ISE23/20-21

• In 2019, over 1 300 ultra-wealthy families had set up private offices in Asia for multiple purposes such as wealth management, succession planning and philanthropy. As the average value of asset under management ("AUM") of these offices can reach US$808 million (HK$6.3 billion) globally, they are considered as the "jewel in the crown" of the wealth and asset management business.^{1Legend symbol denoting In 2019, global family offices managed over three-fourths of the total wealth of UHNW families. See INSEAD (2020) and Financial Services Development Council (2020).} In view of the significant spill-over benefits onto wider economy, many Asian governments are competing hard to attract domiciliation of family offices. Hong Kong appears to have potential to develop as a regional hub of family offices, given its (a) entrenched infrastructure as one of the premier global financial centres; (b) large population of 9 500 people with an ultra-high net worth ("UHNW") of over US$30 million (HK$233 million) in 2020; and (c) strategic position in the Greater Bay Area which is home to over 10 000 UHNW families located on the Mainland.^{2Legend symbol denoting Financial Services Development Council (2020) and Wealth-X (2021).}
• After policy pledges in the 2020 Policy Address and the 2021-2022 Budget, the InvestHK has just set up a dedicated team (i.e. "FamilyOfficeHK") in June 2021 to offer "one-stop support services" for family offices. However, there are ongoing concerns that tax regulation in Hong Kong is not competitive enough to become a regional hub, given that "taxation regime is one of the most important considerations" to the location choice of family offices.^{3Legend symbol denoting GovHK (2021) and Bloomberg (2021).}
• In Asia, Singapore has been vying for the family office business for years. Through streamlining regulation and introducing many incentives, Singapore is becoming one of the most favourite destinations in Asia for setting up new family offices and/or relocating existing ones. This issue of Essentials begins with recent global trends of family offices, followed by respective policy measures taken in both Hong Kong and Singapore.

Recent developments of global family offices

• Robust growth over the past decade: UHNW individuals and families have been "moving out from private banks" to set up their own offices to manage their finance in recent years.^{4Legend symbol denoting Capgemini (2012) and INSEAD (2020).} Based on scattered information available, the number of global single-family offices ("SFO", referring to those serving the founding family only and with a simple structure) has surged from just around 1 000 in 2008 to at least 7 300 in 2019. Their total AUM reached US$5.9 trillion (HK$46 trillion), taking up 5% of overall AUM of the asset and wealth management sector in the world.^{5Legend symbol denoting Forbes (2018) and PwC (2020b).} At present, SFOs are the mainstream in global family offices, accounting for about 80% of such entities, while the rest are multi-family offices ("MFO") which concurrently serve clients from several unrelated families.^{6Legend symbol denoting INSEAD (2020).}
• Contributory factors: The boom in family offices can be attributable to various factors, including (a) strong asset growth of UHNW families amidst aggressive quantity easing policy adopted by central banks after the outbreak of the Global Financial Crisis in 2008; and (b) increased preference of UHNW families to manage their own finance and family affairs upon adoption of more diversified investment strategy and increased awareness of other considerations including social responsibilities. Moreover, some offshore family offices began to redomicile away from the so-called "tax havens" (e.g. the Cayman Islands), in face of tighter global regulation against tax avoidance. This is seen in a recent suggestion put forward by 130 places in the world to lay down a global minimum corporate tax of 15% in July 2021. This apart, increased compliance requirements and cost in certain offshore centres are also relevant.^{7Legend symbol denoting Some jurisdictions (e.g. the Cayman Islands) have gradually implemented "economic substance requirements" since January 2019 stipulating (a) a minimum number of employees hired; and (b) a prescribed amount of annual expense incurred for maintaining business registration of funds domiciled there. Offenders will have their information disclosed to their home countries for taxation purposes, weakening the attractiveness of the offshore fund model. See Asia Business Law Journal (2020b).}
• Asian development: Asian family offices are also booming on the back of rapid wealth accumulation especially on the Mainland, better investment returns and more accommodating regulatory regimes. During 2017-2019, the number of Asian SFOs increased steeply by 44% to 1 314. With the average AUM estimated at around US$600 million (HK$4.7 billion) each, family offices are target customers of financial institutions in the region.^{8Legend symbol denoting UBS (2019).} 

