FIHV Tax Concession Regime

Current FIHV Tax Concession Regime Overview

The Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance, which came into effect on May 19, 2023, introduced profits tax concessions for eligible FIHVs managed by eligible single family offices (“ESF Offices”). Those concessions apply retroactively from the 2022/23 assessment year. For further details, please refer to our earlier article "Hong Kong Tax Concessions Succeed in Drawing Family Offices".

Under the current FIHV tax regime, a 0 per cent. concessionary profits tax rate applies to assessable profits from qualifying transactions and incidental transactions, with the latter subject to a 5 per cent. threshold.

• Qualifying transactions must involve assets listed as "Specified Assets" in Schedule 16C of the Inland Revenue Ordinance.

• Incidental transactionsare those incidental to the carrying out of qualifying transactions. The qualifying transactions must be carried out in Hong Kong by or through the ESF Office of the relevant family or arranged in Hong Kong by such an ESF Office.

An FIHV can also set up family-owned special purpose entities (“FSPEs”), which may be located in Hong Kong or abroad, to hold and manage assets. FSPEs are also eligible for the profits tax concession, although the level of concession depends on the FIHV’s beneficial interest in the FSPE.

Transactions involving non-qualifying assets that do not qualify for the tax concession will not impact the FIHV or FSPE’s qualifying transactions in Specified Assets (i.e. there is no tainting).

Proposed Enhancements to the FIHV Tax Regime

Expanding the Scope of Permitted Assets

The FIHV tax concession regime, modelled after the UFE regime, currently applies to traditional assets like shares, debentures, and derivatives because it is limited to the Specified Assets listed in Schedule 16C which was introduced in 2019 and has not been update since. To update the regime, the consultation paper proposes expanding the list of Specified Assets to include:

• Immovable property located outside Hong Kong;

• Emission derivatives, carbon credits, and allowances;

• Insurance-linked securities;

• Interests in non-corporate private entities (e.g., partnerships);

• Loan and private credit investments;

• Virtual assets.

This proposed expansion reflects the broader range of assets in which family offices typically invest.

Virtual Assets

The Consultation Paper proposes that the definition of "virtual assets" will align with the definition under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, but with a modification to include digital representations of value issued by a central bank, government, or their authorized entities.

The current definition includes widely traded crypto assets like exchange tokens (e.g. Bitcoin), utility tokens, security tokens, and stablecoins, but excludes digital representations that give holders rights to underlying assets not classified as Specified Assets. This is designed to helps protect Hong Kong’s tax base and to prevent the potential misuse of virtual assets to circumvent existing limitations on the Specified Assets in Schedule 16C.

Interaction with the Capital Investment Entrant Scheme (CIES)

Together with the recent updates to the CIES, the enhanced FIHV tax concession regime presents a strong incentive for high-net-worth individuals and their families to relocate to Hong Kong, contributing to the growth of the city's asset management industry. It remains to be seen whether the government will align the two schemes in the future, as the list of permissible investment assets under the CIES currently differs from the proposed Specified Assets under the FIHV tax concession regime.

Income Eligible for Tax Concession

The Consultation Paper proposes clarifying the scope of income that is eligible for the FIHV tax concession by:

• Including all income derived from qualifying transactions;

• Removing the 5 per cent. threshold for incidental transactions;

• Introducing an exclusion list (e.g. income from private companies involved in property trading or development in Hong Kong).

This proposal is particularly welcome as it addresses a current limitation in that interest income from holding debt instruments is currently an incidental transaction subject to the 5 per cent. threshold. The proposed change, combined with loans and private credit investments becoming Specified Assets, would allow family offices, which often rely on fixed income instruments, to qualify for the tax concession on such assets and their income without being constrained by the 5 per cent. threshold.

Upgrading the Treatment of FSPEs

FSPEs are entities set up by an FIHV to hold and manage Specified Assets or investee private companies. The Consultation Paper proposes expanding the permissible activities of FSPEs to include acquiring, holding, managing, and disposing of investee private companies and other interposed FSPEs, as well as activities incidental to these functions.

This change would offer more flexibility to family offices when structuring their holdings and arranging financing.

Amending the Tests for Transactions in Private Companies

Under the current regime, an FIHV or FSPE is taxed on profits from investments in private companies if certain conditions are not met:

• Immovable Property Test: If a private company holds more than 10 per cent. of its assets in immovable property in Hong Kong (excluding infrastructure), the FIHV or FSPE fails the test and is taxed on profits from that investment.

• Holding Period Test: If the immovable property test is passed but the investment has been held for less than two years, the FIHV or FSPE will fail the test and be taxed on profits unless it passes both the control test and the short-term asset test.

• Control Test and Short-term Asset Test: If the immovable property test is satisfied but the holding period test is failed, the FIHV or FSPE will be taxed if it controls the private company and the private company holds more than 50% of its assets in short-term assets (assets held for less than three years).

The Consultation Paper proposes the following changes:

• Adjusting the definition of "infrastructure" to carve out certain infrastructure assets such as data infrastructure and logistics centres.

• Removing the control test and short-term asset test.

• Applying the immovable property and holding period tests to investments in non-corporate private entities (if those are included in Specified Assets after the consultation).

While the removal of the control and short-term asset tests could simplify the regime, it will also narrow the scope of tax concessions, potentially reducing the overall attractiveness of the scheme. It is hoped that these amendments are not adopted.

Clarifying "Business Undertaking for Commercial or Industrial Purposes"

To qualify for the tax concession, an FIHV must not be considered a business undertaking for general commercial or industrial purposes. The Consultation Paper proposes clarifying this by amending the Inland Revenue Ordinance to confirm that FIHVs conducting transactions with Specified Assets will not be deemed to engage in general business activities.

Conclusion

The proposed changes to the FIHV tax concession regime reflect a concerted effort to modernize Hong Kong's tax system and maintain its competitive edge as a global financial hub. Stakeholders are encouraged to submit their feedback on these changes before the consultation period ends on January 3, 2025.