Private Wealth 2024 Comparisons

This chapter appeared in Private Wealth 2023 and is awaiting update by the firm.

Territorial Source Principle of Taxation

Hong Kong adopts a territorial source principle of taxation. Generally, only profits or income arising in or derived from Hong Kong are chargeable to tax in Hong Kong unless the foreign source income taxation regime (further discussed in 1.6 Transparency and Increased Global Reporting) applies to such profits or income. As taxes are not levied based on a person’s domicile, residence or nationality except for double tax treaty purposes, a Hong Kong resident may derive profits from abroad without being subject to tax in Hong Kong, and a non-resident of Hong Kong may be chargeable to tax on profits arising in Hong Kong.

The question of where the profits or income arise or are derived from is a practical matter of fact. Whether profits or income arise in or are derived from Hong Kong depends on the nature of the profits or income and of the transactions or activities that give rise to such profits or income. To determine the locality of profits or income, the broad guiding principle is to see what the taxpayer has done to earn the profits in question and where they have done it. The place where the day-to-day decisions are made in relation to the taxpayer’s business or activities is only one of the factors to be considered, and is usually not the deciding factor.

Salaries Tax

Salaries tax is imposed on all income arising in or derived from Hong Kong from an office, employment or pension. It is necessary to identify where the employment is located in order to decide whether income arises in or is derived from Hong Kong. Such income includes all forms of income and benefits from employment, such as awards of shares or options and the rental value of a place of residence provided rent-free to the employee.

Salaries tax is calculated at progressive rates from 2% to 17% on the net chargeable income or at the standard rate of 15% of the net income (ie, without allowances), whichever is lower.

Allowances

A taxpayer assessed to salaries tax is entitled to a basic allowance. For the 2023/2024 year of assessment, the amount of basic allowance is HKD132,000. There are other allowances that may be claimed, as follows, provided the prescribed conditions as specified in the Inland Revenue Ordinance are satisfied:

•married person’s allowance;

•child allowance;

•dependent brother or dependent sister allowance;

•dependent parent and dependent grandparent allowance;

•single parent allowance;

•disabled dependant allowance; and

•personal disability allowance.

Deductions

Certain deductions are allowed, such as donations paid to recognised charities, expenses of self-education paid on fees in connection with certain courses of education and/or examinations, qualifying home loan interest payments paid towards a Hong Kong property occupied by the taxpayer, and mandatory contributions paid to a mandatory provident fund scheme. With effect from the 2022/23 tax year, tenants chargeable to Hong Kong salaries tax will be allowed a deduction of up to HKD100,000 on the rent paid towards a qualifying tenancy in Hong Kong.

Profits Tax

Persons, including corporations, partnerships, trustees and bodies of persons, carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. To determine whether the profits arise in or are derived from Hong Kong, one would need to identify the operations that produced the relevant profits and ascertain where those operations took place. The source of profits must be attributed to the operations of the taxpayer that produced them and not to the operations of other members of the taxpayer’s group. A person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits.

Rates

For corporations, the profits tax rates are 8.25% on the first HKD2 million of assessable profits and 16.5% on any part of assessable profits exceeding HKD2 million. For unincorporated businesses, the profits tax rates are 7.5% on the first HKD2 million of assessable profits and 15% on any part of assessable profits exceeding HKD2 million. A tax concession regime was introduced in 2022 for qualifying profits derived by a qualifying shipping commercial principal in Hong Kong (eg, ship agents, ship managers and ship brokers).

Expenses

Generally, all expenses are allowed as deductions to the extent to which they have been incurred by the taxpayer in generating chargeable profits. These include the following, for example:

•interest on funds borrowed;

•rent of buildings or land occupied for the purpose of producing the profits;

•bad and doubtful debts;

•repairs of premises, plant, machinery or articles;

•expenditure on environmental protection machinery;

•protection installation and vehicles, etc, used in producing the profits;

•annual contribution to a fund under a recognised occupational retirement scheme; and

•donations made to recognised charities.

Incentives

There are tax incentives in specific areas, such as tax concessions for gains derived from qualified debt instruments and exemption from tax for offshore funds (non-resident individuals, partnerships, trustees of trust estates or corporations) in respect of profits derived from transactions in securities, futures contracts, foreign exchange contracts, etc, in Hong Kong, which are carried out by corporations and authorised financial institutions that are licensed or registered under the Securities and Futures Ordinance.

Dividends received from a corporation are excluded from the assessable profits of the recipient.

To attract families to set up single family offices in Hong Kong, the Inland Revenue Ordinance was amended, with effect from 19 May 2023, to provide profits tax concessions to certain eligible family-owned investment holding vehicles managed by eligible single family offices in Hong Kong and family-owned special purpose entities in respect of certain types of transactions. Subject to certain conditions and restrictions, profits tax is not levied on assessable profits derived from qualifying transactions (such as transactions in shares, stocks, debentures, loan stocks, funds, bonds or notes) and incidental transactions (subject to a 5% threshold) carried out by eligible family-owned investment holding vehicles/family-owned special purpose entities.

