Family Offices in Hong Kong: Comprehensive Financial Services for High Net Worth Families

INTRODUCTION

A family office is typically a family controlled corporation that provides a range of financial services including asset management and estate planning to a family or families. They may adopt various operational structures based on their activities and investment objectives. Typically, family offices are operated through a separate corporate entity, which may or may not be affiliated with the family's investment vehicles. The taxation of the family office entity in Hong Kong follows the same regulations applied to other corporate entities except for possible tax concessions which may be applicable.

Family offices can be broadly categorised into two types:

Single family offices: which typically refers to an arrangement (often structured through a corporate vehicle owned or controlled by the family) under which the assets, investments and long-term interests of members of a single family are managed;

Multi-family offices: which typically refers to corporate vehicles established and run as commercial ventures which serves more than one high net worth family.

There is no definition of “family” or “family office” in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “Ordinance”), which is administered by the Securities and Futures Commission (the ‘SFC’).

GENERAL LICENSING REQUIREMENTS UNDER THE SECURITIES AND FUTURES ORDINANCE

As mentioned above, family offices are not defined in the Ordinance (although they are defined under the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023) and there is no specific licensing regime for family offices under the Ordinance licencing framework. Family offices will be subject to the same licensing requirements as any other licence applicant. The licensing regime is activity-based and does not take account of whether an entity is called a “family office” or whether its clients are families.

Generally speaking and in the context of family offices, the following three key factors must be present in order to give rise to a licensing obligation:

1 the services provided by the family office constitute one or more ‘regulated activity’ as defined under the Ordinance;

2 the family office is carrying on a business in the provision of such services; and

3 the business is carried on in Hong Kong.

If the services provided by a family office do not constitute any ‘regulated activity’ or they fall within any of the available carve-outs, the family office will not be required to be licensed. It is important for family offices to ensure that they do not hold themselves as engaging in a ‘regulated activity’ without possessing the necessary license. The SFC has noted that multi-family offices are more likely to require a licence as it usually operates as a commercial entity.

Genuine single family office arrangements are typically not considered carrying on a business from a licensing perspective where it can be shown that: (i) it has been established to serve the investment needs of members of a single family; and (ii) is not being run as a business or have the pursuit of profit as its business objective.

To assist in determining the licensing obligations of family offices, the SFC issued a circular on 7 January 2020 providing general guidance for family offices intending to carry out asset management or other services in Hong Kong as well as a Leaflet on 21 March 2023 as a quick reference guide to the licensing requirements.

Overview of the licensing regime under the Securities and Futures Ordinance

Part V of the Ordinance establishes a ‘single licence’ regime whereby a person requires only one licence or registration to conduct different types of regulated activities. The only exception to the single licence arrangement is that securities margin financiers and their representatives must conduct their business through a separate corporation (Section 118(1)(d)) and therefore require a separate licence.

There are ten types of ‘regulated activities’ which are as follows:

Type 1: Dealing in Securities

Type 2: Dealing in Futures Contracts

Type 3: Leveraged Foreign Exchange Trading

Type 4: Advising on Securities

Type 5: Advising on Futures Contracts

Type 6: Advising on Corporate Finance

Type 7: Providing Automated Trading Services

Type 8: Securities Margin Financing

Type 9: Asset Management

Type 10: Providing Credit Rating Services

In summary, the Ordinance prohibits any person from carrying on a business (or holding himself out as carrying on a business) in a regulated activity unless an appropriate authorisation has been granted or an exemption or exclusion applies (Section 114(1) and (2)). Certain persons are excluded from the licensing/registration requirements of Part V of the Ordinance in the definitions of the regulated activities in Part 2 of Schedule 5.

Carve-outs relevant to family offices under the Securities and Futures Ordinance

There are a number of general exemptions from the definitions of ‘regulated activities’ set out in the Ordinance. The two most relevant carve-outs from the licensing requirements under the Ordinance are (i) advising group company exemption; and (ii) trust company exemption.

Advising group company exemption

A corporation is not required to be licensed for Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) or Type 9 (asset management) regulated activity if it provides the related investment advice or services solely to its wholly owned subsidiaries, its holding company holding all of its issued shares, or to other wholly owned subsidiaries of that holding company.

In relation to advisory activities

The exemption should not be applied to a corporation advising its group company in respect of that group company’s client assets. However, where the investment advice and/or related research reports are provided to the group company for its own consumption, notwithstanding that the group company may rely, in whole or in part, on such advice/research reports to service its clients, the above exclusion will still apply if the advice/research reports are issued to the clients by the group company in its own name and that group company has assessed the corporation’s input before issuing such advice/research reports.

In relation to asset management activities

The exemption is only applicable to a corporation providing asset management service to its group company (on a wholly owned basis) in respect of that group company’s assets. It should not be read as applying to the management of assets belonging to the group company’s clients. Managing assets belonging to third parties would constitute “asset management” and attract a licensing requirement.

