Tax Concessions for Family-owned Investment Holding Vehicles
The Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Bill 2022 (the Amendment Bill) was gazetted on December 9, 2022 and is subject to scrutiny by the Legislative Council.
Under the concessionary regime, profits tax concessions are provided for:
- eligible Family-owned Investment Holding Vehicles (FIHVs) managed by eligible Single Family Offices (SFOs) in Hong Kong; and
- Family-owned Special Purpose Entities (FSPEs) established by an FIHV.
Concessionary Tax Rate
Assessable profits of an FIHV or an FSPE earned from the qualifying transactions and incidental transactions will be taxed at 0% profits tax rate if the specified conditions are met. The tax concession will apply retrospectively from 1 April 1, 2022.
Requirements for FIHV
To enjoy the profits tax concession, an FIHV must satisfy the following conditions:
- the FIHV must be an entity (established in or outside Hong Kong) that is not a business undertaking for general commercial or industrial purposes.
- entity means a body of persons (corporate or unincorporate) or a legal arrangement and includes a corporation, partnership and trust (including a discretionary trust).
- the FIHV must relate to one or more than one member of a single family.
Central management and control (CMC)
- the FIHV must, at all times during the basis period for the year of assessment, exercise CMC in Hong Kong.
Management of FIHV
- the FIHV must be managed by an eligible SFO and meet the minimum asset threshold (i.e. the aggregate value of assets specified under Schedule 16C to the IRO (Specified Assets) managed by an eligible SFO for the FIHV (or multiple FIHVs) of a family must be at least HK$240 million).
- the FIHV must carry out its core income generating activities (CIGAs) in Hong Kong and meet the requirements of qualified full-time employees and operating expenditures. At a minimum, the FIHV is required to have:
- not less than two full-time employees in Hong Kong who have the qualifications necessary for carrying out the required investment activities; and
- not less than HK$2 million operating expenditure incurred in Hong Kong for carrying out the required investment activities.
- Outsourcing of CIGAs to the eligible SFO is permitted provided that the use of outsourcing is not for circumventing the substantial activities requirement.
Key requirements for an eligible Single Family Office
- Must be a private company with its CMC exercised in Hong Kong;
- At least 95% of its beneficial interest is held (directly or indirectly) by one or more members of the relevant family;
- Must provide services to specified persons of the family during the basis period for the year of assessment and the fees for the provision of those services are chargeable to tax; and
- Must satisfy the safe harbour rules, i.e. at least 75% of the SFO’s assessable profits is derived from services provided to specified persons of the family.
Transactions eligible for the tax exemption
- Transactions in specified assets (qualifying transactions); and
- Transactions incidental to the carrying out of qualifying transactions (incidental transactions), subject to a 5% threshold (i.e. the FIHV’s trading receipts from incidental transactions must not exceed 5% of the total of the FIHV’s trading receipts from qualifying transactions and incidental transactions in the basis period for the year of assessment).
Specified Assets under Schedule 16C of the Inland Revenue Ordinance include:
- Shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a private company;
- Futures contracts;
- Foreign exchange contracts under which the parties to the contracts agree to exchange different currencies on a particular date;
- Deposits other than those made by way of a money-lending business;
- Deposits (as defined by section 2(1) of the Banking Ordinance (Cap. 155)) made with a bank (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571));
- Certificates of deposit (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571));
- Exchange-traded commodities;
- Foreign currencies;
- OTC derivative products (as defined by Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571)).
The qualifying transactions of an FIHV must be carried out in Hong Kong by or through an eligible SFO of the relevant family, or arranged in Hong Kong by the eligible SFO.
Family-owned Special Purpose Entities
Special purpose entities (“FSPEs”) established by an FIHV, whether in or outside Hong Kong, for holding and administering the FIHV’s assets and such FSPEs will also be eligible for the proposed tax concession to the extent which corresponds to the percentage of beneficial interest of the FIHV in the FSPEs.
An FIHV and the eligible SFO should keep sufficient records to enable the identity and particulars of the beneficial owner(s) of the FIHV and the eligible SFO to be readily ascertained.
It is noteworthy that the FIHV tax regime will be regarded as a preferential tax regime in Hong Kong. As such, the foreign-sourced dividends, equity disposal gains and interest income derived by an FIHV or FSPE will be excluded from the revised foreign-sourced income exemption regime.
For more information, please contact Ms. Amie Cheung at firstname.lastname@example.org