Property Tax

The assessable value of any land or buildings situated in Hong Kong (with limited exceptions) is calculated by reference to the actual consideration payable to the owner in respect of the right of use of the property, such as gross rent received or receivable and payment for the right of use of premises under licence. The net assessable value is the assessable value (after the deduction of rates paid by the owner and certain other payments) minus a 20% statutory allowance for repairs and outgoings. Property tax is charged to the owner at the standard rate of 15% on the net assessable value of such land or buildings.

A corporation letting property in Hong Kong is regarded as carrying on business in Hong Kong and should be subject to profits tax in respect of its property income. However, if certain conditions apply, the amount of property tax chargeable can be set off against the amount of profits tax payable, and any excess property tax paid will be refunded. Alternatively, corporations can apply for exemption from paying property tax that would otherwise be set off against their profits tax liabilities.

Stamp Duty

Stamp duty is chargeable on certain documents specified in the First Schedule to the Stamp Duty Ordinance. These documents largely relate to transactions of Hong Kong stock and immovable properties.

For the contract notes for the sale and purchase of Hong Kong stock, ad valorem stamp duty is chargeable at the rate of 0.13% of the consideration (or the market value if it is higher) for each of the buyer and the seller.

For transfers of immovable property in Hong Kong, ad valorem stamp duty at either Scale 1 rates (maximum of 15%) or Scale 2 rates (maximum of 4.25%) is chargeable based on the higher of the sale price and the market value of the property. For residential property disposed of within 36 months of its acquisition, special stamp duty will be imposed in addition to the ad valorem stamp duty at regressive rates from 10% to 20% for different holding periods.

Where the transferee is not a Hong Kong permanent resident acquiring the property, buyer’s stamp duty at the rate of 15% is payable on an agreement for sale or a conveyance on sale for the acquisition of any residential property executed on or after 27 October 2012 in addition to the existing ad valorem stamp duty and the special stamp duty (if applicable).

Exemptions

Certain exemptions and reliefs are available. For example, the transfer of Hong Kong immovable property or stock between associated companies can be exempted from stamp duty if the companies remain associated for at least two years after the transfer. The transfer of shares under stock borrowing and lending transactions may be exempted from stamp duty. Property inherited from a deceased person’s estate under a will or the law of intestacy or right of survivorship by a beneficiary is exempted from stamp duty.

Others

There is no capital gains tax, gift tax, sales tax or VAT in Hong Kong. No estate duty is payable in respect of estates of persons who passed away on or after 11 February 2006.

No estate duty is payable in respect of the estates of persons who passed away on or after 11 February 2006. Certain exemptions, including but not limited to foreign assets, donations paid to recognised charities and mandatory provident funds, are available for estates of persons who died on or before 11 February 2006.

No stamp duty is payable on the transfer of shares or properties from a deceased’s person estate to a beneficiary under a will, rules of intestacy or right of survivorship.

Businesses and individuals in Hong Kong are charged profits tax, salaries tax and property tax (see 1.1 Tax Regimes). There is no withholding tax, capital gains tax or estates tax in Hong Kong. There is no cost base adjustment on a transfer of property.

Hong Kong adopts a territorial scope of taxation. Subject to the applicability of the foreign source income taxation regime (further discussed in 1.6 Transparency and Increased Global Reporting) and double tax treaties, income derived outside of Hong Kong is generally not chargeable to Hong Kong tax.

Additional stamp duty is chargeable to non-Hong Kong permanent residents acquiring Hong Kong property. Please see 1.1 Tax Regimes (Stamp Duty).

Tax laws in Hong Kong are generally relatively stable. The most notable change that affects transfers of property was the introduction of the special stamp duty and the buyer’s stamp duty in the past decade. These measures were intended to curb speculative activities in relation to residential property and to reduce the risks of a property bubble, as the private residential property market has been volatile.

General Anti-avoidance Rules

There are general anti-avoidance provisions in the Inland Revenue Ordinance to tackle abuses of the tax laws.

Where the Inland Revenue Department (IRD) is of the opinion that any transaction that reduces or would reduce the amount of tax payable by any person is artificial or fictitious, or that any disposition is not in fact given effect to, it may disregard any such transaction or disposition, and the person concerned shall be assessable accordingly.

The term “transaction” includes the whole of any particular transaction, and not merely part of it. The transaction as a whole may be held as both artificial and fictitious even though part of the transaction may have a genuine intent. The IRD would take all circumstances into consideration when forming an opinion as to whether a transaction as a whole is artificial or fictitious.

Where a person enters into or carries out a transaction for the sole or dominant purpose of obtaining a tax benefit, the IRD has the statutory power to disregard or reconstruct said transaction and assess the tax liability accordingly. The term “tax benefit” means the avoidance or postponement of the liability to pay tax or the reduction in the amount thereof.

Where a tax avoidance arrangement has been made to take advantage of a specific relief or exemption in such a way that is not intended by the legislature, the above general anti-avoidance rules can be applied to deny the favourable tax consequences even if the taxpayer has, on the face of it, complied with the requirements of the relevant relief or exemption.

