1 Legislative framework
1.1 Which legislative provisions govern private client matters in your jurisdiction?
The laws on succession are primarily governed by:
- the Wills Ordinance;
- the Intestates' Estates Ordinance;
- the Inheritance (Provision for Family and Dependants) Ordinance; and
- the Probate and Administration Ordinance.
Hong Kong trusts law is governed by:
- the Trustee Ordinance;
- the Recognition of Trusts Ordinance;
- the Variation of Trusts Ordinance; and
- the Perpetuities and Accumulations Ordinance.
Taxation in Hong Kong is generally governed by the Inland Revenue Ordinance and the Stamp Duty Ordinance. The laws on powers of attorney are governed by the Powers of Attorney Ordinance and the Enduring Powers of Attorney Ordinance.
1.2 Do any special regimes apply to specific individuals (eg, foreign nationals; temporary residents)?
Stamp duty chargeable to Hong Kong permanent residents and non-Hong Kong permanent residents may differ for certain transactions. Please refer to question 2.7 for further details.
1.3 Which bilateral, multilateral and supranational instruments in effect in your jurisdiction are of relevance in the private client sphere?
Hong Kong has entered into comprehensive double taxation agreements with more than 40 jurisdictions. In addition, Hong Kong has entered into tax information exchange agreements with seven jurisdictions: Denmark, the Faroe Islands, Greenland, Iceland, Norway, Sweden and the United States.
Hong Kong has also implemented the US Foreign Account Tax Compliance Act and the automatic exchange of financial account information standards.
In 2018, transfer pricing rules came into operation in Hong Kong. These rules were designed to comply with the Organisation for Economic Co-operation and Development guidelines with regard to the initiatives of profit shifting and base erosion.
Protocol V of the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income came into effect on 1 January 2020.
2.1 On what basis are individuals subject to tax in your jurisdiction (eg, residence/domicile/nationality)? How is this determined?
Hong Kong adopts a territorial source principle of taxation. Generally, only income or profits derived from or arising in Hong Kong are chargeable to tax in Hong Kong. Determining whether income/profits derive from or arise in Hong Kong is a question of fact. Factors such as residence, domicile and nationality are not relevant.
2.2 When does the personal tax year start and end in your jurisdiction?
In Hong Kong, the year of assessment runs from 1 April to 31 March.
2.3 With regard to income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
Salaries tax: Salaries tax is imposed on any income arising in or derived from Hong Kong from any office or employment. Salaries tax is calculated at progressive rates from 2% to 17% on the net chargeable income, or at the standard rate of 15% of the net income (without allowances), whichever is lower. In order to determine the location of the source of income or employment, the Inland Revenue Department will consider all relevant factors, focusing particularly on:
- where the employer is resident;
- where the contract employment was negotiated, entered into and enforced; and
- where the taxpayer's remuneration is paid to him or her.
For the 2021/2022 year of assessment, the basic allowance is HK$132,000. There are various allowances that individuals may claim if the prescribed conditions specified in the Inland Revenue Ordinance are satisfied. These allowances include:
- child allowance;
- married person's allowance;
- dependent brother or sister allowance;
- dependent parent allowance;
- dependent grandparent allowance;
- single parent allowance;
- disabled dependent allowance; and
- personal disability allowance.
There are also some deductions allowed, such as mandatory contributions paid to a mandatory provident fund scheme, donations to recognised charities and expenses of self-education for certain educational courses.
Completed Form BIR60 ("Tax Return – Individuals") and the relevant supplementary forms must be submitted to the Inland Revenue Department within one month of the date of issue of the return. If the return is filed electronically, an extension of one month will be given automatically.
Profits tax: All entities that carry on a trade, profession or business in Hong Kong – including partnerships, corporations, trustees and bodies of persons – are chargeable to tax on all profits arising in or derived from Hong Kong from such trade profession or business. The sole exception is profits arising from the sale of capital assets. In determining whether the profits arise in or are derived from Hong Kong, the operations which produced the relevant profits and where those operations took place will need to be ascertained.
With effect from the year of assessment 2018/19, two-tiered profits tax rates apply to
corporations and unincorporated businesses:
- For corporations, the tax rate is:
- 8.25% on the first HK$2 million of assessable profits; and
- 16.5% on any part of assessable profits exceeding HK$2 million.
- For unincorporated businesses, the tax rate is:
- 7.5% on the first HK$2 million of assessable profits; and
- 15% on any part of assessable profits exceeding HK$2 million.
