Introduction

Both Singapore and Hong Kong have put in place tax incentive schemes designed to encourage high-net worth private families to set up single family offices (SFO) and family-owned investment holding vehicles (FIHV) in their respective jurisdictions. In this client alert, we will compare the tax incentive schemes available in Singapore and Hong Kong, the conditions required to obtain the tax incentive, as well as outline some features of the SFO regime that are unique to each jurisdiction. An understanding of the nuances between these competing schemes is vital to any potential applicants looking to navigate the various conditions and determine which jurisdiction best suit their individual needs.

Singapore’s scheme

A Fund Company (Fund) in a single family office in Singapore can apply for a tax incentive under Section 13O (13O Scheme) or Section 13U (13U Scheme) of the Income Tax Act 1947. While one can refer to the legislation and the accompanying regulations to determine the scope and the general rules for the 13O and 13U tax incentives, many of the specific rules are provided for in circulars and guidelines issued by the Monetary Authority of Singapore (MAS). The following are some of the key features of the 13O and 13U Schemes.

Qualifying transactions under the 13O and 13U Schemes

The 13O and 13U Schemes provide an exemption from Singapore income tax on Specified Income derived from Designated Investments. This might include, for example, stocks and shares of qualifying companies, qualifying classes of debt securities, futures contracts held in futures exchanges and deposits held with financial institutions.

The full list of Designated Investments is extensive and subject to numerous exceptions. For more information, please feel free to contact us and we can advise you further.

Summary of the conditions for the 13O and 13U Schemes

For a more detailed overview of Singapore’s tax incentive scheme for single family offices, please refer to this article.

Hong Kong’s scheme

On 19^th May 2023, the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2023 (the Ordinance) was gazetted and applied with immediate effect for years of assessment commencing on or after 1 April 2022. The following are some of the key features of Hong Kong’s profits tax concession for family offices.

Types of transactions that qualify for the tax concession

The Ordinance provides a concessionary tax rate of 0% to eligible FIHVs on assessable profits earned from qualifying transactions and incidental transactions. These qualifying transactions include securities, futures contracts, foreign exchange contracts and foreign currencies, deposits, exchange-traded commodities and OTC derivative products, and also investments in underlying investee private companies (in Hong Kong and elsewhere). However, there are certain exceptions that may render the tax concession on assessable profits from transactions involving private companies directly or indirectly holding immovable property in Hong Kong inapplicable. Moreover, it should be noted that non-qualifying incidental transactions may be allowed for profit tax concession provided that the percentage of non-qualifying incidental transaction does not exceed 5% of the total trading receipts in the basis period.

Asset management

SFOs that wish to be qualified under the Hong Kong scheme must have a minimum fund size of HK$240 million (or equivalent in foreign currency). In addition to that, the minimum amount of operating expenditure incurred by the SFOs must be at least HK$2 million.

Investment Professionals employed under the SFO

Previously, an eligible family office under the scheme must have had their ‘central management and control exercised’ in Hong Kong. This was amended to a lower standard of ‘normally managed or controlled in Hong Kong’. This suggests that family offices only need a sufficient number of IPs to be physically present in Hong Kong to be eligible for the tax concession, as opposed to the previous requirement that the administrative control of the family office needs to be physically located in Hong Kong. In this regard, the sufficient number of qualified employees during the relevant basis period should in any event not be less than two.

Further relevant developments for the asset and wealth management industry in Hong Kong

The Policy statement on Developing Family Office Business in Hong Kong has highlighted a few developments in Hong Kong’s family office and wealth management industry:

1. A dedicated FamilyOfficeHK team will be introduced to cover services such as facilitating philanthropic endeavours of wealth owners and assisting in education related matters.
2. Introduction of a new Capital Investment Entrant Scheme to enrich Hong Kong’s talent pool and attract new capital to Hong Kong.
3. Developing Hong Kong into a philanthropic centre by enhancing the application process to obtain tax exemption status for charities.