Set-Off

Companies that have sustained a loss in any trade, profession or business are permitted to carry forward the amount of that loss for set-off against profits in subsequent years of assessment. An unintended effect is that profitable companies are tempted to buy companies with accumulated tax losses and transfer their profitable businesses into the loss company once their ownership has been acquired so that the losses brought forward can be set off against the profits. To tackle this avoidance practice, the Commissioner of the IRD may refuse to set off losses brought forward where he or she is satisfied that the sole or dominant purpose of a change in shareholding was the utilisation of those losses to obtain a tax benefit.

Tax Reporting

Hong Kong has implemented automatic exchange of financial account information (AEOI) and common reporting standards.

Under the AEOI standard, financial institutions are required to identify financial accounts held by tax residents of reportable jurisdictions or held by passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions in accordance with due diligence procedures, and to provide the required information of such accounts to the IRD. To help financial institutions identify such accounts, account holders may be required to provide self-certifications on their personal information, including tax residence.

Hong Kong signed an intergovernmental agreement with the United States in 2014 to implement the Foreign Account Tax Compliance Act in Hong Kong. It requires participating financial institutions to identify and report account information of specified US persons to the Inland Revenue Service of the United States. Accordingly, banks may need to obtain additional information or documentation from their customers to achieve this.

Hong Kong has entered into Tax Information Exchanges Agreements with seven jurisdictions: Denmark, the Faroe Islands, Greenland, Iceland, Norway, Sweden and the United States.

Foreign-sourced income regime

Hong Kong was included in the EU watchlist of non-cooperative jurisdictions for tax purposes. In response, the Hong Kong authorities introduced a refined foreign source income taxation regime, which came into effect on 1 January 2023. Under the new regime, qualifying foreign passive income (interest, income from intellectual property, gains from the disposal of shares/equity interest) can only be exempt from Hong Kong profits tax if the qualifying entity meets:

• the economic substance requirement, if the income is foreign-sourced interest, dividend or disposal gain;
• the nexus requirement, if the income is foreign-sourced intellectual property income; or
• the participation requirement, if the income is foreign-sourced dividend or disposal gain.

Transfer Pricing

The transfer pricing rules in Hong Kong came into operation in 2018 to comply with the base erosion and profit shifting guidelines put forth by the Organisation of Economic Co-operation and Development.

When a related-party transaction is not conducted at “arm’s length”, the IRD can adjust the income or losses to remove any potential tax advantages. Domestic transactions between domestic parties that do not give rise to actual tax differences and are not being made for tax avoidance purposes are not subject to transfer pricing rules.

The IRD requires companies to prepare transfer pricing documentation in the form of a “master file” providing an overview of the Hong Kong entity’s group of enterprises, and a “local file” providing transactional transfer pricing information specific to the enterprise in each jurisdiction. The files should be prepared within nine months after the end of the relevant accounting period and retained for not less than seven years. Companies can be exempt from preparing these files if they meet certain requirements regarding the size of business and the amount of controlled transactions.

Where the consolidated group revenue of a multinational enterprise group having constituent entities or operations in two or more jurisdictions exceeds HKD6.8 billion, that group will be required to file a “Country-by-Country Report”.

Non-residents who have permanent establishments carrying on a trade, profession or business in Hong Kong will also be subject to the transfer pricing rules. The income or losses attributable to a non-Hong Kong resident’s permanent establishment in Hong Kong will be determined as if the permanent establishment was a distinct and separate enterprise.

Public Beneficial Ownership Registers

Hong Kong does not have a public beneficial ownership register. However, all private limited companies incorporated in Hong Kong are required to maintain a “significant controllers register” (SCR) containing up-to-date beneficial ownership information of the company, which only law enforcement officers and persons whose names are entered into the SCR as significant controller are entitled to inspect on demand. Companies are also required to take reasonable steps to ascertain their significant controllers.

An individual or corporate entity has significant control over a company if one or more of the following conditions are met:

• such person holds, directly or indirectly, more than 25% of the issued shares in the company or, if the company does not have a share capital, a right to share in more than 25% of the capital or profits of the company;
• such person holds, directly or indirectly, more than 25% of the voting rights of the company;
• such person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company;
• such person has the right to exercise, or actually exercises significant influence or control over the company; and
• such person has the right to exercise, or actually exercises significant influence or control over the activities of a trust or firm that is not a legal person, and whose trustees or members meet one or more of the above conditions.

Succession planning for large families is usually complex. Typically, the primary goal is to preserve the capital of the family wealth for as long as possible, so family members are permitted to enjoy the income only if there is no emergency that calls for capital. In many cases, older generations would encourage younger generations to participate in the family business. However, they are usually reluctant to turn over full control of the family business to younger generations until they become less active due to old age or sickness.

It is not common for spouses of family members to take an active role in the family business or to be able to benefit from the family wealth directly, although some large families are willing to set aside a small portion of the family wealth for the spouses who have been married into the family for many years, in the event that they become widowed.

