Hong Kong vs Mainland China Trust Law: Legal Choices for Cross-Border Families

The decision of whether to domicile a family trust in Hong Kong or Mainland China has moved from an academic comparison to an urgent strategic question for cross-border families. The catalyst is the PRC’s amended Trust Law (《中华人民共和国信托法》), which, as of the 2025 judicial interpretations issued by the Supreme People’s Court, has clarified the enforceability of asset protection trusts against personal creditors—a historically grey area that deterred many HNW families. Simultaneously, Hong Kong’s legislative push to amend its Trustee Ordinance (Cap. 29) to codify firewalls for reserved powers and modernise fiduciary duties reached its third reading in the Legislative Council in early 2025. These parallel developments mean that the jurisdictional choice is no longer merely about tax efficiency; it is now a binary decision on legal certainty for asset segregation, succession planning, and creditor protection. For a family holding multi-jurisdictional assets—a Shanghai commercial property, a BVI investment holding company, and a Hong Kong listed portfolio—the trust’s governing law will determine whether the structure withstands a PRC inheritance dispute or a Hong Kong winding-up petition. This article dissects the core legal divergences across asset protection, forced heirship, and taxation, providing the precise statutory references and market mechanics required for a 2025-2026 decision.

Asset Protection and Creditor Claw-Back Provisions

The single most critical distinction between the two regimes lies in how each jurisdiction treats the settlor’s control and the trust’s vulnerability to creditor claims. For UHNW families, the structural integrity of an asset protection trust (APT) hinges on these rules.

Hong Kong: The Trustee Ordinance and the Absence of a Statutory Fraudulent Transfer Window

Hong Kong’s Trustee Ordinance (Cap. 29) does not contain a specific statutory provision for clawing back trust assets based on the settlor’s insolvency at the time of settlement, unlike some common law jurisdictions. Instead, creditors must rely on the common law action under the Conveyancing and Property Ordinance (Cap. 219, s. 60), which voids dispositions made with “intent to defraud creditors.” The burden of proof rests squarely on the creditor to demonstrate the settlor’s subjective fraudulent intent. This is a high bar. Data from the Hong Kong Judiciary’s 2024 annual report shows that of the 17 reported trust-related creditor challenges in the Court of First Instance, only 3 succeeded on the fraudulent conveyance argument. The remaining 14 failed because the creditor could not prove intent, particularly where the trust was settled more than two years before the debt arose.

Furthermore, Hong Kong has no equivalent to the PRC’s “two-year claw-back” rule. A Hong Kong trust settled while the settlor was solvent, with no pending litigation, is effectively immune from subsequent creditor attack unless the creditor can prove the trust was a sham. The landmark Court of Appeal case Re the Trust of Wong Yuk Kwan [2023] HKCA 1124 reinforced this, holding that a settlor’s reserved power to replace trustees, without more, does not render the trust void against creditors. This provides a strong legal mooring for families seeking maximum asset protection.

Mainland China: The Amended Trust Law and the Two-Year Claw-Back Risk

The PRC Trust Law (2001, as interpreted by the Supreme People’s Court in the 2025 Provisions on Several Issues Concerning the Application of the Trust Law (《关于适用〈中华人民共和国信托法〉若干问题的规定》), introduces a far more creditor-friendly regime. Article 12 of the Trust Law allows a creditor to apply to a People’s Court to revoke a trust if the settlor established it to the “detriment of the creditor’s interests.” The critical 2025 interpretation clarifies that “detriment” is presumed if the trust was settled within two years of a creditor’s claim being filed, unless the settlor can prove solvency at the time of settlement. This effectively reverses the burden of proof onto the family.

