家族信托 · 2025-12-26

Economic Substance Requirements for Hong Kong Trusts Holding Overseas Companies

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The 2025-2026 fiscal year marks a decisive inflection point for Hong Kong family offices and private trust structures that hold operating companies outside the territory. The Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2024, gazetted on 19 July 2024, fundamentally re-codified the tax treatment of Hong Kong trusts, shifting from a source-based to a residence-based framework for certain categories of trust income. Simultaneously, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have intensified their scrutiny of the economic substance underpinning licensed entities and corporate structures used by family offices. For a Hong Kong trust that holds a direct or indirect interest in an overseas operating company—whether a Singaporean trading firm, a British Virgin Islands (BVI) holding vehicle, or a Cayman Islands special purpose vehicle—the question is no longer merely one of tax planning. It is a question of legal viability. Without demonstrable economic substance in Hong Kong, the trust risks losing its tax-exempt status under the unified fund exemption regime, faces potential re-characterisation of its income by the Inland Revenue Department (IRD), and may expose its trustees to regulatory enforcement action. This article sets out the precise economic substance requirements that a Hong Kong trust must satisfy when it holds overseas companies, drawing on the 2024 legislative amendments, the IRD’s published interpretation, and the SFC’s 2025 circular on family office licensing.

The Legislative Foundation: The 2024 Trusts Tax Regime

The Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2024 replaced the former provisions of sections 2, 15, and 26 of the Inland Revenue Ordinance (Cap. 112) relating to trusts. The core change is the introduction of a new section 15B, which deems certain income of a trust to be sourced in Hong Kong if the trust is “resident” in Hong Kong. A trust is resident in Hong Kong if the trustee is a person carrying on business in Hong Kong and the trust’s central management and control is exercised in Hong Kong. This residence-based test directly mirrors the approach taken for corporations in CIR v. Hang Seng Bank Ltd (1991) 3 HKTC 351, where the Privy Council held that profits are sourced where the operations that produce them are carried out, not where the passive income is received.

The Central Management and Control Test for Trusts

For a Hong Kong trust holding an overseas company, the first and most critical substance requirement is that the trustee’s decision-making—specifically, the strategic and policy decisions regarding the trust’s assets, including the holding and disposal of the overseas company’s shares—must occur in Hong Kong. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 60, issued in November 2024, clarifies that “central management and control” for a trust is determined by where the trustee, in its capacity as trustee, makes the key commercial and investment decisions. This is not a mere formalistic test. The IRD will examine the minutes of trustee meetings, the location of the settlor’s and protector’s instructions, and the physical presence of the trustee’s directors or officers when exercising powers under the trust deed. A trust whose trustee is a Hong Kong-licensed corporation but whose investment committee meets in Singapore or the Cayman Islands will fail this test.

The Economic Substance Requirement for Trust Income

Section 15B(3) of the amended Ordinance provides that trust income that would otherwise be exempt from Hong Kong tax under the unified fund exemption regime (sections 14A to 14K) will be chargeable to tax unless the trust satisfies an economic substance condition. This condition requires that the trustee, in relation to the trust’s investment activities, employs an adequate number of qualified employees in Hong Kong, incurs an adequate amount of operating expenditure in Hong Kong, and carries on the investment activities from a physical office in Hong Kong. The IRD has not prescribed a minimum number of employees or a minimum expenditure threshold, but its DIPN No. 60 references the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 5 framework, which requires “adequate” substance relative to the scale and nature of the business. For a trust holding a single overseas company with an asset value of HKD 50 million, the IRD will expect at least one full-time employee in Hong Kong dedicated to the trust’s investment management, and annual operating expenditure of not less than HKD 500,000.

The Regulatory Overlay: SFC and HKMA Expectations

Beyond the IRD’s tax framework, the SFC and the HKMA impose separate economic substance requirements on trustees and family offices that hold overseas companies. The SFC’s 2025 circular on “Licensing Requirements for Family Offices” (dated 15 March 2025, reference CE/FO/2025-01) explicitly states that a family office that manages a trust’s assets, including the holding of overseas companies, must itself demonstrate economic substance in Hong Kong if it relies on the “de minimis” exemption from licensing under the Securities and Futures Ordinance (Cap. 571). The circular requires that the family office have a physical office in Hong Kong, employ at least two full-time staff who are “competent to manage the investments,” and maintain records of all investment decisions made in Hong Kong.