Small families are more inclined to distribute the capital and income of their wealth to their children and/or grandchildren directly after they pass away, and therefore require relatively simpler succession planning strategies.

Many family members in younger generations are now tax residents of high-tax jurisdictions. As Hong Kong is a relatively low-tax jurisdiction with no foreign exchange control and no forced heirship laws, families are incentivised to place ownership and/or control of the family wealth into the hands of a family member in Hong Kong who has little or no exposure to taxes in high-tax jurisdictions, so that that such family member can exercise their rights and powers over the family wealth for the benefit of all family members.

Hong Kong does not have forced heirship laws.

However, under the Inheritance (Provision for Family and Dependants) Ordinance, certain categories of persons (such as spouse, children, parents of the deceased who were being maintained by the deceased immediately before the death of the deceased) may apply to the court for an order, for example, to make periodic payments out of the net estate of the deceased to the applicant, on the grounds that the disposition of the deceased’s estate effected by their will or the law relating to intestacy – or the combination of such will and that law – is not such as to make reasonable financial provision for the applicant.

Furthermore, if a person makes a gift or disposition for which the full valuable consideration was not given (eg, a contribution to a trust) within six years before their death and such gift or disposition was made with the intention of defeating an application for financial provision against their estate, the court may on application order the recipient (eg, the trustees of a trust) to provide such sum of money or other property for the purpose of the making of that financial provision.

There is no matrimonial property regime in Hong Kong. Each spouse owns and administers the property they acquired both before and during the marriage, and they can freely transfer their property without the consent of the other spouse during the marriage.

In the event of a divorce, the division of matrimonial property will be determined by common law principles of fairness and equality: when applying these principles, the courts will look at what is fair and reasonable considering the unique circumstances of each case.

Division of Assets

In deciding how matrimonial assets are to be divided, Hong Kong courts will consider all the circumstances of a case, including the factors contained in Section 7(1) of the Matrimonial Proceedings and Property Ordinance, as follows:

• the income, earning capacity, property and other financial resources that each of the parties to the marriage has or is likely to have in the foreseeable future;
• the financial needs, obligations and responsibilities that each of the parties to the marriage has or is likely to have in the foreseeable future;
• the standard of living enjoyed by the family before the breakdown of the marriage;
• the age of each party to the marriage and the duration of the marriage;
• any physical or mental disability of either of the parties to the marriage;
• the contributions made by each of the parties to the welfare of the family, including any contribution made by looking after the home or caring for the family; and
• in the case of proceedings for divorce or nullity of marriage, the value to either of the parties to the marriage of any benefit (for example, a pension) that, by reason of the dissolution or annulment of the marriage, said party will lose the chance of acquiring.

A five-step process guides all family judges on how to approach the above factors in exercising their discretion:

• step 1 – identify the parties’ assets;
• step 2 – assess the parties’ financial needs;
• step 3 – consider the sharing principle if assets exceed needs;
• step 4 – consider whether there are good reasons to depart from equal division; and
• step 5 – decide the outcome.

The Court of Final Appeal further identified the following four principles to be followed when deciding on each case:

• objective of fairness;
• rejection of any gender or role discrimination;
• yardstick of equal division; and
• rejection of minute retrospective investigation.

Nuptial Agreements

Prenuptial and postnuptial agreements are not binding on the courts of Hong Kong. However, in a 2014 case the Court of Final Appeal held that the principles laid down in a 2011 UK Supreme Court decision represent the position of the law on nuptial agreements in Hong Kong. In summary, marital agreements entered into by the parties with a full appreciation of its implication should be given effect unless it would be unfair to hold the parties to their agreement in the prevailing circumstances.

In deciding whether the division of matrimonial assets should depart from equal division, Hong Kong courts will treat the nuptial agreement as part of all the circumstances of the case under Section 7(1) of the Matrimonial Proceedings and Property Ordinance, but the weight to be attached to it in each case is subject to the courts’ discretion.

In applying the 2011 UK Supreme Court decision, the Hong Kong court agreed in a 2019 case that, where an unvitiated nuptial agreement exists, the overriding consideration of the court is fairness. An unvitiated nuptial agreement is one of the circumstances to be considered in arriving at a fair distribution of assets. The court will have to assess its weight; in that assessment, needs and compensation would be important, whilst sharing less so. The court further proposed to approach the issue of needs with reasonableness as the guide.

As there is no capital gains tax in Hong Kong, there is no cost base adjustment on a transfer of property. However, gains on the disposal of assets may be subject to profits tax if such transaction amounts to trade, which is a question of fact.

As there is no capital gains tax or inheritance tax in Hong Kong, there has historically been little incentive to establish vehicles or planning mechanisms solely for the purpose of transferring assets to younger generations in Hong Kong tax-free. This has now changed as Hong Kong families become more and more international and therefore more exposed to high-tax jurisdictions. As a result, there are more incentives for succession planning from a tax perspective. However, discretionary trusts are still commonly used for the purpose of family and succession planning.

