf of beneficiaries or investors who are resident in participating CRS jurisdictions, information about those accounts — balances, income, and disposals — may be automatically reported to the beneficiary's home country tax authority. CRS has fundamentally changed the information landscape: structures that might previously have operated with limited overseas visibility are now subject to automatic reporting. We advise on CRS classification of family office structures, due diligence obligations, and the implications of CRS reporting for the tax positions of overseas beneficiaries and family members.

Direct real estate holdings present one of the most challenging aspects of FIHV compliance because direct property investment is not included in the list of permissible investments for the FIHV exemption under Schedule 16C of the Inland Revenue Ordinance. This means that if the FIHV directly holds investment properties, the rental income and gains from those properties will not be covered by the FIHV exemption and will remain subject to profits tax or property tax as applicable. There are, however, indirect approaches to including real estate exposure within a tax-efficient family office structure: (1) holding property through a separate property holding company outside the FIHV, which is not eligible for the exemption but can use normal property tax and profits tax planning; (2) exposure to real estate through REITs and property-related listed securities, which typically do qualify as permissible investments within the FIHV; or (3) property funds and real estate private equity fund interests, which may qualify depending on their legal structure. We advise on the optimal approach to integrating real estate with the family office structure to minimise overall tax while maintaining FIHV exemption eligibility.

The HK$2 million minimum local expenditure requirement for the FIHV exemption is intended to ensure that qualifying family offices have genuine economic substance in Hong Kong rather than being purely nominal HK entities. In practice, the HK$2M minimum must be incurred by the qualified investment manager (the family office management entity) in connection with managing the FIHV — not merely the family office's personal spending. Qualifying expenditure includes: compensation of HK-based investment management employees (salary, MPF, benefits), Hong Kong office rent and related occupancy costs, professional services fees paid to HK-based service providers (legal, accounting, compliance), and other operating costs directly attributable to the investment management activity of the FIHV. Non-qualifying items include: personal household expenses of family members, overseas expenditure, and costs of offshore service providers. For smaller family offices where the HK$2M minimum is close to the margin, careful expenditure planning and documentation is essential. We monitor local expenditure levels throughout the year and advise where additional qualifying expenditure may need to be incurred to maintain the threshold.

Hong Kong does not impose gift duty or gift tax on the transfer of assets during the donor's lifetime. This makes lifetime gifting in HK an extremely flexible succession tool — a parent can transfer HK assets of any value to children without any HK tax consequence at the time of transfer. However, there are several indirect considerations. First, for assets held in a corporate structure, the transfer of shares in the holding company triggers HK ad valorem stamp duty at 0.2% of the higher of consideration and market value — manageable but not zero. Second, if the donor is a US person, US gift tax rules apply to worldwide gifts above an annual exclusion of USD $18,000 per donee (2024), and large gifts may be subject to US federal gift tax at up to 40%. Third, UK-domiciled or deemed-domiciled donors may be subject to UK inheritance tax on gifts if they die within seven years of making them. Fourth, the receipt of a gift may be relevant income or capital for the recipient in their jurisdiction of residence. We advise on the optimal gifting programme for the family's specific asset composition and the jurisdictional profile of all family members.

The distinction between a single family office (SFO) and a multi-family office (MFO) has important implications for FIHV qualification in Hong Kong. The FIHV exemption is available only where the family investment holding vehicle is managed exclusively for the benefit of a single family — meaning a connected group of individuals defined by blood, marriage, or adoption within a specified degree of relationship. An SFO managing assets exclusively for one family can qualify for the FIHV exemption provided all other conditions are met. An MFO managing assets for multiple unrelated families cannot use a single FIHV structure — each family's assets would need to be held in a separate qualifying vehicle with separate FIHV qualifications, or the MFO would need to restructure to serve each family through independent qualifying structures. Additionally, the carried interest concessionary rate under ss.14C-14D is specifically available to HK-resident SFOs — MFO structures face more complex qualification requirements for this concession. The practical implication is that families that co-invest through shared MFO arrangements should seek specific structuring advice to ensure the shared management arrangements do not inadvertently disqualify them from SFO-specific reliefs.