Setting Up a Trust in Hong Kong: A Comprehensive Guide

Hong Kong has established itself as a premier jurisdiction for trust formation.

According to KPMG, the Hong Kong trust market size is over HKD 5,000billion (over USD 660billion) as of the end of 2023, in terms of the assets under trusts.

Why is it an attractive location for individuals and families seeking to protect and manage their assets?

To begin with, its robust legal framework based on English common law, combined with its business-friendly environment are vital factors.

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This includes if you are looking for a second opinion or alternative investments.

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This post provides a detailed exploration of how to set up a trust in Hong Kong.

What is a Trust in Hong Kong?

A trust in Hong Kong represents a three-party fiduciary arrangement between:

• The settlor
• The trustee
• The beneficiaries

In this arrangement, a settlor transfers the legal title of specified assets to a trustee, who holds and manages those assets for the benefit of one or more beneficiaries.

This creates a fundamental separation between legal ownership (vested in the trustee) and beneficial ownership (held by the beneficiaries).

The legal framework governing trust in Hong Kong primarily consists of the Trustee Ordinance (Cap. 29) and English jurisprudence-based common law principles.

A trust can be established in Hong Kong through either oral or written declarations with the latter being more common.

Express trusts, the most prevalent form, require three certainties: certainty of intention, subject matter, and objects.

That is, the settlor’s intent must be clear, the property to be held on trust must be precisely identified, and the beneficiaries must be ascertainable.

Informal or resulting trusts may arise in specific contexts, but for clarity and enforceability, most Hong Kong trusts are documented in a written trust deed.

Types of Trust in Hong Kong

Hong Kong’s flexible trust laws accommodate various trust structures designed to meet different objectives and circumstances.

Discretionary Trusts

In a discretionary trust, the trustee has unfettered discretion over which beneficiaries receive distributions and in what proportions.

Beneficiaries do not hold fixed entitlements, which enhances asset protection and allows trustees to respond to changing circumstances or family dynamics.

Family Trusts

Family trusts cater to intergenerational wealth transfer and protection needs, often involving professional or lay trustees (relatives or friends) as appropriate.

These trusts can provide for education, healthcare, or other needs of descendants while preserving family assets and minimizing potential disputes.

Charitable Trusts

Charitable trusts are specifically designed to benefit charitable purposes rather than individual beneficiaries.

These trusts are common in Hong Kong and receive certain regulatory and potential tax advantages.

Inter Vivos and Testamentary Trusts

An inter vivos trust is created during the settlor’s lifetime, enabling immediate asset planning and protection.

On the other hand, a testamentary trust takes effect upon the settlor’s death via provisions in a will.

Testamentary trusts are integral to estate planning, ensuring orderly distribution according to the settlor’s last wishes.

Corporate Trust Services

The Hong Kong trust industry also includes substantial corporate trust services, representing a sizeable portion of the market.

These include unit trusts, REITs (Real Estate Investment Trusts), and commercial trusts, which serve specific investment and business purposes.

Pension Funds

Pension funds represent approximately 38% of Hong Kong’s trust industry in terms of the amount of assets, making them the largest segment.

These trust structures are designed specifically for retirement planning and are subject to distinct regulatory requirements.

How Much Does It Cost to Set Up a Trust in Hong Kong?

Setting up a trust in Hong Kong involves various costs that should be carefully considered during the planning process.

Trust Registration and Licensing Fees

For entities seeking registration as a trust company, there is an application fee of HK$11,250 plus an additional HK$840 for the issuance of the certificate of registration.

The latter fee is refundable if the application is unsuccessful.

Capital Requirements

Trust companies must meet substantial capital requirements.

This typically involves depositing a sum not less than HK$1,500,000 with an authorized institution within the meaning of section 2 of the Banking Ordinance (Cap. 155).

Alternatively, this deposit can be made with a finance company that is a subsidiary of a bank, or through a bank guarantee in terms acceptable to the Director of Accounting Services.

Professional Fees

While not explicitly detailed in the search results, establishing a trust typically involves professional fees for legal advice, trust deed, and potentially accounting services.

These costs vary depending on the complexity of the trust structure and the professionals engaged.

Trust Management Costs

Trusts also incur ongoing management costs, including trustee fees, accounting expenses, and potential administrative charges.