The Securities and Futures Commission and the Hong Kong Monetary Authority introduced a circular in 2022 imposing a number of restrictions on the sale of qualifying virtual asset-related products. However, Hong Kong has yet to put in place a framework to govern the passing of digital assets upon death for the purposes of succession. In 2023, the Hong Kong court ruled that cryptocurrencies satisfy the definition of “property” and are considered proprietary assets, and their ownership can be traced even if they have been mixed with other assets. In the matrimonial context, the ruling implies that digital assets can potentially be traced, and the issue of whether they form part of the matrimonial assets may be put forward for determination.

Discretionary trusts are commonly used for succession and estate planning purposes. There is no private foundation under Hong Kong law.

Major changes were made to the Trustee Ordinance in 2013, including:

• imposing a statutory duty of care on trustees in relation to certain powers and functions;
• introducing a regime of control over professional trustees’ exemption clauses;
• providing a default charging provision for professional trustees; and
• statutory protection of Hong Kong trusts against foreign forced heirship rules.

The Perpetuities and Accumulations Ordinance was amended at the same time. The rule against perpetuities was abolished, and a trust may now continue in existence for an unlimited period unless the terms of the trust provide to the contrary.

Trusts are recognised and respected in Hong Kong. The Trustee Ordinance is an important piece of legislation on the law governing the powers, duties and responsibilities of trustees in Hong Kong. English decisions, the rules of equity and common law rules are also relevant to the interpretation and application of trust laws in Hong Kong.

Hong Kong adopts a territorial source principle of taxation, and chargeability to Hong Kong tax is not dependent on a person’s domicile, residence or nationality. Therefore, there are no tax consequences arising by virtue of a Hong Kong citizen or resident serving as a fiduciary or being a beneficiary of a foreign trust.

The Trustee Ordinance provides that the reservation of powers of investment or asset management functions by the settlor does not invalidate a trust, and a trustee who exercises their power or function accordingly is not in breach of the trust.

Discretionary trusts are increasingly common as a tool for asset protection. Once assets have been attributed into a trust, they are no longer owned by the settlor and are instead held by the trustees on behalf of the beneficiaries. With an appropriate structure and if done in advance of any threatened or perceived claims, such trusts may be able to shield the underlying assets from future claims made against the trust or the settlor.

In addition, through the use of a trust, families can consolidate or maintain control over the bulk of family assets or businesses so as to allow family members to enjoy the family wealth (for example, by receiving income distributions) without taking titles or voting rights to any capital assets in the trust fund.

Discretionary trusts are useful for families to pass wealth and control of the family business from generation to generation. In many cases, they are used to mitigate the overall tax exposure of the family assets and, in some cases, family members who have connection to high-tax jurisdictions. Tax advice is therefore important in the setting up and administration of the trust. It is also possible to put detailed guidelines in place for the trustees as to how they should position themselves in the event of a family conflict.

In a more complex structure, additional bodies (such as a family office, a family council, an investment committee and a philanthropy committee) will assist the trustee in making major decisions. These bodies may consist of family members, non-family members of the senior management of the family business and/or professional advisers.

There is no transfer tax in Hong Kong. Stamp duty may be chargeable on the transfer of Hong Kong immovable property or stock, which will be calculated at the higher of the sale price and the market value, and there will be no discount for lack of marketability and control.

Private wealth disputes in Hong Kong mainly revolve around divorce, estates and trusts.

Divorce

In divorce proceedings, parties make ancillary relief claims against each other in terms of maintenance pending suit, periodical payments, secured periodical payments, lump sum orders, property adjustment orders, transfer of property orders, settlement of property orders, variation of settlement and sale of property orders. Third parties’ interests may be involved in some cases, such as arguments over the beneficial ownership of assets paid by parents and a party’s entitlement in a dynastic trusts structure.

Estates

With regard to disputes over estates, aggrieved parties may attack the validity of wills by claiming that the testator lacked mental capacity or was unduly influenced by third parties while making the will, or they may attempt to vary distribution of the estate through claims made under the Inheritance (Provision for Family and Dependants) Ordinance or common law.

Trusts

Litigation involving contentious trusts, both offshore and onshore structures, mainly arise from actions for and against trustees over breach of trusts, asset disputes and duties or conflicts issues.

Spouses in divorce proceedings may be awarded various forms of ancillary relief orders, as summarised in 5.1 Trends Driving Disputes. For disputes over estates or trusts, aggrieved parties typically seek to set aside a will, make claims under the Inheritance (Provision for Family and Dependants) Ordinance, vary a determination made by the trustee, or obtain information (in particular financial information) of the estate or the trust. The remedies available to address these claims include for the courts to order the making of periodical payments or lump sums or transfer of property out of the net estate of the deceased, for the recipient or holder of the assets (eg, trustee) to provide money or other property, for information to be provided, and for assets to be traced.

Corporate fiduciaries are prevalent in Hong Kong. Generally, a trustee must exercise the care and skill that is reasonable in the circumstances, having regard to any special knowledge or experience that the trustee has or holds out as having; if the trustee is acting in a professional capacity, they will have to adhere to the level of care and skill that is reasonably expected of a person acting in such a professional capacity, taking into account any special knowledge or experience.