Any expenses which have been incurred by the taxpayer in generating chargeable profits can be allowed as deductions. Some examples include:
- rent of buildings or land occupied for producing the profits;
- repairs of premises, plant, machinery or articles used to produce the profits;
- interest on funds borrowed;
- bad and doubtful debts;
- annual contributions to a fund under a recognised occupational retirement scheme; and
- donations to recognised charities.
There are tax concessions for profits derived from qualified debt instruments and offshore funds.
Dividends received from a corporation are excluded from the assessable profits of the recipient.
The appropriate profits tax return, together with the relevant supplementary forms, should be filed with the Inland Revenue Department within one month of the date of issue.
Please see question 2.7 for income derived from properties.
2.4 With regard to capital gains: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
There is no capital gains tax in Hong Kong.
2.5 With regard to inheritances: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
There is no estate duty in Hong Kong in respect of deaths on or after 11 February 2006.
2.6 With regard to investment income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
Dividends received from a corporation and profits arising from the sale of capital assets are not subject to tax in Hong Kong.
2.7 With regard to real estate: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
Property tax: The owner of any land and/or buildings situated in Hong Kong is liable for property tax, except those:
- owned by the government, approved charitable institutions or trusts of public character; or
- used for consular purposes.
Property tax is charged at a standard rate of 15% on the net assessable value of land or buildings. The assessable value is calculated by reference to the consideration payable to the owner in respect of the right of use of the property, such as payment for the right of use of premises under licence, or gross rent received or receivable. The net assessable value is the assessable value (after deduction of rates paid by the owner and certain other payments), less a 20% statutory allowance for repairs and outgoings.
The appropriate property tax return should be filed with the Inland Revenue Department within one month of the date of issue.
Please see question 2.8 for stamp duty chargeable in relation to properties.
2.8 With regard to any other direct taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
Stamp duty: The First Schedule to the Stamp Duty Ordinance specifies certain documents on which stamp duty is chargeable. Broadly speaking, these documents relate to transactions of Hong Kong stock and immovable properties.
For the transfer of immovable property, several forms of stamp duty are chargeable. Ad valorem stamp duty is chargeable either at Scale 1 rates (maximum of 15%) or Scale 2 rates (maximum of 4.25%), based on the higher of the market value and the sale price of the property. Any instrument executed on or after 26 November 2020 for the sale and purchase or transfer of non-residential property will be subject to ad valorem stamp duty at the rates under Scale 2.
For any residential property acquired on or after 27 October 2012 and disposed of within 36 months, special stamp duty will be imposed in addition to the ad valorem stamp duty at regressive rates from 10% to 20% for different holding periods.
A purchaser that is not a Hong Kong permanent resident is chargeable to buyer's stamp duty at a flat rate of 15% for purchases made on or after 27 October 2012, in addition to ad valorem stamp duty and special stamp duty (if applicable).
There are certain reliefs and exemptions available. For example, a beneficiary who inherits property from a deceased person's estate under a will or the law of intestacy or right of survivorship is exempt from paying stamp duty on that property. Transfer of Hong Kong immovable property or stock between associated companies can be exempt from stamp duty as long as they remain associated for at least two years after the transfer. Transfer of shares under stock borrowing and lending transactions may be exempt from stamp duty.
Ad valorem stamp duty is charged on contract notes for the sale and purchase of Hong Kong stock at the rate of 0.1% of the consideration (or the market value if it is higher) payable by each of the buyer and the seller.
2.9 With regard to any indirect taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
Motor vehicles for use on the road are subject to a first registration tax.
Tobacco, liquors, methyl alcohol and hydrocarbon oil are subject to excise duties regardless of whether they are locally manufactured or imported.
Betting duty is chargeable on bets on lotteries, football matches and horse races.
Generally, with a few exceptions, every person carrying on business in Hong Kong must register the business with the Inland Revenue Department and pay the required levy and fee.
Rates are chargeable at 5% at the rateable value of property in Hong Kong. Government rent is charged at 3% of the rateable value of property situated on the land leased and is adjusted in step with any subsequent changes in rateable value.
There is no value added tax or sales tax in Hong Kong.
3.1 What laws govern succession in your jurisdiction? Can succession be governed by the laws of another jurisdiction?
The disposal of movable property in Hong Kong by will or intestacy is governed by the law of the deceased's domicile at death. The disposal of immovable property is governed by the law of the jurisdiction where the immovable property is situated.
3.2 How is any conflict of laws resolved?
Please see question 3.1.
3.3 Do rules of forced heirship apply in your jurisdiction?
Forced heirship rules do not apply in Hong Kong. Hong Kong recognises full testamentary freedom.
3.4 Do the rules of succession rules apply if the deceased is intestate?
The Intestates' Estates Ordinance governs the succession rules for intestate estates.
