Hong Kong introduces bill on tax concessions for family-owned investment holding vehicles

FIHV

An entity,3 whether established or created in or outside Hong Kong, is an FIHV for a year of assessment if:

• The entity is not a business undertaking for general commercial or industrial purposes.
• At all times during the year, one or more than one member of a family4 has at least aggregated 95% of the direct and indirect beneficial interest in the entity.5
• Its central management and control are exercised in Hong Kong at all times during the year.
• It is managed by an eligible SFO of the family which carries out any one of the investment activities6 for the FIHV.

Eligible SFO

A private company, whether incorporated in or outside Hong Kong, is an eligible SFO if:

• Its central management and control are exercised in Hong Kong.
• At least aggregated 95% of its direct and indirect beneficial interest is at all times during the year held by one or more than one member of the family.7
• It provides services to specified persons8 of the family during the basis period for the year of assessment and the fees for the provision of those services are chargeable to Hong Kong profits tax.
• It fulfils the safe harbor rule whereby at least 75% of the eligible SFO’s assessable profits are derived from the services provided to specified persons of the family

The Bill further proposes that no more than 50 FIHVs managed by the same eligible SFO may benefit from the proposed regime. The Bill relaxed the permitted scope of services so an eligible SFO can provide other services to members of the relevant family.

Qualifying transactions

• Transactions in specified assets and transactions incidental thereto, subject to a 5% threshold. There is no tainting provision in the Bill so an FIHV undertaking non-qualifying transactions will only be subject to tax in respect to profits from that portion of transactions.
• However, profits from investments in certain private companies (whether incorporated overseas or in Hong Kong) by FIHVs or eligible SPEs will not be eligible for the tax concessions if they fail the immovable property test; holding period test; and control and short-term asset test.
• The qualifying transactions of an FIHV must be carried out in Hong Kong by or through an eligible SFO of the relevant family or arranged in Hong Kong by an eligible SFO.
• There is a minimum asset threshold whereby the aggregated net asset value of the specified assets of each relevant FIHV at the end of the FIHV’s basis period for a year of assessment must be of at least HK$240 million (i.e., approximately US$31 million).9 The assets held by an eligible SPE of the relevant FIHV will be included in calculating the net asset value.

Substantial activities requirements

Subject to an “adequacy” test, the FIHV should at a minimum:

• Have at least two full-time qualified employees in Hong Kong.
• Incur at least HK$2 million (i.e., approximately US$0.3 million) of annual operating expenditure in Hong Kong for carrying out the investment activities for the year.

The qualified employees and operating expenditures incurred by an eligible SFO should be attributed to each FIHV for ascertaining the substantial activities requirements.

Outsourcing of investment activities by the FIHV to the SFO is permitted, provided that it is not for circumventing the substantial activities requirement.