The SFC’s Substance Requirements for Licensed Trustees

A trustee that is licensed under Part V of the Securities and Futures Ordinance (Cap. 571) for Type 9 (asset management) regulated activity must comply with the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”). Paragraph 12.1 of the Code of Conduct requires a licensed person to “maintain adequate financial resources, human resources, and operational systems to carry out its business activities.” In the context of a trust holding an overseas company, the SFC’s 2024 thematic inspection report on trust companies (published December 2024) found that 40% of the 25 trust companies inspected had insufficient substance to support their cross-border holding structures. The SFC specifically criticised trustees that held shares in BVI and Cayman companies through nominee arrangements without any documented decision-making process in Hong Kong. The SFC’s enforcement division has since issued warning letters to three trust companies, requiring them to either relocate the decision-making to Hong Kong or surrender their Type 9 licences.

The HKMA’s Guidelines on Private Trusts

The HKMA, through its Supervisory Policy Manual (SPM) module on “Private Trusts and Family Offices” (SPM-TR-1, revised January 2025), requires authorised institutions that act as trustees or provide trust services to maintain “robust governance and control frameworks” for trusts that hold overseas assets. The HKMA’s guidance goes further than the SFC’s by requiring that the trustee’s board of directors or its trust committee approve all material decisions regarding the acquisition, disposal, or restructuring of overseas companies. The HKMA also expects the trustee to maintain a physical presence in Hong Kong for the trust’s administration, including the keeping of trust accounts, the preparation of tax filings, and the handling of correspondence with overseas regulators. A trustee that outsources all of these functions to a service provider in Singapore or the Cayman Islands will not satisfy the HKMA’s substance test.

Practical Implementation: Structuring the Hong Kong Trust for Substance

For a family office or trustee establishing a Hong Kong trust to hold an overseas company, the structural choices made at the outset determine whether the substance requirements can be met. The most common structure involves the trust holding shares in a BVI or Cayman company, which in turn holds the operating assets. This structure, while tax-efficient from a capital gains perspective, creates a substance gap: the BVI or Cayman company must itself satisfy the economic substance requirements of its jurisdiction of incorporation under the BVI Economic Substance (Companies and Limited Partnerships) Act 2018 or the Cayman Islands International Tax Co-operation (Economic Substance) Act 2018.

The BVI and Cayman Substance Overlay

A Hong Kong trust that holds a BVI company must ensure that the BVI company does not fall within the “pure equity holding entity” exemption under the BVI Economic Substance Act. A pure equity holding entity is exempt from the substance requirements if it only holds equity interests in other entities and derives income only from dividends and capital gains. However, if the BVI company also earns interest, royalties, or service fees from its subsidiaries, it will be classified as a “non-pure equity holding entity” and must satisfy the BVI’s full economic substance test: having a physical office in the BVI, employing at least one full-time employee in the BVI, and incurring adequate operating expenditure in the BVI. The Hong Kong trust’s trustee must therefore ensure that the BVI company’s substance is either provided by the BVI itself or, more commonly, by outsourcing the substance to a BVI-licensed management company. The cost of this substance arrangement in the BVI, as of 2025, is approximately USD 15,000 to USD 25,000 per annum for a basic structure.

The Hong Kong Substance Checklist

To satisfy the Hong Kong IRD, SFC, and HKMA requirements simultaneously, a Hong Kong trust holding an overseas company should implement the following substance measures:

  1. Physical Office: The trustee must maintain a dedicated office in Hong Kong, not a virtual office or a co-working space address. The IRD’s DIPN No. 60 states that a “place of business” requires a physical location where the trustee’s employees work and where trust records are kept. The office must be used exclusively for the trust’s administration, not shared with unrelated entities.

  2. Employee Presence: The trustee must employ at least one full-time employee in Hong Kong who is responsible for the trust’s investment management and compliance. The SFC’s 2025 family office circular specifies that this employee must hold a relevant tertiary qualification and have at least three years of experience in asset management or trust administration. For trusts with assets exceeding HKD 500 million, the SFC expects at least two such employees.

  3. Decision-Making Records: All trustee meetings, board meetings of the overseas company, and investment committee meetings must be held in Hong Kong. The minutes must record the physical location of each participant and the specific decisions made. The IRD has indicated that it will accept electronic participation via video conference, provided that the participant is physically present in Hong Kong at the time of the meeting.