In March 2018, a licensing regime was introduced that requires trust and company service providers (TCSPs) to apply for a licence from the Hong Kong Companies Registry. TCSPs need to satisfy a “fit-and-proper” test to be granted a licence.

Trustees are liable for the liabilities of the trust, but it is possible to limit their liabilities in the absence of a breach of trust arising from the trustees’ fraud, wilful misconduct or gross negligence by including appropriate exemption clauses in the terms of the trust.

Anti-Bartlett clauses are commonly found in trust instruments, and seek to limit the trustee’s duties and obligations of supervising the investment and management of the underlying investment companies of a trust. In 2019, the Court of Final Appeal of Hong Kong handed down a decision upholding the use of anti-Bartlett clauses, determining that they are effective in excluding any high-level supervisory duty of the trustee in relation to investment decisions made by an investment adviser on behalf of the underlying investment company of the trust and that the trustee is not liable for any losses incurred as a result.

Unless the trust instrument provides otherwise, trustees may only invest in the authorised investments specified in the Trustee Ordinance and, in exercising such power, trustees would not be responsible for any loss to the trust fund if they have discharged the statutory duty of care.

The Trustee Ordinance stipulates a relatively conservative and limited list of authorised investments that trustees may make in the absence of an express power of investment in the trust instrument, with the intention of providing a default objective standard for less experienced trustees. Professional trustees, on the other hand, may choose to opt out of the list under the Trustees Ordinance and, generally, it is expected that professional trustees who are sophisticated in investment and have wider investment powers would adopt the modern portfolio theory, which advocates the diversification of securities and asset classes.

Trusts may hold active businesses and (through an entity) participate in the running of that business. Depending on the nature of the business, certain licensing requirements may need to be met in order to conduct the business or relevant activities.

Domicile

Generally, a person who does not have a domicile of origin in Hong Kong can acquire a domicile in Hong Kong if they are lawfully present in Hong Kong and intend to make a home in Hong Kong for an indefinite period.

Becoming a Permanent Resident

There are six categories of persons who are eligible to enjoy the right of abode in Hong Kong and to apply for permanent resident status:

• category one – a Chinese citizen born in Hong Kong before or after the establishment of the HKSAR (ie, 1 July 1997);
• category two – a Chinese citizen who has ordinarily resided in Hong Kong for a continuous period of not less than seven years before or after the establishment of the HKSAR (ie, 1 July 1997);
• category three – a person of Chinese nationality born outside Hong Kong before or after the establishment of the HKSAR (ie, 1 July 1997) to a parent who, at the time of birth of that person, was a Chinese citizen falling within category one or two;
• category four – a person not of Chinese nationality who has entered Hong Kong with a valid travel document, has ordinarily resided in Hong Kong for a continuous period of not less than seven years and has taken Hong Kong as their place of permanent residence before or after the establishment of the HKSAR (ie, 1 July 1997);
• category five – a person under 21 years of age born in Hong Kong to a parent who is a permanent resident of the HKSAR in category four before or after the establishment of the HKSAR (ie, 1 July 1997)if, at the time of their birth or at any later time before they reach 21 years of age, one parent has the right of abode in Hong Kong; and
• category six – a person other than those in categories one to five above, who had the right of abode in Hong Kong only, before the establishment of the HKSAR (ie, 1 July 1997).

Becoming a Citizen

A person is eligible to apply for a Hong Kong passport if they are:

• a Chinese citizen;
• a permanent resident of Hong Kong; and
• a holder of a valid Hong Kong permanent identity card.

A person is regarded as being of Chinese nationality if they are a Hong Kong resident:

• of Chinese descent who was born in Hong Kong or other parts of China; or
• who fulfils the criteria of Chinese nationality in the Nationality Law of the People’s Republic of China.

There are no expeditious means for an individual to obtain citizenship in Hong Kong. All applicants will need to fulfil the criteria of citizenship specified in 7.1 Requirements for Domicile, Residency and Citizenship.

Nonetheless, changes have been made to the immigration policies in Hong Kong to attract offshore talent. This includes the launch of the Top Talent Pass Scheme, which allows those who qualify to enter Hong Kong for an initial period of a maximum of two years for the purpose of exploring professional opportunities and extending the limit of stay of employment visas. Under the General Employment Policy, foreign entrepreneurs may apply for a visa or entry permit if the applicant is in a position to make a substantial contribution to Hong Kong’s economy.

Parents and relatives can set up a special needs trust for an affordable fee by appointing the Director of Social Welfare Incorporated as the trustee to manage their assets in the form of a trust for their children or family members who have special needs or lack self-care capability. Special needs trusts are available to Hong Kong permanent resident parent(s) or relative(s) of an individual with special needs (ie, a Hong Kong permanent resident with an intellectual disability, a mental disorder or autism who can claim for rehabilitation services subsidised by the Social Welfare Department or admission to special schools under the Education Bureau).

