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Comparative Advantages of Hong Kong as a Worldwide Trust Centre

Comparative Advantages of Hong Kong as a Worldwide Trust Centre

The Status Quo of Hong Kong’s Trust Industry

The Hong Kong trust industry is comprised of four main types of trust, namely corporate trusts, private trusts, pension schemes and charitable trusts.

Corporate trusts

Corporate trust providers offer core trustee services and essential corresponding activities – such as formation and administration of trusts – while also acting as custodians. These service providers are critical to Hong Kong’s fund management industry.

Corporate trustees offer professional services for wholesale and retail investment products that are normally set up utilizing a unit trust structure, and provide investors with the opportunity to invest in assets or stocks that they might not usually have access to in the open market. This is associated with risk diversification ability.

Private trusts

With the support from advisors who specialize in private trusts, the growth of HNWIs across China and the Asia Pacific region has stimulated a surge in the demand for wealth and estate planning services.

There is a growing demand for these services from HNWIs seeking to manage the inter-generational transmission of wealth and to implement succession plans for family-owned businesses, because Hong Kong is at the center of the world’s largest and fastest growing market for Asia’s wealthy.

Pension schemes

The pension system will continue to mature when assets reach a scalable size, since the government is looking to increase participation and enhance the MPF schemes. The role of the trustee within the design of the scheme will remain pivotal as these schemes are likely to continue to grow. 

Hong Kong’s funds are relatively small when compared with mature schemes in other jurisdictions, since the Hong Kong MPF system is still in an early stage of development.  The proportion of pension assets as a share of GDP will continue to grow, mirroring global trends.

Charitable trusts

Although charitable trusts represent a small proportion of the wider Hong Kong trust industry, they are becoming vital to advisors working with HNWIs as they look to create long-term legacies through philanthropy. 

Onshore charitable trusts – unlike other areas of the Hong Kong trust industry where offshore trusts dominate – are normally set up in Hong Kong under the Hong Kong Trustee Ordinance, in which a charitable trust is one of four structures that can be utilized to form a charity in Hong Kong.

Comparative Advantages of Hong Kong as a Worldwide Trust Centre

Macro conditions

  • Hong Kong is a special administrative region of China;
  • Well-established legal system based on a mixed system of English model common law and Chinese customary law (in matters of family and land tenure);
  • Free market economy, highly dependent on international trade and finance;
  • Hong Kong has substantially implemented the internationally agreed tax standard set out by the OECD guidelines and is part of its white list;
  • Hong Kong complies with the Hague Convention in the recognition of trusts;
  • Hong Kong Trust law currently allows for the situs or the governing law of a trust to be changed from Hong Kong, or for resettlement of the assets in a new trust, subject to the laws of the receiving jurisdiction

Taxation

  • Tax-efficient legislation with a treaty network of more than 30 double taxation agreements in place;
  • There is no capital gains tax levied in Hong Kong;
  • Taxation of income in Hong Kong is assessed on a territorial basis and only income arising in or derived from Hong Kong is subject to tax in Hong Kong;
  • No estate duty for locals or foreigners

Trust law reform

  • Hong Kong is a world-renowned wealth management center following recent amendments to its trust law. On 17th July 2013, the Trust Law (Amendment) Bill 2013 was passed. This amends Hong Kong’s Trustee Ordinance (Cap.29) and the Perpetuities and Accumulations Ordinance (Cap.257) which date back to 1934 and 1970 respectively. These amendments usher in much-needed improvements and modernization to the legal infrastructure for trusts subject to Hong Kong law. The most significant amendments that will come into force on 1st December 2013 are as follows:
  • Providing appropriate checks and balances

– the trustee must exercise the care and skill that is reasonable in the circumstances, taking into account any special knowledge or experience that the trustee has or has represented that it possesses;

– Professional trustees cannot be exempted from liability for willful misconduct, gross negligence or fraud;

– Beneficiaries have the right to appoint and retire trustees

  • Improvement or validation of certain governing powers or rules

– Settlors can reserve for themselves certain powers;