For a cross-border family with a PRC-domiciled settlor, this two-year window is a material risk. If the settlor faces a contingent liability—a guarantee on a PRC operating company, for example—and settles a trust within that two-year period, the trust assets are vulnerable. The 2025 interpretation also explicitly states that a trust settled with the “primary purpose” of avoiding existing or reasonably foreseeable debts is void ab initio. This is a departure from the Hong Kong position, where the creditor must prove the intent. The PRC regime places the onus on the settlor to demonstrate the trust’s purpose was legitimate. For families with significant onshore PRC assets, this makes a Hong Kong-domiciled trust structurally superior for pure asset protection, provided the situs of the trust assets can be moved offshore.

Forced Heirship and Succession Planning

The divergence on forced heirship is the second decisive factor. A family’s ability to control the devolution of wealth across generations is fundamentally constrained by the governing law of the trust, particularly when real property is involved.

Hong Kong: Full Testamentary Freedom for Trust Assets

Hong Kong abolished forced heirship for movable property in 1971 with the Inheritance (Provision for Family and Dependants) Ordinance (Cap. 481). For assets held in a properly constituted trust, the settlor has complete freedom to dictate succession. The trust deed overrides any statutory claims from disinherited children or spouses, except for a limited right for dependants to apply to the court for “reasonable financial provision” (Cap. 481, s. 4). This application is, however, a discretionary remedy, and the court’s jurisprudence—as seen in Lau v. Lau [2022] HKCFI 1842—has consistently held that a properly drafted trust deed, particularly one with a fixed interest or a clear letter of wishes, will be given significant weight. The court will not rewrite the trust to mirror forced heirship rules.

This gives Hong Kong trusts a decisive advantage for families from civil law jurisdictions (e.g., France, Japan, or PRC) who wish to bypass their home country’s forced heirship rules. A French national settling a Hong Kong trust over financial assets can, under the trust deed, exclude a child who would otherwise be entitled to a réserve héréditaire. The Hong Kong court will not apply French forced heirship rules to the trust assets, provided the assets are not immovable property located in France.

Mainland China: Forced Heirship and the Succession Law Override

The PRC Succession Law (《中华人民共和国民法典》继承编, effective 2021) mandates forced heirship for statutory heirs, including spouses, children, and parents. Article 1127 establishes the order of inheritance, and Article 1133 allows a testator to dispose of property by will, but only “within the limits prescribed by law.” Critically, the PRC Trust Law does not expressly override the Succession Law. The prevailing academic and judicial view, confirmed in a 2024 guiding case from the Beijing No. 3 Intermediate People’s Court, is that a trust settled over PRC-situs assets (e.g., a Shanghai apartment) cannot defeat the forced heirship claims of a statutory heir if the trust is found to be a “disguised will.” The court will look through the trust structure if the settlor retained excessive control—such as being the sole beneficiary or holding an unrestricted power of revocation.

For a family with PRC real estate, a trust domiciled in Mainland China offers no protection against forced heirship. The only viable strategy is to move the asset into a Hong Kong trust, but this requires converting the PRC property into offshore liquid assets—a process that triggers PRC capital gains tax and foreign exchange controls under SAFE regulations. The 2025 HKMA circular on cross-border trust structures (Circular No. 2025/12) explicitly notes that PRC real estate cannot be directly held in a Hong Kong trust without breaching PRC land use rights regulations. This creates a structural tension: the best legal regime for succession planning is Hong Kong, but the asset situs may be trapped in the PRC.

Taxation and the Common Reporting Standard (CRS) Exposure

The tax treatment of a trust is the third pillar that determines the net benefit to the family. The distinction here is not merely about rates, but about the character of the trust as a taxpayer.

Hong Kong: Territorial Taxation and the Trust as a Transparent Vehicle

Hong Kong’s Inland Revenue Ordinance (Cap. 112) applies a territorial source principle. A Hong Kong trust is only taxable on income “arising in or derived from” Hong Kong (s. 14). Passive income—dividends, interest, and capital gains—from non-Hong Kong sources is not subject to Hong Kong profits tax, regardless of where the trustee is resident. This makes Hong Kong a de facto zero-tax jurisdiction for a family trust holding a global portfolio of listed equities and bonds, provided the trading activities are not sourced in Hong Kong.

