The current legal framework of Hong Kong Trusts
The Trust Law (Amendment) Ordinance 2013 ("the Ordinance"), which aims to modernize Hong Kong's trust laws, became effective on 1 December 2013. The Ordinance states that its main objective is to amend the Trustee Ordinance and Perpetuities and Accumulations Ordinance to extend trustees' powers in certain aspects, impose a statutory duty of care on trustees, provide for the validity of certain trusts, abolish the rule against perpetuities, and change the rule against excessive accumulations of income.
The major changes include (i) extension of trustees' powers to take certain actions, where the trust deed does not provide for it; (ii) introduction of a default provision on statutory duty of care on trustees; (iii) imposition of statutory controls on trustees’ exemption clauses; (iv) provision of a court-free process for the appointment and retirement of trustees on beneficiaries’ directions; (v) provisions against forced heirship rules; (vi) abolition of the rule against perpetuities and excessive accumulations of income; (vii) inclusion in the trust of provisions reserving powers relating to investment and asset management functions which will not invalidate the trust.
The above provisions bring improvements to Hong Kong's trust law and strengthens Hong Kong's position as an international asset management and trust planning center and makes it a more attractive trust domicile for settlors.
Why Hong Kong is the ideal place
Over the last couple of decades, the fact that Hong Kong has sustained and grown a diverse trust industry has depended on a number of favorable factors.
International financial center – Experienced and market-leading providers in Hong Kong offer a wide range of financial, legal and supportive professional and corporate services, which drive demand for trust services. The Hong Kong government frequently organizes overseas road shows to promote its financial market. Hong Kong trusts can also benefit from a simple tax system with low tax rates and preferential double tax treaties.
Well-established legal system – Unlike other Chinese cities, Hong Kong is governed under Common Law, a legal framework that overseas investors are familiar with. Hong Kong, being the renminbi (RMB) offshore hub and trust administration center, provides a stable legal and political certainty to protect assets, and continues to capture the new growth of China’s market.
Affluent population – Hong Kong is a wealthy city with an educated population and a culture that likes to invest according to world standards. An affluent and sophisticated population drives demand for retail investment, retirement planning and wealth planning, which all need trust services.
Proximity to China – Owing to the growth of its number of High Net Worth Individuals (HNWI) and providing investment opportunities for offshore RMB funds and products for foreign investors, China has already had an important influence on the Hong Kong trust industry.
Well-educated workforce – Hong Kong has established a strong pool of professional talent to serve a variety of increasingly sophisticated trust-related services over the last few decades.
Strong infrastructure – Hong Kong has a robust infrastructure to support business activities, including an efficient transportation network, airport and telecommunications network.
Four main types of trust structure
The Hong Kong trust industry is comprised of the following four types of trust:
- Corporate trusts
Corporate trust providers offer core trustee services and essential corresponding activities, such as formation and administration of trusts as well as acting as custodians. These service providers are critical to the fund management industry of Hong Kong.
Corporate trustees offer professional services for wholesale and retail investment products that are normally set up by utilizing a unit trust structure, and provide investors with the opportunity to invest in assets or stocks that they might not usually have access to in the open market. This is associated with risk diversification.
- Pension schemes
The pension system will continue to mature when assets reach a scalable size, since the government is looking to increase participation and make enhancements to the MPF schemes. The role of the trustee within the design of the scheme will remain pivotal as these schemes are likely to continue to grow.
The fund size of Hong Kong is relatively small when compared with mature schemes in other jurisdictions, since the Hong Kong MPF system is still at an early stage of development. The proportion of pension assets as a share of GDP will continue to grow, mirroring the global trend.
- Private trusts
With the support from advisors who specialize in private trusts, the growth of HNWIs across China and the Asia Pacific region has stimulated a surge in the demand for wealth and estate planning services.
There is a growing demand for these services from HNWIs seeking to manage the inter-generational transmission of wealth and implement succession plans for family owned businesses, because Hong Kong is at the center of the world’s largest and fastest growing markets for wealthy people in Asia.
