Author: Dominik Stuiber
Family offices have been gaining greater visibility in Asia not just in the private wealth management business. They have become increasingly important to the whole financial services industry. As a financial hub in Asia, Hong Kong is well positioned to attracting family offices. Financial markets in Hong Kong are mature, sophisticated, and provide unrestricted access beyond its borders. Close ties with Mainland China and the launch of pilot programs with the bourses in China have established Hong Kong as the main investment gateway into and out of China. The unique positioning and advantages of Hong Kong make it a natural choice for family offices looking to establish a presence in the Asia-Pacific region.
What is a Family Office?
In its simplest form, a family office is a private office for a family. While the definition of “family” differs across jurisdictions, family members are generally defined as the lineal descendants of a common ancestor, spouses of the descendants as well as stepchildren and adopted children. With the expansion of the family tree, the structure of a family can become quite complex, and this complexity will also often be reflected in the structure of the family office.
Family offices have a stronger tradition in Europe and North America, whereas in Asia, this is still a rather new concept. With the growing wealth in Asia, family office services found great traction and acceptance in Asia as well. The private wealth management industry in Asia was not too long ago dominated by Swiss banks. However, with the transition to the second or third generation and the current fashion of principled investment, private equity and venture capital, the needs of wealthy families go beyond pure investment management.
Main functions of Family Offices
Whether a family office is established for a single family (“SFO”) or as an office serving multiple families (“MFO”), there are typically four main functions of family offices.
- Investment and financial management. A family office usually takes up the role as the family’s investment manager for its wealth, including asset allocation strategies, monitoring investment performance and financial planning services to each family member.
- Inheritance management. A family office is usually tasked with supporting the family’s inheritance management, estate planning and succession planning
- Advisory and governance services. Family offices offer optimised and tailored professional advice when needed, including tax and legal advice. Another important function of a family office is record-keeping, where good practises from the earlier generations will be recorded and followed and thereby maintain good family governance.
- Other family affairs. From bill payments, expenses management, organising family meetings, to other types of concierge services, family offices may take charge of the services some or all family members require.
In order to perform these functions well the family office requires to operate in the presence of matured financial markets, robust regulatory and legal frameworks for asset protection purposes, predictable tax system, and first class infrastructure.
Hong Kong Regulatory Approach to Family Offices
In January 2020, the SFC issued a circular titled “The licensing obligations of family offices” providing guidance on the SFC’s approach to regulating family offices. This recognizes the completed emergence of the family office in Hong Kong.
There is no specific licensing regime for family offices and whether or not a family office requires to be licensed by the SFC will depend on whether the activities being undertaken constitute a Regulated Activity or whether they fall within any of the available Carve-Outs. In its circular the SFC indicated that a company or family office set up as a business to manage securities or futures may be required to be licensed for asset management. While the SFC confirms that it has no intention to regulate family offices as an arrangement, the way in which a family office has been structured and operates will give rise to any licensing obligation. Family offices, thus, unless getting licensed, need to rely on professional advice and conduct their activities within the limits of existing carve-outs.
One carve-out is the intra-group carve-out. If a single family office appoints a trustee to hold the assets in a family trust and the trustee operates a family office as an internal unit to manage the trust assets or the family office is established as a separate legal entity which is wholly owned by a trustee or a company that holds the assets of the family and provides asset management services solely to related entities, it will not need a licence.
As regards to MFOs, an SFC licensing obligation would likely be triggered. MFOs are likely to provide services to clients who are not related entities and would not be able to rely upon the intra-group carve-Out.
Tax considerations for family offices of Hong Kong
Hong Kong does not impose tax on capital gains or dividend and interest income.
The current profits tax exemption regimes, Unified Funds Exemption (“UFE”) and Non-Fund Investor Exemption (“NFIE”), provide tax exemption to funds and non-funds entities respectively, which are either managed by SFC licensed entities or regarded as qualifying funds.
Families with business and investment interests in Asia utilize Hong Kong’s unique position managing their family affairs without the any of the capital restrictions often in place in emerging countries including China.
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