For a more detailed overview of Hong Kong’s scheme, please refer to this article.

Overview of the differences between Singapore’s and Hong Kong’s schemes

Potential considerations in deciding between Singapore and Hong Kong

It is also important to take into account the following factors when determining the feasibility of establishing a family office in either Singapore or Hong Kong.

Application Process

• To be eligible for the 13O or 13U tax incentive, the Fund must submit an application to the MAS. The time it takes for a Fund to be approved for the tax incentive may range from 1 to 2 years, depending on the profile of the ultimate beneficial owners, as well as the complexity of the family office involved. The purpose of this process is for the MAS to conduct background checks on the applicants, assess the experience of the investment professionals, as well as determine the applicant’s source of wealth, etc. Do note that the applicant would also need to set up a private banking account in Singapore, which may delay the setting up of an SFO in Singapore due to the stringent know-your-client checks that banks in Singapore must undertake.
• On the other hand, the application of the profits tax concession is not subject to prior approval by any regulatory body in Hong Kong. An FIHV can elect for profits tax concession through an election in writing. Nonetheless, to obtain tax certainty, the FIHV can make an application to the Commissioner of Inland Revenue of Hong Kong for an advance ruling on whether it is eligible for the profits tax concession.

Please feel free to contact us if you require us to guide you through the relevant application process in Singapore or in Hong Kong.

Permissible structures

• Singapore’s 13O Scheme requires the Fund company to be incorporated in Singapore, while the 13U Scheme can apply to a Fund that is incorporated overseas. Under both Schemes, the family office is required to be incorporated and managed in Singapore.
• In comparison, Hong Kong does not require the FIHV or the family office to be locally incorporated in Hong Kong to qualify for the tax concession. However, the family office needs to be ‘normally managed or controlled in Hong Kong’.

Financial Penalty

• Under the 13O Scheme, non-qualifying investors (e.g., a company incorporated in Singapore) in an approved Fund may be liable to pay to the Comptroller of Income Tax a financial penalty. For the avoidance of doubt, the financial penalty does not apply for a Fund company under the 13U Scheme.
• In Hong Kong, if the owner of the SFO or FIHV is a Hong Kong resident and, either individually or in conjunction with his/her associates, has no less than 30% beneficial ownership of the relevant SFO or FIHV, then that person is liable to pay profit tax on investment gains.
• In other words, the financial penalty mechanism in Hong Kong disincentivises its own residents from setting up an FIHV to benefit from the profits tax concession. In contrast, provided that proper advice is obtained, Singapore residents are not precluded from setting up their own single family office in Singapore and apply for the 13O or 13U tax incentive.

Charity

• In an effort to increase Singapore’s reputation as a regional philanthropy hub, family offices will receive a 100% tax deduction for overseas donations made through qualifying local intermediaries (capped at 40% of the donor’s Singapore statutory income). Please refer to our client alert here for more information on the philanthropy tax incentive scheme for family offices.
• For Hong Kong, the Ordinance provides that a family office can allow for up to 25% of beneficial interest to be owned by a charitable entity, with the remaining beneficial interest of at least 75% owned by one or more member(s) of the family. This is a deviation from the requirement that 95% of the beneficial interest of a family office must owned by one or more member(s) of the family. This incentivises more family offices to invest into charitable entities.

Conclusion

In conclusion, both Singapore and Hong Kong have introduced tax incentive schemes tailored to attract high-net worth individuals and families seeking to establish single family offices and family-owned investment holding vehicles in their respective jurisdictions. Regardless of which jurisdiction you may be interested in, please feel free to contact us and we can advise you further on the nuances and complexities of each scheme, assist you with the application / advance ruling process, as well as advise you on how a single family office may be integrated into your existing wealth management and/or succession structures.

Dentons Rodyk thanks and acknowledges Intern Paul Leow for his contributions to this article.