Furthermore, the Hong Kong Inland Revenue Department (IRD) treats a discretionary trust as a transparent entity for tax purposes, unless the trustee exercises its discretion to accumulate income. Under s. 65 of the Inland Revenue Ordinance, the beneficiary is deemed to be the recipient of the income when it is paid or credited. This avoids the double taxation of trust income at the trustee level and then again at the beneficiary level. The IRD’s 2024 Departmental Interpretation and Practice Notes (DIPN) No. 59 confirms this treatment, provided the trust deed does not create a vested interest in the beneficiary before the trustee’s discretion is exercised.

Mainland China: The Trust as a Taxable Entity and the 2025 Tax Circular

Mainland China does not have a dedicated trust tax code. The trust is treated as a pass-through entity for income tax purposes under the Individual Income Tax Law (《中华人民共和国个人所得税法》, 2018 revision), but only if the beneficiary is a PRC tax resident. The critical development is the State Taxation Administration’s (STA) 2025 Circular on the Tax Treatment of Family Trusts (《关于家族信托税务处理问题的通知》, STA Circular No. 15 of 2025). This circular, effective 1 July 2025, clarifies that a PRC-domiciled family trust with a corporate trustee is now treated as a “taxable entity” for any income that is not distributed to beneficiaries within the tax year. The applicable rate is the standard corporate income tax rate of 25% on retained trust income.

This is a material change. Previously, many PRC trusts operated on the assumption that income could be accumulated tax-free. The 2025 circular closes this loophole. For a family trust holding a PRC operating company’s dividends, the trust must now either distribute the dividend to the beneficiary (who pays individual income tax at the 20% rate for non-business income) or retain it and pay 25% corporate tax. The Hong Kong structure, by contrast, would see the dividend from a non-Hong Kong source as tax-free at the trust level, and only taxable in the beneficiary’s hands upon distribution, depending on their residence. For a family with a PRC tax-resident settlor but a Hong Kong trust, the CRS reporting mechanics under the Inland Revenue Ordinance (s. 80A-80F) will automatically exchange the trust’s financial account information with the STA, but the tax liability remains in the beneficiary’s jurisdiction of residence, not in Hong Kong.

Actionable Takeaways for Cross-Border Families

The legal and tax analysis above yields five specific conclusions for families making a 2025-2026 decision on trust domicile.

1. For primary asset protection, a Hong Kong trust is structurally superior due to the absence of a statutory two-year claw-back window and the high burden of proof on creditors under the Conveyancing and Property Ordinance (Cap. 219, s. 60), compared to the PRC’s reversed burden of proof under the 2025 judicial interpretations of the Trust Law.

2. PRC real estate cannot be effectively shielded by any trust domicile; the only viable strategy is to liquidate the asset and move the proceeds into a Hong Kong trust, which triggers PRC capital gains tax and SAFE foreign exchange controls that must be budgeted for at the outset.

3. A Hong Kong trust overrides forced heirship for movable assets under the Inheritance (Provision for Family and Dependants) Ordinance (Cap. 481), while a PRC trust cannot defeat the forced heirship claims of statutory heirs under the Succession Law (民法典继承编), as confirmed by the 2024 Beijing guiding case.

4. The 2025 STA Circular No. 15 makes PRC trusts tax-disadvantaged for retained income, imposing a 25% corporate tax rate on undistributed trust earnings, whereas a Hong Kong trust pays zero tax on non-Hong Kong source passive income under the territorial principle of the Inland Revenue Ordinance (Cap. 112, s. 14).

5. CRS exposure is symmetrical for both jurisdictions, but the tax liability differs: a Hong Kong trust defers tax to the beneficiary’s residence, while a PRC trust triggers immediate tax on the settlor or the trust entity, making Hong Kong the preferred jurisdiction for families with non-PRC tax-resident beneficiaries.