Introduction of Hong Kong Trust
Hong Kong is an international finance centre. With the amendment to the Hong Kong Trustee Ordinance in 2013, Hong Kong Trust regime has been comprehensively modernized, further strengthening the protection of beneficiaries, and enabling the settlor to reserve powers in investment and asset management. Under the Trustee Ordinance, Hong Kong trust has indefinite perpetuity, the Trustee Ordinance also provides strong legal protection for Hong Kong trust, makes Hong Kong one of the most attractive trust jurisdiction in Asia.
Hong Kong is the Special Administrative Region of China. Hong Kong is constitutionally protected under the Basic Law and it has a well-established and a robust legal system based on English Common Law which offers a high degree of certainty that any legal issues and disputes for Hong Kong trusts will be resolved in a sensible and commercial manner by a judiciary of high standard of competency, professionalism and independence.
Hong Kong has access to a wide range of world class banks and has one of the world’s major stock exchanges. Investment operations including the trading in shares, bonds, currencies, funds and other financial products benefits from the leading financial markets, banks, brokerage firms and asset management firms. Trust administration benefits from the wide range of law firms and accounting firms with expertise of legal and accounting practitioners in trust law, tax law and investment activities.
There is no capital gains tax and no estate duty in Hong Kong. Income tax is assessed on territorial basis, only income arising in or derived from Hong Kong is subject to Hong Kong income tax.
Hong Kong is party to many double tax treaties. Hong Kong has substantially implemented the internationally agreed tax standard set out by the Organization for Economic Cooperation and Development (“OECD? guidelines including Common Reporting Standard/ Automatic Exchange of Information, and is therefore on the white list of the OECD.
A Hong Kong Trust may be created by a Trust Instrument sets out the terms of the trust in which the settlor transfers the assets to the trustee on trust for the benefit of the beneficiaries.
The Settlor of the trust is the owner of the assets who settled the assets into a trust. The professional corporate Trustee is the company which is the legal owner of the trust assets. The Trustee has the power to hold, administer and distribute the trust assets in accordance with the terms of the trust. The Trustee holds the trust assets for the benefit of the beneficiaries of the trust. The Settlor can be one of the beneficiaries but he cannot be the sole beneficiary of the trust.
Highlights of amendments to the Hong Kong Trustee Ordinance in 2013
- Statutory Duty of Trustee
A statutory duty of care requires trustee to exercise reasonable skill and care. Professional trustees cannot exclude liability for wilful misconduct or negligence or fraud. The rule applies retrospectively to trusts created before the date of the legislation.
- Power of Appointment of Beneficiary
Beneficiaries have the right appoint and remove the trustees without having to apply for a court order.
- Reserved Powers of Settlor
Settlors can reserve the investment or asset management powers to themselves without invalidating the trust. The Trustee who acts according to the Settlor’s exercise of such power is not treated as being in breach of trust.
- Abolition of the Rule Against Perpetuities and Accumulation of Income
Hong Kong Trust can be settled for an indefinite period of time. The rule against excessive accumulation income is abolished.
- Default Power of Trustees
Trustees?powers have been extended to ensure effective support in the administration of trust even in cases where the trust instrument does not contain certain provisions. These default powers include:
(1) Power to appoint agents, nominees and custodians to act on certain functions;
(2) Power to insure trust property against loss or damage;
(3) Trustee is entitled to receive remuneration; and
(4) A wider range of authorised investments are available to the Trustee. The Trustee can now invest in most investment products.
- Provision against Forced Heirship
Some civil law jurisdictions apply mandatory forced heirship rules. Under Hong Kong law, the transfer of movable property to a Hong Kong trust is protected from challenge under any forced heirship rules. This allows the Settlor to achieve succession planning by settling assets into the Hong Kong Trust.
Benefits of a trust：
- Succession planning: the Trustee can hold the trust assets and distribute the trust assets to the beneficiaries in accordance with the terms of the Trust Deed. The Settlor may give a letter of wishes as a guidance regarding the timing, amount and manner of distribution to the Trustee. The Trustee can hold the shares of a family business for concentration of shareholding of family business and to ensure that the family business can pass to future generations.
- Asset protection: by transferring the assets to the trust, the Settlor segregating the trust assets with his own assets, protect the trust assets from creditor’s claims provided that the intention of setting up a trust is not to defraud creditors and the Settlor does not reserve to himself unrestricted powers to revoke the trust, a trust can serve as an important asset protection functions. In addition, the trustee can appoint the spouses of the descendants as excluded persons of the trust who cannot benefit from the trust. The Trustee may cease to make distribution to the beneficiaries who have the risk of divorce.
- Avoidance of probate: assets owned by an individual usually pass on death in accordance with the terms of a will. If the assets are held in a wide variety of countries, it may be necessary to obtain a grant of probate with respect to the will in each country where assets are located. This can be an onerous, lengthy and costly process which can last between six months to two years. Moreover, there may be estate duties and taxes payable before the estate can be settled and the assets distributed to the heirs of the deceased. If such assets are settled on trust, the trust can enable the trust assets to be passed on future generations smoothly and according to the wishes of the settlor.
- Tax planning: During the existence of the trust, under the current tax regulations of Hong Kong, Singapore, Cayman Islands, British Virgin Islands, and Jersey, there is no tax reporting obligation for the income generated by the trust assets. However, when a beneficiary receives a trust distribution, there may be tax reporting obligations depending on the tax residency status of that beneficiary. Trust can be used to protect or exclude property settlements for UK inheritance tax purposes and foreign grantor trusts for US tax purposes.
- Avoidance of forced heirship rules: to guarantee that the trust assets can be distributed to the beneficiaries according to the wishes of the Settlor. An individual from a country with rigid legal or religious inheritance laws may implement a scheme of distribution of assets among his heirs that differs from that prescribed by his domiciliary law. By establishing a trust in common law jurisdictions such as Hong Kong, Cayman Islands, British Virgin Islands, Jersey and Guernsey, the desired distribution plan can often be implemented.
- Confidentiality: a trust does not need to be registered and it is a private legal arrangement between the Settlor and the Trustee. The information relating to the trust is not accessible by the general public.
- Philanthropy: a trust can be set up for charitable purpose in which the beneficiary of a trust can includes charitable organizations or for charitable purposes.
- Commercial uses such as Employee Benefits Trust.
Different kinds of Hong Kong Trusts:
Discretionary Trust:
A discretionary trust is the most common type of trusts which gives the trustees wide powers to administer the assets and to distribute the assets to the discretionary beneficiaries at their discretion. The trustees will usually be guided by a non-legally binding letter of wishes from the settlor setting out wishes of the settlor regarding the manner in which the trust fund is to be administered and distributed. The letter of wishes can be updated from time to time. A Hong Kong Trust can exist indefinitely under the Hong Kong Law.
Reserved Powers Trust:
The Settlors of Hong Kong Trust may reserve certain powers of investment and management of trust assets to themselves without invalidating the trust.
Hong Kong Private Trust Company
A Hong Kong Private Trust Company does not need to obtain a licence to act as the trustee of a Hong Kong Trust. A Private Trust Company carries on connected trust business with related parties. There is no requirement for the Hong Kong Private Trust Company to be a Hong Kong Company, to be a resident or administered in Hong Kong. A Private Trust Company usually hold the family business or listed company shares.
KAIZEN Group is equipped with experienced and highly qualified professional consultants and is therefore well positioned to provide professional advices and services in respect of the formation and registration of company, application for various business licences and permits, company compliance, tax planning, audit and accounting in China. Please call and talk to our professional consultants for details.
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