- Charitable trusts
Although charitable trusts represent a small proportion of the wider Hong Kong trust industry, they are becoming vital to advisors working with HNWIs as they look to create long-term legacies through philanthropy.
Onshore charitable trusts, unlike other areas of the Hong Kong trust industry where offshore trusts dominate, are normally set up in Hong Kong under the Hong Kong Trustee Ordinance, in which a charitable trust is one of the four structures that can be utilized to form a charity in Hong Kong.
A comparison with Singapore
Hong Kong and Singapore are both reputable international financial centers. Both are dominant players within Asia for the provision of trust-related services, and as a jurisdictional base for trusts.
Hong Kong’s competitive advantage includes its geographical location and legal system which can capture the growth of China on one hand, and operate under a Common Law system on the other, which is identical to those in Jersey, the Cayman Islands, the British Virgin Islands and Singapore. The long history of Hong Kong’s core legislative system is critical for clients.
Singapore has adopted the following strategies to boost its trust industry in recent years:
Government backing of the trust industry – Clear policies and strong government investment backing are the cornerstones of the development of Singapore’s trust services. The infant industry was then largely promoted to incentivize international players and clients.
Trust practitioner regulation – The requirement that trust practitioners be licensed to practice in Singapore and the condition that specific services must be performed by Singaporean licensed practitioners or providers are the two key factors that helped drive demand for local trust services.
Professional training and accreditation – Singapore has adopted a proactive approach and built up an institution to provide accredited training, which is partly subsidized by the government, whereas Hong Kong has a well-educated workforce and an established pool of professional talent ready to support the industry.
In practice, while not all of the measures taken in Singapore would function and be beneficial to Hong Kong, some industry leaders consider that the Hong Kong government should formulate policies addressing some of these areas. Hong Kong can develop some tactics for sustaining its long-term goals for the trust and related industries through analyzing competitors’ characteristics and latest developments.
Tax implications of a Hong Kong trust
Generally speaking, there are no express statutory tax exemptions for Hong Kong trust structures. Trustees should plan their investments to make sure their profits fall within specific exemptions. A person can be taxed in Hong Kong if they carry out business in Hong Kong, either itself or through an agent, and earn profits with a Hong Kong source. A trustee can be taxed on fees for acting as a trustee. The taxability of the trust fund’s profits are determined as if each trust is a separate taxpayer. If the trust conducts its activities through underlying companies, then the companies are subject to the normal corporate tax rules in Hong Kong.
There are four strategies to avoid trusts being taxed in Hong Kong. Firstly, avoid being taxable in the first place, ensuring that each individual investment is structured so as to be tax-free. Secondly, use offshore managers and onshore advisers. Thirdly, rely on the offshore funds exemption (but this is limited). Fourthly, use regulated collective investment vehicles such as mutual funds, unit trusts and limited partnerships which must be registered with the Securities and Futures Commission of Hong Kong.
Conclusion – Looking to the future
The industry, government and regulators need to increase their level of collaboration, to come to a consensus on a medium to long-term vision for the Hong Kong trust industry, and work together rigorously to build on Hong Kong’s strong foundations as an international financial center.
It is also vital for law makers to take a holistic approach to policy creation, which supports the comprehensive financial services subsectors to foster a robust and independent financial and administrative services market in Hong Kong.
It is important for the Hong Kong government to pursue a long-term vision and policy on developing and promoting the trust industry and creating a favorable environment to foster business growth, thereby further cementing Hong Kong’s position as a truly world-class financial services center in all areas, given that an increased number of overseas jurisdictions are now competing with Hong Kong in its role as a trust center.
Catherine Le Bourgeois is the Main Partner of Masson de Morfontaine Ltd. She is a qualified lawyer specializes on international M&A, legal and taxation.
Wilson Yeung is the International Tax Director of Masson de Morfontaine Ltd. He is a qualified accountant and certified tax adviser specializes on international tax planning and transfer pricing for individual and corporate clients.