Recent policy measures on family offices in Hong Kong

• Potentials of local development: In 2020, some 50 local family offices were licensed by the Securities and Futures Commission ("SFC") for conducting regulated asset management activities. There are also family offices not subject to licensing requirements as they are not deemed as conducting regulated activities (discussed in detail later).^{9Legend symbol denoting South China Morning Post (2020a).} Hong Kong had over 9 500 UHNW persons in 2020, the second-highest amongst global cities and trailing only New York.^{10Legend symbol denoting Wealth X (2021).} Coupled with over 10 000 UHNW families in other parts of the Greater Bay Area, Hong Kong is considered to have visible potential to develop as a hub of family offices for such UHNW families within the geographical vicinity as well as those from other places.^{11Legend symbol denoting Over 15% of UHNW population in Mainland China is located in the Greater Bay Area. See Caproasia (2020).}
• Macroeconomic and social benefits: According to a study report published by the Financial Services Development Council ("FSDC") in July 2020, new family offices could create additional business spending of US$600 million (HK$4.7 billion) and 680 professional jobs (e.g. risk management, legal and accounting services) annually in Hong Kong.^{12Legend symbol denoting Financial Services Development Council (2020) and Legislative Council Secretariat (2021).} In a survey of financial practitioners conducted in 2020, 73% indicated that family offices could be a "main growth opportunity" for local wealth management business.^{13Legend symbol denoting KPMG (2020).} On social benefits, it is noted that family offices are keener to promote philanthropic projects, arts, environmental protection initiatives and incubation of start-ups, all of which will bode well for enhancing the quality of life and innovation in the city.
• Licensing regulation on family offices: Under the Securities and Futures Ordinance (Cap. 571), there is no statutory definition on "family offices". In January 2020, SFC issued a circular clarifying that family offices need not be licensed as entities like asset management companies ("AMC"), insofar they are serving "related entities" (e.g. its wholly-owned subsidiaries) only but not a third party, and not engaged in "regulated activity" laid down in the Ordinance.^{14Legend symbol denoting Securities and Futures Commission (2020).} While SFC reiterates that it has no intention to regulate SFOs, those family offices with more complicated structures may need to seek legal advice for regulatory certainty.
  