TRUST COMPANY EXEMPTION

In relation to dealing in securities

A trust company registered under Part VIII of the Trustee Ordinance (Chapter 29 of the Laws of Hong Kong) (the “Trustee Ordinance”) is not required to be licensed for Type 1 regulated activity (dealing in securities) if it acts as an agent for a collective investment scheme in distributing application forms, redemption notices, conversion notices and contract notes, receiving money and issuing receipts on behalf of its principal.

In relation to investment advisory activities

A trust company registered under Part VIII of the Trustee Ordinance is not required to be licensed for Type 4 regulated activity (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) or Type 9 (asset management) regulated activity if it provides such investment advice or services wholly incidental to the discharge of its duties as a trustee.

In relation to asset management activities

If a trustee company acting as trustee of a discretionary trust has appointed an appropriate person to manage the portfolio or in practice acts on professional advice in carrying out its duties as trustee, it would not be required to be licensed. However, if the provision of portfolio management services becomes a separate or distinct business of the trustee company, it is unlikely that the trustee company could rely on the wholly incidental exemption and it would have to apply for a licence for Type 9 regulated activity.

SINGLE FAMILY OFFICES

How a single family office operates could possibly lead to different licensing obligations under the licensing regime. For example, in cases where a family appoints a trustee to hold its assets of a family trust, and the trustee operates a family office as an internal unit to manage the trust assets, the family office may not need a licence because it will not be providing asset management services to a third party.

Similarly, if the family office is established as a separate legal entity which is wholly owned by a trustee or a company that holds the assets of the family, it may not need a licence as it will qualify for the intra-group carve-out as full discretionary investment manager of the securities or futures contracts portfolio. The family office is not required to be licensed for Type 9 regulated activity (asset management) if it provides asset management services solely to related entities, which are defined as its wholly- owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly-owned subsidiaries.

Example 1: A company wholly owned by another company which is held by family and non-family members

Example 2: A company wholly owned by another company which is wholly owned by a trustee appointed by the family to set up a family trust

MULTI-FAMILY OFFICES

Where a multi-family offices provides services to clients who are not related entities then it would not be able to rely on the advising group company exemption.

Questions may arise on whether the sharing of common administrative infrastructure for the purpose of reducing operating overheads would trigger a licensing obligation. The SFC has clarified that the sharing of office premises and administrative infrastructure by two or more family offices would not of itself automatically trigger a licensing obligation for such single family offices. However, where two or more single family offices make arrangements for the sharing of human resources involved in investment related matters, research or the investment process, this may be regarded as a multi-family office structure and, where the provision of services is carried on as a business, increases the likelihood of a licensing obligation arising.

COMMON LICENSES HELD BY FAMILY OFFICES

Given the nature of multi-family offices, it is common for the following licenses to be obtained:

Regulated activity	Reasoning
Type 1: Dealing in Securities	A family office which intends to provide other services such as acquiring financial assets following instruction made by the family may fall within the definition and be required to hold a licence for Type 1 regulated activity (dealing in securities).
Type 4: Advising on Securities	A multi-family office which has not been delegated full discretionary investment authority and only provides securities investment advice and executes securities transactions may be required to hold a licence for Type 1 regulated activity (dealing in securities) and Type 4 regulated activity (advising on securities).
	A family office which intends to provide other services such as acquiring financial assets following instruction made by the family may fall within the definition and be required to hold a licence for Type 1 regulated activity (dealing in securities).
Type 9: Asset Management	A family office which has been set up as a business to manage assets which includes securities or futures contracts may be required to hold a licence for Type 9 regulated activity (asset management).

Please note that the relevant licensing requirements are not dependent on whether clients are family members and the relationships among beneficiaries of a family trust or between family members are not a relevant factor. The specific license required by the family office would depend on the specific business and is case specific.

POSSIBLE TAX CONCESSIONS

Hong Kong has introduced a tax regime to attract and retain single family offices in Hong Kong. The new regime provides tax concessions for eligible family-owned investment holding vehicles managed by single family offices in Hong Kong and family-owned special purpose entities since the assessment year starting 1 April 2022.

This new tax regime provides profits tax concessionary rate of 0% for (a) eligible family-owned investment holding vehicles (“FIHVs”) managed by eligible single family offices (“SFOs”) in Hong Kong; and (b) family-owned special purpose entities (“FSPEs”) in respect of their assessable profits arising from qualifying transactions and incidental transactions.

Eligible family-owned investment holding vehicles (FIHVs)

For a FIHV to be eligible for the profits tax concession, it must fulfill the following conditions:

1. the FIHV must be an entity which includes a corporation, partnership and trust, established in or outside Hong Kong, not for general commercial or industrial purposes;
2. the FIHV must relate to one or more members of a single family and has at least 95% in aggregate of beneficial interest (whether direct or indirect) (except where a charitable entity is involved);
3. the FIHV must be normally managed or controlled in Hong Kong during the basis period for the year of assessment;
4. the FIHV must be managed by an eligible SFO and meet the minimum asset threshold of HK$240 million (or equivalent in foreign currency); and
5. the FIHV must carry out its core income generating activities in Hong Kong and meet the substantial activities requirements of having at least two qualified full-time employees and incurring at least HK$2 million operating expenditures in Hong Kong for carrying out the activities concerned.