– Abolition of the rule against perpetuities; a Hong Kong trust can be settled for an unlimited amount of time;

– Abolition of the rule against excessive accumulation of income;

– Provision against forced heirship rules in jurisdictions outside Hong Kong

  • Enhancing trustees’ default powers where the trust instrument is silent

– In view of the complexity of modern-day trust structures, the Trust Law Amendment Ordinance 2013 enhances the default powers of trustees to ensure that the law will support effective administration of the trust even if the trust instrument does not contain specific provisions. These default powers include:

  • The ability to appoint agents, nominees and custodians to perform certain functions;
  • The power to insure trust property against loss or damage;
  • The entitlement to receive remuneration;
  • Authorization to invest in a widened scope of investments

Private trust companies

Hong Kong trust law provides that there is no requirement to obtain a license to act as a Hong Kong trustee. There is no requirement for a Hong Kong trustee to be resident or administered in Hong Kong, or for it to be a Hong Kong Company. This offers a good foundation to establish a Private Trust Company (“PTC”) structure, usually to hold the family business or listed company shares. Correct administration of the PTC is crucial to ensuring successful succession planning and protection provided by the “Family Trust”.

A comparison with Singapore

Hong Kong and Singapore are both reputable international financial centers. Both are dominant players within Asian for the provision of trust-related services and as a jurisdictional base for trusts. 

Hong Kong’s competitive advantage includes its geographical location and legal system that, on one hand, can capture the growth of China  and, on the other, can operate under the common law practices which are identical to those in Jersey, the Cayman Islands, the British Virgin Islands and Singapore. The long history of Hong Kong legislation’s core system is critical to clients.

Singapore has adopted the following strategies to boost its trust industry in recent years:

Government backing of the trust industry – Clear policy and strong government investment backing are cornerstones to the development of Singapore’s trust services.  The infant industry was largely promoted to incentivize international players and clients.

Trust Practitioner Regulation – The requirement that trust practitioners be licensed to practice in Singapore and the condition that specific services be performed by Singaporean licensed practitioners/providers are the two key factors that helped drive demand for local trust services.

Trust Professional Training and accreditation – Singapore has adopted a proactive approach and built up an institution to provide accredited training, which is partly subsidized by the government, whereas Hong Kong has a well-educated workforce and an established pool of professional talent ready to support the industry. 

In practice, not all of the measures taken in Singapore would function and be beneficial to Hong Kong; some industry leaders consider that the Hong Kong government should formulate policy addressing some of these areas. Hong Kong can develop tactics for sustaining its long-term goals for the trust and related industries through analyzing the competitors’ characteristics and latest development.

Below is a table showing a basic comparison between Hong Kong and Singapore trusts:

Jurisdiction

Hong Kong

Singapore

Available structure

Trust

Trust

Maximum trust period

Unlimited unless trust instrument provides otherwise

100 years

Reservation of investment powers by settlor

Yes

Yes

Reservation of other powers by settlor

No

No

Protection against foreign forced heirship rules

Yes

Yes

Purpose trusts

Yes, only in certain circumstances (e.g. charitable trust)

Yes, only in certain circumstances (e.g. charitable trust)

Other types of trust

No

No


Looking forward

The industry, government and regulators need to increase their collaboration, come to a consensus on a medium to long-term vision for the Hong Kong trust industry, and work together rigorously to build on Hong Kong’s strong foundations as an international financial center.

It is also vital for law makers to take a holistic approach to policy setting, which shall support the comprehensive financial services subsectors to foster a robust and independent financial and administrative services market for Hong Kong.

It is important to the Hong Kong government to pursue a long-term vision and policy on developing and promoting the trust industry, thereby creating a favorable environment to foster business growth and to further cement Hong Kong’s position as a truly world-class financial services center in all areas, given that an increased number of overseas jurisdictions are now competing with Hong Kong as a trust center.

Catherine Le Bourgeois, Wilson Yeung