After the parents or relatives pass away, the trustee will activate the trust account and disburse funds to the carer specified by the parents or relatives in accordance with the instructions laid down in the trust deed and letter of intent. The carer will implement the long-term care plan formulated by the parents or relatives for the beneficiary. The executor of the settlor’s will will deposit the cash derived from the settlor’s estate to the trust account. The trustee will pool together funds from different trust accounts for making investment and allocate investment gains or losses to individual trust accounts on a pro rata basis.

Guardian for Children

Parents can appoint a guardian for their children in case both of them pass away while their children are under the age of 18 years. Such an appointment may be made in writing by the parents and attested by two witnesses in accordance with the provisions of the Guardianship of Minors Ordinance without the need for a court proceeding.

Upon assuming guardianship, a person appointed as the guardian of a minor has parental rights and authority with respect to the minor.

A person appointed by a parent (or guardian) as the guardian will automatically assume guardianship over the minor upon the death of the appointing parent (or appointing guardian) if the appointing parent (or appointing guardian) has a custody order over the minor immediately before they die or if the appointing parent (or appointing guardian) lived with the minor immediately before dying and the minor does not have any surviving parent or surviving guardian when the appointing parent (or appointing guardian) dies.

In other cases, after the appointing parent (or appointing guardian) dies, the person appointed as the guardian may apply to the court to assume guardianship over the minor and the court may order the person to:

• act jointly with the surviving parent or surviving guardian;
• act as the guardian of the minor after the minor no longer has any parent or guardian;
• act as the guardian of the minor at a time, or after the occurrence of an event, specified by the court;
• be removed as a guardian; or
• act as the guardian of the minor to the exclusion of the surviving parent or surviving guardian.

The court may, in its discretion, remove any guardian and appoint another person to replace that guardian if they are satisfied that it is in the best interest of the minor.

In making any order in relation to the guardianship of a minor, the court will regard the best interests of the minor as the first and paramount consideration, and will give due consideration to the views of the minor if it is practicable to do so, having regard to the age and understanding of the minor and the circumstances of the case.

Guardian of a Mentally Incapacitated Person

The guardian of a mentally incapacitated person (MIP) is appointed by the Guardianship Board and has statutory power to make decisions on accommodation and care arrangements for the MIP.

The Guardianship Board is a quasi-judicial tribunal consisting of a chairman with legal experience, at least three members who are barristers or solicitors, at least three members who have had experience in assessing or treating MIPs (who may include registered medical practitioners or social workers) and at least three members who have had personal experiences with MIPs.

A family member, a friend or the public guardian may be appointed as the guardian and may have the following powers, subject to the Guardianship Order:

• to specify the MIP’s residence;
• to bring the MIP to a specific place as necessary;
• to bring the MIP to attend medical and other treatments or training;
• to consent to medical or dental treatment on behalf of the MIP;
• to arrange access to the MIP by any doctor, approved social worker or other persons specified in the Guardianship Order; and
• to hold, receive or pay a specified monthly sum for the maintenance or benefit of the MIP.

An assigned social worker will visit the MIP each month and the guardian will need to provide reports every month, including monthly accounts and all relevant information such as accommodation and medical treatment.

Committee of the Estate of a Mentally Incapacitated Person

The Committee of the estate of an MIP is appointed by the court and has statutory power to manage and administer the financial affairs and property of the MIP, such as bank accounts, stocks and investments, buying and selling properties, settling utility bills and making tax payments.

For a Committee to be appointed, the Mental Health Court of the High Court of Hong Kong will hear applications made by family members, the Director of Social Welfare, the Official Solicitor or the guardian.

Generally, the Committee will need to open a Committee bank account, prepare accounts every year or, as may be ordered by the court, inform the court about any changes in the MIP’s financial situation and general condition.

The Hong Kong government launched the Mandatory Provident Fund (MPF) scheme in December 2000, which all employees and self-employed persons who are 18 to 65 years old, except for exempted persons, are mandated to join. Each employee and employer is required to make regular mandatory contributions amounting to 5% of the employee’s relevant income. Employees have the right to choose from the constituent funds offered under the MPF scheme selected by their employer. Generally speaking, MPF scheme members can only withdraw their accrued benefits when they reach the age of 65, but some would be allowed to do so if specified conditions are met (eg, permanent departure from Hong Kong).

The HKMC Annuity Plan was introduced in July 2018, allowing retirees of 65 years old or above to receive guaranteed monthly annuity payments for life with the contribution of a single premium, as long as their policy remains in force.

Children Born out of Wedlock

The mother of an illegitimate child will enjoy custody rights of the child, while the father can only enjoy such rights with the order of the court. In other words, an illegitimate child will automatically be recognised as the child of their birth mother, but will only be treated as the child of their birth father after a court order is in place. Nonetheless, illegitimate children now enjoy the same succession rights as legitimate children if their parents die after 19 June 1993.

Adopted Children

Generally speaking, and for the purpose of succession, adopted children are treated as the children of their adoptive parents once an adoption order is made. Testators can, however, exclude adopted children from their wills.