  Put it simply, most of the SFOs serving the founding family only and with a simple structure are not subject to licensing requirements. For MFOs, they are more likely to touch upon provision of financial services to multiple third parties, and hence, subject to licensing requirements like AMC. Nevertheless, there remain industry practitioners who continue to advocate for a higher degree of clarity regarding the applicability of licensing requirements and conditions for licensing exemptions.
• Tax consideration in domiciliation decisions of family offices: As pointed out by FSDC, investments made by corporate entities domiciled in Hong Kong may be subject to local profits tax unless a specific exemption is granted. However, the tax exemption regime does not cover SFO without licensing with SFC. Some SFOs may thus prefer to domicile in offshore tax havens for tax savings, conducting their investment activities outside Hong Kong. This offshore domiciliation arrangement could shift a large portion of the relevant value chain out of Hong Kong, reducing the potential economic benefits brought by family offices.
• Recent initiatives on family offices: Before 2020, the Government had not launched any specific initiative to attract the presence of family offices in Hong Kong, though some recent refinements of tax regime on offshore funds (e.g. exempting incomes made by private equity funds from profits tax) and selected fund vehicles (i.e. introducing Limited Partnership Funds, which is a feasible option for some family offices) should help.^{15Legend symbol denoting According to FSDC, personal investment companies and trusts are other types of structures commonly found for family offices. See Financial Services Development Council (2020) and South China Morning Post (2020a).} Most recently in the 2021-2022 Budget, the Financial Secretary undertakes to "review the relevant tax arrangements" of family offices, and "offer one-stop support services" to potential clients worldwide previously mentioned in the 2020 Policy Address as well. InvestHK then set up a dedicated team in June 2021 to promote Hong Kong as a hub of family offices.^{16Legend symbol denoting Budget Speech (2021).}
• Major issues of concerns: First, most SFOs prefer not to license with SFC partly due to concern over additional compliance costs arising from maintaining the licence and reporting requirements that could inadvertently lead to issues of business confidentiality. But without such a licence, they are not eligible for exemption from profits tax available for licensed AMC under the Inland Revenue Ordinance (Cap. 112). Licensing decision of family offices will thus become a trade-off between tax benefits and concerns over compliance cost and confidentiality.^{17Legend symbol denoting Deloitte (2021) and KPMG (2021).} Secondly, the scope of tax exemption in Hong Kong now available for family offices with licences is alleged to be narrower than regional competitors. Taking tax-exempted incidental interests (e.g. dividend or interest from securities sourced in Hong Kong) as an example, they cannot exceed 5% of the annual qualifying incomes of a family office in Hong Kong, contrasted against a full exemption in Singapore normally.^{18Legend symbol denoting Asia Business Law Journal (2020a) and Inland Revenue Department (2020).} 
• Thirdly, for those existing family offices which have moved offshore a long time ago, the existing tax provision against round-tripping for tax exemption makes their re-domiciliation back to Hong Kong difficult. For instance, to safeguard against abuse for tax evasion, the proportion of interests held by Hong Kong residents in an offshore family office cannot exceed 30% in order to qualify for tax exemption, but this shareholding restriction could paradoxically discourage their relocation to Hong Kong.^{19Legend symbol denoting Round-tripping refers to local residents setting up a shell entity overseas as its pre-dominant shareholder and abusing tax exemption for funds to shelter otherwise taxable profits in Hong Kong. See Inland Revenue Department (2020) and The Hong Kong Institute of Chartered Secretaries (2020).} Fourthly, re-domiciliation process of offshore family offices to Hong Kong is allegedly burdensome, without a statutory fast-track mechanism.^{20Legend symbol denoting By now, offshore funds would need to create a new fund vehicle in Hong Kong before transferring their assets and shareholders from overseas. Issues of concerns include (a) adverse impact on investors' existing rights and liabilities of those funds; and (b) exposure to additional stamp duty in Hong Kong. In July 2021, the Government has introduced a bill on creating a statutory re-domiciliation mechanism to the Legislative Council for scrutiny. See Asia Business Law Journal (2020a).} Against this backdrop, there is growing advocacy in the financial sector to introduce "more attractive tax policies" and "streamlined" requirements for family offices.^{21Legend symbol denoting KPMG (2020).}

Recent policy measures on family offices in Singapore

• In 2002, the Singaporean government began to introduce regulatory reforms and tax exemptions to attract domiciliation of UHNW clients and promote wealth management business. More recently, further initiatives are launched to attract the setting up of new family offices in as well as relocation of offshore family offices to Singapore.
• Here are the major Singaporean measures on family offices:
  
  