Professional trustees generally charge annual fees as either a percentage of assets held under the trust or a fixed fee structure.

For example, some trustee fees range from 1 percent to 2 percent of assets held under the trust, depending on services rendered.

Initial Funding

A trust generally requires initial settlement funding to become effective.

While some trusts commence with a nominal sum (e.g., HK$1,000), practical asset levels are determined by the trust’s objectives and beneficiary needs.

What are the Requirements for a Trust in Hong Kong?

Establishing a valid trust in Hong Kong requires meeting several key requirements to ensure its legal enforceability and effectiveness.

The Three Certainties

All valid trusts must satisfy the “Three Certainties” principle derived from common law. These include:

1. Certainty of intention: There must be a clear intention to create a trust
2. Certainty of subject matter: The property to be held in trust must be clearly identified
3. Certainty of objects: The beneficiaries or purposes of the trust must be clearly defined. This can include specific individuals, classes of individuals, or charitable purposes, depending on the trust type.

Trust Deed

A comprehensive deed sets out the trust’s terms, trustee powers, beneficiary rights, and distribution mechanisms.

It is the primary legal document governing the trust relationship.

Proper Asset Transfer

For express trusts, the settlor must transfer the legal title of assets to the trustee.

In a self-declaration of trust, where the settlor and trustee are the same person, the transfer requirement is deemed satisfied as the property is already held in trust.

Compliance with Regulatory Standards

Professional trustees must be licensed as Trust and Company Service Providers (TCSPs) under Cap. 615.

They must adhere to anti-money laundering, licensing, and ongoing reporting obligations governed by the Companies Registry and the DAS.

Trust Registration Process

Applications for trust‑company licenses are submitted electronically or in hard copy, accompanied by:

• statutory declarations
• proof of capital compliance
• background disclosures

A certificate is typically issued within ten working days of a successful application.

How are Trusts Taxed in Hong Kong

Hong Kong’s tax treatment of trusts is a significant factor in the jurisdiction’s attractiveness for trust establishment.

General Tax Framework

The general charge to profits tax in Hong Kong is contained in section 14 of the Inland Revenue Ordinance.

Under this framework, a person (which includes a trustee) is taxable in Hong Kong.

This is if they carry on a trade, profession, or business in Hong Kong and derive Hong Kong-source profits from that activity.

Taxation of Professional Trustees

Professional trustees may be subject to taxation on profits derived from their business of providing trustee services in Hong Kong.

These profits typically come from remuneration paid for acting as a trustee, and professional trustees should ensure compliance with their tax obligations regarding this income.

Taxation of Trust Business Activities

An important distinction exists when trustees carry on business activities on behalf of a trust.

In such cases, the trustee may be carrying on more than one trade or business:

• First, the business of being a professional trustee
• Second, the actual business administered on behalf of the trust (such as managing a family business or trading in shares)

Beneficial Ownership Principle

A key principle in Hong Kong trust taxation is that a trustee cannot be taxed with respect to trust profits.

Because the profits of a trade or business carried on for the benefit of a trust are not “beneficially” owned by the trustee.

This principle creates important tax planning opportunities within the Hong Kong trust framework.

Source of Profits

The determination of whether profits are subject to Hong Kong tax involves a complex analysis of where the profit-generating activities take place.

The consensus view, accepted by the IRD, is that one looks to what the taxpayer has done to earn its profits and where those activities occurred.

This is done while discounting purely antecedent or incidental transactions.

Conclusion

Setting up a trust in Hong Kong offers significant advantages for asset protection, wealth management, succession planning, and potentially tax optimization.

The jurisdiction’s well-established legal framework, professional infrastructure, and business-friendly environment make it an attractive option for trust establishment.

The process requires careful planning, from selecting the trust structure to meeting regulatory requirements and understanding the management obligations.

There are costs associated with establishing and maintaining a trust. Nevertheless, the long-term benefits often substantially outweigh these expenses for those with significant assets or complex family situations.

There are reportedly over 550,000 registered trusts in Hong Kong, which testifies to its reputation as a premier trust jurisdiction.

With proper professional guidance, establishing a trust in Hong Kong can be a straightforward process that provides lasting benefits for settlors and their beneficiaries.

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