Despite the economic challenges created by the COVID-19 pandemic, the number of ultra-wealthy individuals in Asia is continuing to grow at a significant rate. A total of 87,460 people in Asia have amassed a fortune of at least US$30 million each, with this group collectively sitting on wealth worth US$10.2 trillion, according to wealth insight company Wealth-X’s World Ultra Wealth Report 2021.
These ultra-high-net-worth individuals (UHNWI) are increasingly turning to family offices to help manage their wealth and assist with succession planning, creating significant opportunities for the financial services sector.
In a bid to cement Hong Kong’s status as a family office hub, Financial Secretary Paul Chan FCPA announced plans to introduce a tax concession for family offices in the 2022-23 Budget. Under the proposal, which is expected to come into effect for the 2022/23 tax year, family-owned investment holding vehicles managed by single family offices in Hong Kong would be exempt from profits tax on qualifying transactions.
In order to benefit from the exemption, the family office must have its central management in Hong Kong, be owned by members of the same family, have assets under management of at least HK$240 million and not be engaged in commercial or industrial activities.
Dixon Wong FCPA, Head of Financial Services and Global Head of Family Office at InvestHK, says: “The proposed tax exemption would attract family offices to domicile in Hong Kong, creating more demand for investment management and other related professional services, including financial, legal, and accounting services. It will also deepen Hong Kong’s funding pool and create more business opportunities for the financial services industry.”
Roy Phan CPA, Tax Partner at Deloitte China, agrees the change will make Hong Kong more attractive as a location for family offices, in part due to the tax certainty it provides. “Given the rapidly changing tax landscape, such as the refinement to the Foreign Source Income Exemption regime in Hong Kong, which is expected to be effective from 1 January 2023, it is important to have certainty on the tax exemption treatment for family offices,” he says.
But Simon Ng CPA, Senior Partner at Consortium Family Office Limited, points out that the exemption would only apply to family-owned investment holding vehicles, which likely cover single family offices managing the assets of a single family, and not multi-family offices, which work on behalf of several families. “Some professionals and practitioners have commented that the scope is too narrow and won’t help to build Hong Kong up as a family office hub, as by only applying to single family offices, it misses out a major part of the business,” he says.
A competitive advantage
Hong Kong was already a popular destination for both single and multi-family offices before the proposed new tax exemption was announced.
Gigi Chan CPA, Founder and Chief Executive Officer of Wonder Capital Group, a boutique investment firm specializing in family offices, points out that Hong Kong’s status as an established financial centre with a diverse range of financial services and access to a wide range of investments, as well as all the necessary professional services needed to build and maintain an efficient family office, makes it a compelling base for family offices.
Ng adds that Hong Kong’s role as a gateway to Mainland China, and the significant business and investment opportunities this creates, also gives it a unique advantage. He points out that there are two aspects to managing family assets, namely: wealth preservation and wealth creation. “Preservation is largely dependent on the principles and operation of law, as well as the integrity and effectiveness of the law and court system. I think most common law jurisdictions would argue that their system and infrastructure are the best,” he says. “So for Hong Kong, our unique position is acting as the front door to the Greater Bay Area, in particular, and in Mainland China in general, which gives us the edge over the others under one country, two systems.”
Travis Lee CPA, Tax Partner, KPMG, and member of the Institute’s China Tax Subcommittee, adds that as family offices not only manage a family’s wealth, but also assist with succession planning, Hong Kong’s robust legal system and established trust structures also make it an appealing place in which to set up a family office.
While not directly related to the running of a family office, Lee thinks Hong Kong’s diversified education sector, with top-tier government schools and a wide range of international schools, as well as a gateway to world-class universities in the Mainland, further increases its appeal as a location. “Families often choose to be based in the place where they set up their family office, and Hong Kong is well positioned from an education standpoint,” he says.
A growing sector
Family offices are an important growth component of the wealth and asset management industry in Hong Kong, according to Wong. “The family office business is booming. According to an industry report, by 2026, the number of UHNWI in Asia and Australasia is expected to grow by 33 percent from 2021 to 2026, creating a huge demand for family offices. This is a rare and ideal opportunity for the asset management industry.”
He adds that the government has introduced a number of initiatives which benefit family offices, including the newly launched Limited Partnership Funds regime, which offers low setup and operating costs, and tax exemptions on carried interest, subject to certain conditions, when the main investment activities of the fund are carried out in Hong Kong. It has also introduced a simplified mechanism to facilitate the re-domiciliation of foreign funds to Hong Kong as Limited Partnership Funds and open-ended fund companies, and has introduced the carried interest tax concession regime.