  (a)	Certainty of tax exemptions for SFOs: The Monetary Authority of Singapore ("MAS") introduced a licensing exemption regime to eligible family offices (mostly SFOs). Successful applicants are not subject to any licensing requirement under the Securities and Futures Act on the one hand, but are still entitled to tax exemptions under the Income Tax Act on the other.22Legend symbol denoting Monetary Authority of Singapore (2020a). This represents a noticeable contrast with the licensing dilemma faced by SFOs in Hong Kong, which is largely a trade-off between tax benefits and concern over compliance cost and confidentiality as discussed above;
  (b)	Innovative company structure meeting unique needs of family offices: As early as in the mid-2000s, Singapore began to amend laws to increase operational flexibility and widen investment activities of all forms of funds (including family offices) based in Singapore, along with tax exemption schemes for them.23Legend symbol denoting These include Offshore Fund Tax Exemption Scheme, Singapore Resident Fund Tax Exemption Scheme and Enhanced Tier Fund Tax Exemption Scheme. See Grant Thornton (2020). More recently in January 2020, Singapore launched a new fund vehicle namely "Variable Capital Company" ("VCC"), granting a single identity to a master umbrella fund holding many sub-funds (e.g. a common structure seen in licensed MFO) without public disclosure of the register of shareholders. Sub-funds are automatically granted the same tax exemption as the umbrella funds, obviating the need for multiple tax returns, facilitating co-investment from different family branches under MFO, and enabling more smaller sub-funds previously ineligible alone to enjoy tax benefits.24Legend symbol denoting The pre-conditions of some tax exemption schemes (e.g. a minimum AUM and annual business expense) will only apply to the VCC master fund level. As such, small-sized sub-funds can entitle to the same tax benefits without satisfying those pre-conditions individually. As VCC is hailed as a "potential game changer" of personal wealth management business in Asia, MAS is planning to extend VCC from MFO to SFO after completion of a study in June 2021;25Legend symbol denoting There are over 280 VCCs registered in Singapore as of June 2021. See PwC (2020a) and Investment Management Association of Singapore (2021).
  (c)	Relaxing shareholding restrictions for relocation of offshore family offices to Singapore: For prevention of tax avoidance, there is likewise a general shareholding restriction of 30% on the proportion of Singaporean residents in re-domiciliation of family offices entitling to tax exemption. However, if there are at least 10 shareholders in such family offices (e.g. MFOs), the restriction could be relaxed to no more than 50%. For those family offices holding assets with an AUM of at least S$50 million (HK$287 million), this restriction could even be waived;26Legend symbol denoting EY (2019).
  (d)	Wider scope of products and income subject to tax exemption: On top of conventional investment products (e.g. securities and bonds), tax exemption was extended to income derived from new products (e.g. Islamic financial products) and green investments (e.g. emission allowances) in Singapore in February 2019. These help promote the development of alternative investments and a green financial centre in Singapore as well, on top of the positive effect on the family office sector. Moreover, most of the dividends and interest payments sourced in Singapore are tax-exemptible for eligible family offices, without the proportional restriction of 5% seen in Hong Kong;27Legend symbol denoting Deloitte (2019).
  (e)	Encouraging re-domiciliation of overseas family offices: In October 2017, a statutory mechanism was launched to facilitate the relocation of offshore entities (including family offices) to Singapore. Put it simply, the mechanism helps streamline the re-domiciliation processes and reduce administrative expenses. A subsidy is further provided to those re-domiciled VCC as from late 2020, covering 70% of the relevant costs (capped at S$150,000 (HK$861,000)) per entity. The re-domiciliation process may be completed within two months;28Legend symbol denoting Accounting and Corporate Regulatory Authority (2017) and Monetary Authority of Singapore (2020b). and
  (f)	Granting residence status to redomiciled families: Under the Global Investor Programme, the Singaporean government offers permanent residence to foreigners setting up SFOs in Singapore, subject to several thresholds of economic contributions.29Legend symbol denoting These requirements include (a) investing at least S$2.5 million (HK$14 million) in a Singapore-based SFO with AUM over S$200 million (HK$1.1 billion); (b) having at least five years of entrepreneurial, investment or management track record; (c) personally holding assets of at least S$200 million (HK$1.1 billion); and (d) submitting a 5-year business plan of that SFO. This is coherent with the government's drive to attract diverse talents as well.

• Policy effectiveness: The above measures in Singapore to address the issue of tax certainty and facilitate the setup of family offices seem to be attractive to family offices, as manifested in the quintupled increase in the number of SFOs in Singapore during 2017-2019. Some of these SFOs are established by famous billionaires from the West, enhancing its appeal as a family office hub amongst UHNW people globally.^{30Legend symbol denoting They are Sergey BRIN (co-founder of Google), Sir James DYSON (founder of Dyson Limited) and Ray DALIO (founder of the largest hedge fund globally) amongst others. See South China Morning Post (2020b).} At end-2020, there were as many as 400 SFOs in Singapore, with an average AUM as high as US$100 million (HK$777 million) each.^{31Legend symbol denoting Parliament of Singapore (2020 and 2021).}

Prepared by LEUNG Chi-kit
Research Office
Information Services Division
Legislative Council Secretariat
13 August 2021