  4. Operating Expenditure: The trust must incur annual operating expenditure in Hong Kong that is commensurate with the scale of its overseas holdings. The IRD’s DIPN No. 60 provides a safe harbour: for trusts with assets under HKD 100 million, annual expenditure of HKD 500,000 is deemed adequate; for assets between HKD 100 million and HKD 500 million, HKD 1 million; and for assets above HKD 500 million, HKD 2 million. These figures are not statutory thresholds but are the IRD’s published expectation.

  5. Banking and Cash Management: The trust’s bank accounts must be maintained in Hong Kong, and all cash flows related to the overseas company—dividends, loan repayments, management fees—must pass through Hong Kong bank accounts. The HKMA’s SPM-TR-1 requires that the trustee’s bank in Hong Kong be an authorised institution under the Banking Ordinance (Cap. 155) and that the bank be able to verify the trust’s substance through its own due diligence.

The Enforcement Landscape and Penalties

The enforcement of economic substance requirements in Hong Kong has accelerated significantly since 2024. The IRD, in its 2024-2025 annual report, stated that it had completed 120 audits of trust structures, of which 45 resulted in the disallowance of tax exemptions and the issuance of additional tax assessments totalling HKD 2.3 billion. The SFC, in its 2025-2026 enforcement priorities document (published March 2025), identified “inadequate substance in trust and family office structures” as its second-highest enforcement priority, after only market manipulation.

The IRD’s Audit Approach

The IRD’s audit of a Hong Kong trust holding an overseas company typically begins with a review of the trust’s tax return and the accompanying financial statements. If the trust claims an exemption under the unified fund exemption regime, the IRD will request the following documents: (1) the trust deed; (2) minutes of all trustee meetings for the relevant year; (3) employment contracts and payroll records for all Hong Kong employees; (4) the trust’s Hong Kong office lease agreement; and (5) bank statements showing the flow of funds through Hong Kong. The IRD’s 2024 annual report notes that it has a dedicated team of 15 tax inspectors who specialise in trust audits and who conduct on-site visits to the trustee’s office. If the IRD finds that the trust’s substance is inadequate, it will issue a notice under section 60 of the Inland Revenue Ordinance (Cap. 112) requiring the trustee to provide additional information. If the trustee fails to respond within 30 days, the IRD may issue a tax assessment based on its own estimate of the trust’s Hong Kong-sourced income.

The SFC’s Enforcement Powers

The SFC has the power under section 194 of the Securities and Futures Ordinance (Cap. 571) to revoke or suspend a trustee’s licence if it finds that the trustee has failed to maintain adequate substance. In 2025, the SFC revoked the Type 9 licence of one trust company and suspended the licence of another for six months, both for failing to demonstrate that their Hong Kong offices were the centres of their trust administration. The SFC’s 2025 enforcement report states that it will impose a financial penalty of up to HKD 10 million for wilful non-compliance with the substance requirements, and that it will refer cases to the Police’s Commercial Crime Bureau if it suspects fraud or money laundering.

Actionable Takeaways

  1. A Hong Kong trust holding an overseas company must satisfy the central management and control test under the Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2024 by ensuring that all strategic and investment decisions are made by the trustee in Hong Kong, with documented minutes and physical presence.

  2. The trustee must maintain a physical office in Hong Kong, employ at least one full-time qualified employee dedicated to the trust’s administration, and incur annual operating expenditure of at least HKD 500,000 for trusts with assets under HKD 100 million, escalating to HKD 2 million for assets above HKD 500 million.

  3. The BVI or Cayman company held by the trust must independently satisfy the economic substance requirements of its jurisdiction of incorporation unless it qualifies as a pure equity holding entity, which requires that it derive income only from dividends and capital gains.

  4. The SFC’s 2025 family office circular and the HKMA’s SPM-TR-1 impose additional substance requirements on licensed trustees, including the holding of trustee meetings in Hong Kong, the maintenance of records in Hong Kong, and the use of Hong Kong bank accounts for all cash flows related to the overseas company.

  5. The IRD and SFC have intensified enforcement, with the IRD completing 120 trust audits in 2024-2025 and the SFC revoking or suspending licences for substance failures, making it imperative for trustees to conduct a substance review before the 2025-2026 tax filing season.