Hong Kong as a Private Client Planning Centre

Hong Kong has a longstanding reputation as the global financial and trade centre of choice within Asia. This has continued since its 1997 return to Chinese sovereignty in part due to China’s ‘one country two systems’ rule, which has preserved Hong Kong’s favourable tax regime and separate legal and courts system. These factors have made Hong Kong an important centre for the management of private wealth. The Hong Kong Government has, over recent years, shown a commitment to maintaining Hong Kong’s position as a centre for private wealth with there being a number of likely developments in the future that will only increase Hong Kong’s attractiveness as a forum for private client planning.

At the heart of Hong Kong’s attractiveness as a centre for the management of private wealth is its tax system. Hong Kong is not a tax-free jurisdiction as some traditional ‘offshore centres’ essentially are; that said, it operates a ‘territorial principle’ of taxation under which only income arising in or derived from Hong Kong is taxable. In the commercial investment context, this principle produces some very favourable results. For example, dividend income received by a Hong Kong parent company from a foreign subsidiary is not taxable income in the recipient’s hands, interest on a loan made from Hong Kong to an overseas borrower is not taxable in Hong Kong and gains on the disposal of foreign real estate by a Hong Kong entity are not taxable in Hong Kong. Further, dividends and interest gains, even if they have a Hong Kong source, are not taxable. These principles are also attractive in the private wealth context because while the profits of trade will be taxable in Hong Kong, returns from long-term investments should not be.

Revisions to Hong Kong’s tax regime have further increased its attractiveness. Hong Kong used to levy tax on certain types of Hong Kong source interest. This tax on interest was abolished with effect from 1 April 1989. In an attempt to further enhance its position as a jurisdiction for wealth management, Hong Kong abolished estate duty with effect for deaths from 11 February 2006: estate duty had previously applied to holdings of Hong Kong situate assets on death such as Hong Kong securities, real estate and bank deposits.

Hong Kong has further encouraged inward investment through its policy of entry into double tax treaties. Hong Kong was traditionally limited in its ability to enter into comprehensive treaties because Hong Kong law did not allow Hong Kong to exchange information with other jurisdictions. In 2009, the position changed with an amendment allowing tax information exchange being made in accordance with the Inland Revenue Ordinance. Hong Kong has been actively pursuing a policy of entry into double tax treaties now that it has the legislative framework to do so, and at the end of 2010, Hong Kong had a number of treaties with jurisdictions including France, the Netherlands, Switzerland and the UK.  

Not only was Hong Kong’s Government actively pursuing double tax treaty negotiations in 2010, it was also beginning to implement the revision of the Hong Kong Trustee Ordinance. This statute contains much of Hong Kong’s trust law. It is, for the most part, modelled on the English Trustee Act 1925, which has led to a decline in the popularity of Hong Kong trusts with Hong Kong’s trust law needing significant modernisation. It was, however, announced in 2008 by Professor K C Chan, Hong Kong’s Secretary for Financial Services and the Treasury, that the Ordinance would be revised to simplify trust administration and to create a regime more suited to modern financial markets. One of the stated aims of the review of the Ordinance that he announced was to promote the use of Hong Kong’s trust law by non-Hong Kong residents with a view to enhancing Hong Kong’s position as a major asset management centre.

The Hong Kong Government began a public consultation on the review of the trust law on 21 June 2009. The consultation came to an end on 21 September 2009 and consultation conclusions, and proposals for legislative reform, were issued in February 2010. Draft legislation is presently being prepared to go before the Hong Kong legislature. If passed, the draft legislation will significantly increase Hong Kong’s attractiveness as a trust planning jurisdiction.

Key proposed changes include:

• Rule against remoteness of vesting
• It is proposed that the Perpetuities and Accumulations Ordinance be amended to repeal the existing rule against perpetuities for new trusts. This is in line with a trend in other modern trust law jurisdictions.  

Accumulations of income

It is proposed that the Perpetuities and Accumulations Ordinance be amended to repeal the rule limiting accumulations of income (except in relation to charitable trusts) for trusts created after the effective date.

Settlor reserved power trusts and forced heirship

It is proposed that the Trustee Ordinance be revised such that trusts with limited settlor reserved powers are expressly provided not to be voidable; and that forced heirship rules do not affect the validity of a Hong Kong trust.

Trustee duty of care

It is proposed that a statutory duty of care for trustees will be incorporated into Hong Kong law as was implemented in England and Wales in the Trustee Act 2000. The 2000 Act introduced a duty of care that requires regard to be had to any special knowledge or expertise a trustee has or holds himself out as having or, where a trustee is a professional, knowledge or experience that he might reasonably be expected to have. Trustees and settlors are able to opt out of this statutory duty of care and agree to a lower standard of care.

Singapore revised its trust law in 2005 and experienced an increase in new trust business; Hong Kong will be hoping also to see an increase in trust business following the revision of its Trustee Ordinance. As the proposals look set to significantly change the Trustee Ordinance such that it contains typical ‘offshore’ provisions, Hong Kong will not only be in an improved position to offer trusts to Asian families but it should attract more international trust business from families with no Asian nexus.

Generally, Hong Kong’s tax system and its commitment to developing a full double tax treaty network make it an attractive jurisdiction for the management of assets. The Hong Kong Government has shown itself not only to be committed to the preservation of Hong Kong’s favourable tax regime but also to legislative reform where this will improve Hong Kong’s position.