In addition, it has created FamilyOfficeHK, a dedicated team at InvestHK, to provide one-stop support services to people interested in running family offices in Hong Kong. Wong says as of 1 June 2022, the team has been actively processing more than 50 cases from different regions, covering licensing, visa and marketing assistance, and has successfully assisted at least 13 family offices to set up or expand their business in Hong Kong, including Mainland, European, ASEAN, and North America family offices.
Phan thinks the proposed profits tax exemption, coupled with the existing unified funds exemption and carried interest tax concession, will be a big step forward in attracting family offices to manage their assets in Hong Kong through different investment holding or fund structures. “The launch of Hong Kong fund vehicles, such as Limited Partnership Funds and open-ended fund companies, which have gained increasing popularity in the past year or so, will also be a catalyst to facilitate the ‘onshorization’ of investment structures,” he says.
Lee points out that the increasing demand for succession planning, primarily fuelled by Chinese entrepreneurs’ need to plan, will also help to drive growth in the sector in the years ahead. “Succession planning broadly involves passing on wealth and the family business to the right people, and protecting the family’s wealth so that it can last for generations,” he says. “The number of family offices will increase going forward, particularly as Chinese families are observed to have a much stronger awareness of the reach of their third generation and need to turn their attention to succession planning and wealth protection. They see it equally important as driving business and investment returns.” Lee adds that succession planning varies between families, as no families are the same. For example, some families want to operate the family business over generations as the business stands for the family’s values, while others may prefer to exit the business and use the wealth for other investments to sustain succession.
Chan also thinks Hong Kong will benefit from growing wealth in Mainland China. “There is a lot of potential from China that hasn’t been capitalized. The family office segment in China is still at its infancy and there is tremendous demand from Mainland China families looking for offshore asset managers in Hong Kong,” she says.
But there are a number of challenges the city needs to overcome to increase further its attractions as a family office hub. Like much of the financial services sector, family offices are currently facing problems recruiting talent, and anti-pandemic measures disrupting mobility, according to Lee.
He adds that Hong Kong also undeniably faces significant competition for family office business from Singapore. “Singapore is a very strong rival to Hong Kong in terms of attracting family offices, and it shares many similarities with Hong Kong in terms of positioning itself as a financial centre, therefore it is also attractive to family offices.”
Chan adds that increasing connectivity with other markets to grow investment opportunities is also key to helping Hong Kong remain an attractive base. “I would like to see Hong Kong develop a more diversified portfolio of unique financial products and platforms that other competing markets do not yet offer,” she says.
Ng suggests Hong Kong should also adopt a more strategic and coordinated approach to encourage family offices to be based in the city, with a single government department put in charge of the sector. “The Monetary Authority of Singapore offers a one-stop shop to family offices setting up there, in terms of tax, visas and so on. But in Hong Kong, you have to go to the Securities and Futures Commission for the relevant licence(s), the Immigration Department for a working visa and talk to someone else about office space and recruitment. Hong Kong needs to have one dedicated and speciality team where you can go to save time and effort.”
He adds that the city should also introduce a simplified licensing regime and make it easier for the sponsoring family and professionals employed by family offices to obtain visas and school places. Lee thinks another important step the government could take would be to make it easier for the family to gain permanent resident status in the city. “It currently takes seven years, and voices from various sectors in the city are calling for a revisit of the immigration policy, which is a long time by international standards. Hong Kong suspended its Capital Investment Entrant Scheme back in 2015, but it may be time to revisit the programme, or consider a new one.”
“Succession planning broadly involves passing on wealth and the family business to the right people, and protecting the family’s wealth so that it can last for generations.”
Changing investment trends
In the meantime, family offices already established in Hong Kong are becoming increasingly sophisticated in terms of their investments.
Ng recalls the family office setup was already commonly found in Hong Kong when he was a junior accountant at a CPA firm 30 years ago, when clients would employ a small team of lawyers and accountants to manage their assets, such as renting out entire residential buildings, redeveloping land or properties, or investing in a side business such as restaurants. “In recent years, we have seen more full-scale family offices being established, with ultra-high-net-worth clients and families retaining their own investment professionals to manage their investments without solely relying on the traditional banks and fund houses as they previously did,” he says.