Eligible single family offices (SFOs)

An eligible FIHV must be managed by an eligible SFO. To be an eligible SFO, the SFO must fulfill the following conditions:

1. the SFO must be a private company (incorporated in or outside Hong Kong) which is normally managed or controlled in Hong Kong;
2. the SFO must provide services to specified persons of a family and the fees for the provision of those services are chargeable to tax;
3. the SFO must have at least 95% of its beneficial interest being held (directly or indirectly) by members of the family (except where a charitable entity is involved); and
4. the SFO must meet the safe harbor rule of at least 75% of the assessable profits is derived from the services provided to specified persons of the family.

Definition of FSPEs

An FSPE must fulfill the following conditions:

1. the FIHV must have a beneficial interest (whether direct or indirect) in the FSPE;
2. the FSPE must be established solely for holding (directly or indirectly) and administering one or more investee private companies and / or for holding (whether directly or indirectly) and administering any qualifying assets and does not carry on any trade or activity (including executing a legal document); and
3. the FSPE must not be an FIHV or an investee private company.

Qualifying transactions and incidental transactions

For the purpose of the tax concessions, qualifying transactions mean transactions in specified assets under Schedule 16C to the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) which include the following assets:

1. securities;
2. shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company;
3. futures contracts;
4. foreign exchange contracts under which the parties to the contracts agree to exchange different currencies on a particular date;
5. deposits other than those made by way of a money-lending business;
6. deposits (as defined by section 2(1) of the Banking Ordinance (Chapter 155 of the Laws of Hong Kong)) made with a bank (as defined by Part 1 of Schedule 1 to the Ordinance);
7. certificates of deposit (as defined by Part 1 of Schedule 1 to the Ordinance);
8. exchange-traded commodities;
9. foreign currencies; and
10. OTC derivative products (as defined by Part 1 of Schedule 1 to the Ordinance).

Incidental transactions refer to transactions that are incidental to the carrying out of qualifying transactions. Incidental transactions must not exceed 5% of the total of the FIHV’s trading receipts from qualifying transactions and incidental transactions in the basis period for the year of assessment.

A charitable entity is involved

For the purpose of the tax concessions, a charitable entity may hold up to 25% of beneficial interest (whether direct or indirect) in an eligible FIHV and/or an eligible SFO. However, this is subject to the conditions that (i) family members must hold at least 75% of the beneficial interest of the eligible FIHV and/or eligible SFO; and (ii) the total percentage of beneficial interest held by unrelated persons in the eligible FIHV and/or eligible SFO must not exceed 5%.

Anti-round tripping provisions

Anti-round tripping measures are designed to prevent the exploitation of the profits tax exemption. If a Hong Kong resident person has beneficial ownership of not less than 30% in a relevant FIHV, either alone or jointly with an “associate” and the FIHV is an associate of the Hong Kong resident person, anti-round tripping provisions may apply. In such case, the assessable profits of the FIHV or FSPE may be considered as the Hong Kong resident person’s assessable profits and be subject to tax.

Anti-avoidance provisions

To prevent tax abuse, the profits tax concession will not apply to an FIHV or FSPE if the Commissioner of Inland Revenue determines that the main purpose of entering into an arrangement or transferring an asset or business to the FIHV or FSPE is to obtain a tax benefit. However, if the transfer is carried out at arm’s length and the transferor is subject to tax on the assessable profits from the transfer, the profits tax concession may still apply.

ADVANTAGES OF SETTING UP FAMILY OFFICE IN HONG KONG

As an international financial centre and asset management hub, Hong Kong is an obvious choice for family offices, which are typically set up to manage the financial affairs of high net worth families. Some of the relevant advantages and factors are set out below for reference.

Tax concessions

As mentioned above, Hong Kong provides profits tax concessionary rate of 0% for eligible FIHVs and FSPEs in respect of their assessable profits arising from qualifying transactions and incidental transactions. This would significantly reduce the tax burden on investment profits, allowing families to retain more of their wealth.

Wealth and Succession Planning

Hong Kong provides a range of options for wealth transfer and succession planning. Family offices can establish trusts, which offer a flexible way to transfer wealth and assets to future generations. Further, family offices can also use other estate planning tools such as wills and insurance policies to manage wealth transfer and succession planning.

Strategic gateway to China

Hong Kong's strategic location in Asia makes it an ideal hub for family offices. It offers easy access to the vast and rapidly growing markets of China, as well as other Asian economies. This proximity enables family offices to tap into diverse investment opportunities and expand their global reach.

Advanced infrastructure

Hong Kong boasts a well-developed financial infrastructure, including a sophisticated banking system, robust capital markets, and a wide range of financial services. These resources provide family offices with access to diverse investment instruments, efficient capital management, and wealth preservation solutions.

Internationally accepted and transparent common law legal system

Hong Kong's legal system is based on common law principles, which are widely recognized. Hong Kong's internationally accepted and transparent common law legal system provides family offices with confidence in conducting transactions and protecting property rights

The above information is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation.