Family Office Structures in Hong Kong: Tax Efficient Wealth Management Solutions – Part 2

Part 2: Tax Considerations for Different Investment Types

Introduction

Following our exploration of family office structures in Hong Kong, this second article in our three-part series examines the tax considerations for different investment types commonly held through family office arrangements. Hong Kong’s evolving tax landscape offers significant planning opportunities, but also requires careful navigation of recent regulatory changes that affect the taxation of family wealth.

Securities Investments

Hong Kong’s territorial tax system provides significant advantages for family offices engaging in securities investments, though recent developments have introduced important nuances:

Current Tax Treatment:

• No capital gains tax on disposal of securities
• No withholding tax on dividends received
• No estate duty or inheritance tax
• No wealth tax on securities holdings

Recent Regulatory Developments:

• Unified Funds Exemption Enhancements: Amendments effective April 1, 2024 expanded the scope of “qualifying transactions” under the unified funds exemption to include a broader range of private company investments, creating new opportunities for family investment vehicles.
• Foreign-Sourced Income Exemption (FSIE) Regime: Implemented on January 1, 2024, the FSIE regime impacts certain passive income streams, requiring family offices to demonstrate adequate substance in Hong Kong to maintain tax exemptions on foreign-sourced dividends, interest, and disposal gains.
• Economic Substance Requirements: New guidance issued by the IRD in October 2024 provides specific economic substance thresholds for family offices seeking exemption on passive income, including minimum local expenditure requirements proportionate to assets under management.
• Tax Concession for Family-Owned Investment Holding Vehicles: As of April 2024, qualifying family-owned investment holding vehicles managing at least HK$240 million can apply for profits tax exemption on eligible transactions, subject to meeting substance requirements.

Planning Considerations

• Structuring the family office to qualify for the unified funds exemption or the specific family office tax concession
• Maintaining appropriate economic substance in Hong Kong
• Documenting investment strategies and decision-making processes
• Careful monitoring of changes to international tax information exchange requirements

Real Estate Investments

Real estate investments require careful structuring due to recent regulatory changes:

Current Tax Treatment:

• Property tax of 15% on rental income from Hong Kong properties
• No capital gains tax on property disposals, but trading profits are taxable
• Significant stamp duty considerations, including:
  • Ad valorem stamp duty (Scale 2 rates apply to Hong Kong permanent residents)
  • Additional Buyer’s Stamp Duty (ABSD) of 15% for most purchasers
  • Special Stamp Duty (SSD) on properties resold within 3 years

Recent Regulatory Developments:

• Cooling Measures Relaxation: In February 2024, the Hong Kong government reduced the ABSD rate from 15% to 7.5% for specific groups, including companies whose ultimate beneficial owners are Hong Kong permanent residents.
• Enhanced Disclosure Requirements: New beneficial ownership disclosure requirements effective July 1, 2024 require greater transparency for property held through corporate structures.
• Mortgage Insurance Programme Adjustments: Expanded eligibility criteria announced in December 2024 potentially benefit family members relocating to Hong Kong, with higher property value caps for mortgage insurance coverage.
• Property Tax Consolidation Option: From April 1, 2025, owners of multiple properties can elect to have their properties assessed together with their profits tax, potentially simplifying administration for family offices.

Planning Considerations

• Determining optimal ownership structure (direct vs. corporate ownership)
• Evaluating jurisdictional considerations for foreign real estate investments
• Implementing effective rental income management strategies
• Considering implications of cross-border real estate holdings

Private Equity and Venture Capital

Family offices increasingly allocate to private equity and venture capital investments:

Current Tax Treatment

• No specific tax on capital gains from disposal of private equity investments
• Possible profits tax exposure if investments are deemed trading in nature
• Carried interest tax concessions available for qualifying carried interest recipients (effective tax rate as low as 0%)

Recent Regulatory Developments

• Limited Partnership Fund (LPF) Regime Enhancement: Amendments effective September 2024 streamlined the LPF registration process and expanded the scope of permissible investments, making this vehicle more attractive for family office private equity investments.
• Carried Interest Tax Concession Extension: In February 2025, the government extended the qualifying carried interest tax concession program through 2030 and expanded eligibility criteria to benefit certain family office arrangements.
• Co-Investment Matching Scheme: Launched in January 2025, this scheme provides matching funds for qualifying family offices investing in Hong Kong innovation and technology startups, effectively enhancing returns.
• Technology Investment Documentation Requirements: New IRD guidance issued November 2024 clarifies documentation requirements for family offices claiming deductions for R&D investments in technology companies.

Planning Considerations:

• Structuring investments to qualify for carried interest tax concessions
• Utilizing the LPF regime for pooled investments
• Maintaining appropriate documentation to support investment intentions
• Considering exit strategies and tax implications early in the investment cycle

Alternative Investments (Art, Collectibles, Digital Assets)

For family offices managing significant collections or digital assets:

Current Tax Treatment

• No wealth tax or inheritance tax in Hong Kong
• Import duty considerations for bringing valuable items into Hong Kong
• Uncertainty regarding taxation of digital assets, with IRD generally treating crypto gains as capital in nature (non-taxable) unless trading in nature

Recent Regulatory Developments

• Digital Asset Regulatory Framework: The Securities and Futures Commission implemented a comprehensive regulatory regime for virtual asset service providers in June 2024, providing greater clarity but increasing compliance requirements.
• Luxury Asset Reporting Standards: While not directly tax-related, new anti-money laundering regulations effective January 2025 require enhanced due diligence and reporting for high-value dealers, affecting art and collectible transactions.
• NFT Classification Guidance: In October 2024, the IRD issued specific guidance on the tax treatment of Non-Fungible Tokens, distinguishing between different types of NFTs based on their characteristics and underlying rights.
• Regulatory Sandbox for Digital Assets: The HKMA launched a regulatory sandbox in December 2024 specifically for family offices exploring digital asset custody solutions.

Planning Considerations

• Implementing proper valuation protocols for alternative assets
• Establishing clear ownership structures for valuable collections
• Addressing cross-border movement and insurance considerations
• Developing specific governance policies for digital asset investments

Conclusion

Hong Kong continues to offer a competitive tax environment for family offices, though recent regulatory developments require careful planning and ongoing compliance attention. The territory’s strategic approach to attracting family wealth has resulted in targeted tax incentives, while broader international tax initiatives necessitate greater substance and transparency.

Family offices should work closely with tax advisors who specialize in Hong Kong taxation to ensure their structures and investments are optimized for the current regulatory environment. Regular reviews of tax positions are essential as both family circumstances and regulations continue to evolve.

In our final article in this series, we will explore succession planning elements within family office arrangements, including governance structures, trust arrangements, and next-generation involvement strategies.

If you have any question, please feel free to contact us and check our website: https://www.serviceonnewgrounds.com

References

1. Inland Revenue Department. (2024). “Unified Funds Exemption – Expanded Scope.” Departmental Interpretation and Practice Notes No. 62. Retrieved from https://www.ird.gov.hk/
2. Financial Services and the Treasury Bureau. (2024, April). “Foreign-Sourced Income Exemption Regime – Implementation Guidelines.” Retrieved from https://www.fstb.gov.hk/
3. Hong Kong Monetary Authority. (2024, October). “Economic Substance Requirements for Family Offices.” HKMA Circular. Retrieved from https://www.hkma.gov.hk/
4. Inland Revenue Department. (2024, November). “Guidance on Technology Investment Documentation Requirements.” Departmental Interpretation and Practice Notes No. 63. Retrieved from https://www.ird.gov.hk/
5. Securities and Futures Commission of Hong Kong. (2024, June). “Regulatory Framework for Virtual Assets.” SFC Consultation Conclusions. Retrieved from https://www.sfc.hk/
6. Hong Kong Government. (2024, February). “Adjustment to Stamp Duty Measures for Residential Properties.” Government Press Release. Retrieved from https://www.info.gov.hk/