Lee has seen a growing interest in environmental, social and governance (ESG) and socially responsible investing, as well as philanthropy, among family offices. “Family offices are increasingly not just about managing wealth but also about building up the family’s reputation in society; they care about how much they give away and who they give it to,” he explains.
Lee adds that as the younger generation have become more informed in the decision-making, and investments are becoming more diversified and more globalized, often because this generation has spent time overseas. Wong agrees: “UHNWI, including the newly rich, are recognizing the importance of family offices in protecting and passing on their wealth. We note that their interest in green finance, the arts and philanthropy continues to grow.”
He adds that Hong Kong is well-placed to meet this growing demand, with the government committed to strengthening its position as a green finance hub, while it already has one of the largest green bond markets in the world. “Hong Kong also has an extensive network of philanthropic activities, and charitable assets account for about 3.3 percent of Hong Kong’s economy, the highest in Asia. The city is also the regional centre for more than 15,000 charitable organizations,” Wong adds.
Phan has observed a trend for family offices to invest in digital assets. “Alongside traditional private equity and securities in the secondary market, more family offices are getting in on the digital assets trend by investing in cryptocurrencies, tokens, and non-fungible tokens,” he says.
Chan agrees. “For the crypto world, while traditional investors have their eyes mostly on investment opportunities in the real world, the next generation are more open-minded and have started their journey in this area in recent years,” she says. “But, particularly after the adjustment of crypto in the past six months, investments require more solid backing and a decent structure, instead of being purely virtual. It will be very exciting to see how the market will evolve and how the market players will merge real and virtual to make the investment opportunities more viable and risk managed.”
“Family offices are increasingly not just about managing wealth but also about building up the family’s reputation in society.”
Opportunities for accountants
The growth in family offices choosing to be based in Hong Kong creates significant opportunities for accountants. Chan says: “New rules and regulations create more opportunities for accounting and tax professionals to offer advice and services to users. Tax planning and implementations are always crucial for investments and businesses. Family offices will be keen to understand the new tax rule and how to capitalize on the benefits in practice.”
She adds that accountants in Hong Kong generally have more diverse exposure to and experience of in different industries, markets and jurisdictions. “They are very resourceful for family offices and UHNWI, not only for their investments but their businesses. accountants should be more proactive about bringing their intelligence and knowhow of success factors, best practices and governance to family offices and UHNWI.” Chan suggests that to thrive in the industry, at a corporate level, CPA firms should seek solid partnership and co-organize events with financial institutions and multi-family offices, while at the individual level, they should learn more about financial products, tools and structures to provide more pragmatic solutions to investors.
Lee points out that accountants play an important role in family offices. “Accountants are widely perceived by family business owners as being well trained, trustworthy, and sensitive to numbers. Indeed, these attributes are of paramount importance to drive the success and values of family offices. In addition, the network of accountants in Hong Kong is an important asset in the eyes of business owners as we have a huge accounting community here, and many issues can be solved through leveraging this network.”
Ng thinks accountants also have an important role to play in helping to educate wealthy clients about the benefits the arrangement can bring the family. “As trusted advisors, accountants can introduce clients to the concept of a family office and the benefits it offers to effectively and efficiently manage their assets. Accountants also understand the current accounting and other regulatory regimes, such as Trust or Company Service Provider Licenses, and all the relevant initiatives proposed by the government where accountants then become the ideal party to advise clients on establishing a family office structure in Hong Kong.” He adds that most accountants have an in-depth understanding of the family business they have been dealing with, but many hesitate to reach out to the family and advise them on how to structure a proper and holistic platform to manage the family assets – not just the operating business but also the financial assets and other investments.
Phan points out that accountants can also provide professional accounting and tax services to help UHNWI design, review and implement their investment holding structures, as well as their family trust structure where applicable. “Accountants also play an important role during the investment phase by providing due diligence (financial and tax), deal structuring and post-deal support services,” he says.
Wong agrees that the growth in family office business in Hong Kong will not only boost the financial services industry, but also create a ripple effect for related professionals, including accountants, lawyers, compliance officers and risk management personnel. “With the strong support of the government and the continuous growth of private wealth in the Greater China region and Asia, the development of the family office industry in Hong Kong will definitely go up a notch,” he says.
A total of 87,460 people in Asia have amassed a fortune of at least US$30 million each, with this group collectively sitting on wealth worth US$10.2 trillion, according to wealth insight company Wealth-X’s World Ultra Wealth Report 2021.