Surrogate Children

Hong Kong only permits surrogacy arrangements that are non-commercial in nature. The surrogate mother is naturally regarded as the mother of the child under Section 9 of the Parent and Child Ordinance (PCO). Under Section 10(2), if the surrogate mother is married at the time of her insemination or when the embryo or the sperm and egg are placed in her, and the embryo is not brought about with the sperm of her husband, then her husband will be regarded as the father of the surrogate child, unless it is shown that he did not consent to the placing of the embryo or the sperm and egg or her insemination. Similarly, under Section 10(3), if the surrogate mother is not married but received the treatment with her male partner and the embryo carried by her was not brought about with his sperm, then her male partner will be regarded as the father of the surrogate child.

However, the court may make a parental order under Section 12 to make the intended parents the legal parents of the surrogate child and permanently extinguish the parenthood of the surrogate mother and her spouse/male partner.

Posthumously Conceived Children

For the purpose of succession, under Section 10(6) of the Parent and Child Ordinance, where the sperm of a man is used after his death to conceive a child, or where an embryo was used after the death of the man with whose sperm the embryo was created, that man is not regarded as the father of the child.

Parental Rights for Same-Sex Partners

In Hong Kong, same-sex couples do not enjoy the same parental rights as heterosexual couples. In 2021, the Hong Kong courts determined that the non-biological parent of natural children born by their prior same-sex partner should be granted guardianship rights, joint custody and shared care and control over their children. Following this decision, same-sex parents may now apply to have equal parental rights over their children upon their births.

Hong Kong does not recognise same-sex marriage, in the sense that a valid marriage in Hong Kong is heterosexual and monogamous.

However, under the Married Persons Status Ordinance, married person’s status can apply to the parties to a marriage that is celebrated or contracted outside Hong Kong, according to the law in force at the time and in the place where the marriage was performed. As there is no definition of “parties to a marriage”, same-sex couples appear to enjoy legal status in Hong Kong. Having said that, when it comes to divorce, nullity, judicial separation or presumption of death and dissolution of marriage, the Family Courts in Hong Kong have no authority or jurisdiction to make any order in respect of same-sex marriages.

Recent case law has shown how benefits that once came with traditional heterosexual marriages are now becoming more accessible for non-traditional families.

Following the judgment of a case involving a same-sex couple in 2018, the Immigration Department revised its policy to allow a person who has entered into a same-sex civil partnership, same-sex civil union, same-sex marriage, opposite-sex civil partnership or opposite-sex civil union outside Hong Kong to apply for a dependent visa/entry permit for entry into Hong Kong, provided that all the other eligibility criteria are met, though this case did not involve any claim that same‐sex couples have a right to marry under the Hong Kong law.

For the purposes of succession, the definition of “marriage” under the Intestate Estates Ordinance only covers heterosexual marriage and not same-sex marriage. Following a 2020 judgment, the court ruled that the exclusion of same-sex marriage violated the principles laid down in the Basic Law. However, the court refused to rule on the question of whether “marriage” could include “civil partnerships” and “civil unions” for the purposes of the Inheritance Estates Ordinance.

In 2019, the court ruled that same-sex marriages would be regarded as a valid marriage for the purposes of the Inland Revenue Ordinance. The decision enables same-sex couples to elect for joint assessment of taxable income and claim appropriate allowances or allowable deductions.

In a case involving the non-biological mother of children born to her former same-sex partner in 2022, the court ruled that both parents should be granted guardianship rights, joint custody and shared care and control over their children.

Charities are exempt from tax under the Inland Revenue Ordinance, provided that certain requirements are met.

For the purpose of profits tax, the profits derived from any trade or business carried on by a charity are exempted if:

• the profits are applied solely for qualifying charitable purposes;
• the profits are not expended substantially outside Hong Kong; and
• either the trade or business is exercised in the course of the actual carrying out of the expressed objects of the charity, or the work in connection with the trade or business is mainly carried on by persons for whose benefit such charity is established.

A donor can be granted deductions for the purposes of personal assessment, salaries tax and profits tax for money donated to charities.

Generally, stamp duty will not be chargeable on any conveyance of immovable property or any transfer of Hong Kong stock where such assets are donated to charities.

Any organisation wishing to seek exemption from tax as a charity will need to apply to the IRD to obtain the tax exemption status.

The most common types of structures used by private individuals and organisations for charitable planning are companies limited by guarantee and societies; trusts are also increasingly common.

Company Limited by Guarantee

A company limited by guarantee is quick, simple and inexpensive to set up. It is a separate legal entity and the legal liability of members is limited to the amount of their contributions. The general compliance requirements include holding annual general meetings, filing annual returns to the Companies Registry, preparing audited financial statements, etc.

Society

A society is also quick, simple and inexpensive to set up and run, but it has no separate legal status and members are personally liable if the assets are not sufficient to meet the liabilities. It is not subject to the general compliance requirements for a company, as mentioned above.

Trust

A trust is generally more expensive and takes more time to set up and run if it is going to be managed by a professional trustee. It may be able to afford more privacy for the founder and the assets in the trust fund. Trustees can be personally liable, although it is possible to limit their liabilities subject to the restrictions in the Trustee Ordinance.