3.5 Can the rules of succession be challenged? If so, how?
A person who was maintained by the deceased (eg, spouse, children or parents of the deceased) may make a claim under the Inheritance (Provision for Family and Dependants) Ordinance against the estate of the deceased if the will and/or law relating to intestacy does not make sufficiently reasonable financial provision for the applicant. For example, the applicant may apply to the court for an order to make periodic payments out of the deceased's estate for the financial provision of the applicant.
4 Wills and probate
4.1 What laws govern wills in your jurisdiction? Can a will be governed by the laws of another jurisdiction?
The disposal of movable property in Hong Kong by will is governed by the law of the deceased's domicile at death. The disposal of immovable property is governed by the law of the jurisdiction where the immovable property is situated.
4.2 How is any conflict of laws resolved?
Please see question 4.1.
4.3 Are foreign wills recognised in your jurisdiction? If so, what process is followed in this regard?
Yes, foreign wills are recognised in Hong Kong. Hong Kong courts will generally consider that a will has been properly executed if its execution conformed to:
- the internal law in force in the territory where it was executed;
- the law of the territory where, at the time of its execution or of the testator's death, he or she was domiciled or had his or her habitual residence; or
- the law of a state of which, at either of those times, he or she was a national.
4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?
Hong Kong recognises full testamentary freedom. Please see question 3.5.
4.5 What formal requirements must be observed when drafting a will?
A will must be in writing (in English or Chinese), and signed by the testator in the presence of at least two witnesses.
That said, even if a will fails to satisfy the formalities of a valid will, if on application the Hong Kong courts are satisfied that there is no reasonable doubt that the document embodies the testamentary intentions of the deceased person, it may still be considered duly executed.
4.6 What best practices should be observed when drafting a will to ensure its validity?
It is good practice for solicitors to take written instructions from the testator prior to drafting the will. Such instructions should include the following, among others:
- the testator's age;
- the testator's health condition;
- whether the testator has a surviving spouse;
- the number of children and grandchildren;
- whether the testator has any dependants outside his or her immediately family who are financially dependent on him or her;
- the testator's intended beneficiaries;
- the testator's properties;
- whether the testator made previous wills;
- whether the testator understands that the new will will revoke the previous will; and
- whether the testator understands the difference between the provisions of the new and the previous will.
Where a testator is aged or seriously ill, the will should be witnessed or approved by a medical practitioner.
4.7 Can a will be amended after the death of the testator?
A will cannot be amended after the testator's death. All alterations made after the execution of a will are invalid unless they are executed by the testator in a manner in which he or she could validly execute a will.
4.8 How are wills challenged in your jurisdiction?
Challenges to wills are largely concerned with attacks to their validity. Examples include claiming that the testator lacked the requisite testamentary capacity or was unduly influenced by third parties while making the will. Other disputes over estates include attempts to vary the distribution of the estate by making claims under the Inheritance (Provision for Family and Dependants) Ordinance.
4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?
Please see questions 3.4 and 3.5.
5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?
The Trustee Ordinance (Cap 29) is the primary piece of legislation which sets out the law governing trustees in Hong Kong. Generally, English decisions, the rules of equity and common law rules apply to the interpretation of trust laws in Hong Kong. Trusts can be governed by the laws of another jurisdiction.
5.2 How is any conflict of laws resolved?
Trusts governed by foreign law are recognised in Hong Kong. The Recognition of Trusts Ordinance incorporates the Hague Convention on the Law Applicable to Trusts into Hong Kong law. Article 6 of the convention states that a trust is governed by the law chosen by the settlor. Article 7 further states that where no applicable law has been chosen, a trust shall be governed by the law with which it is most closely connected.
5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?
Discretionary trusts, fixed trusts and settlor reserved powers trust are common in Hong Kong.
A discretionary trust gives the trustee greatest flexibility in the administration of the trust fund. This allows the trustee to easily deal with changes in circumstances and contingencies. The disadvantage is the lack of certainty and control of the trustee's action. Discretionary trusts are often accompanied by a detailed letter of wishes of the settlor in relation to distribution, investment and management.
The trustee of a fixed trust does not have discretion over the distribution of the trust fund, as each beneficiary's entitlement is expressly set out in the trust deed. The advantage is certainty, but the disadvantage is that the trustee may be unable to sufficiently address contingencies.
A settlor reserved powers trust allows powers of investment and asset management functions to be reserved to the settlor. This enables the settlor to maintain control over the investment and asset management functions of the trust fund. However, the risk of exposure of the trust fund to claims against the settlor may increase.
5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?
Please see question 5.2. By virtue of the Recognition of Trusts Ordinance, foreign trusts which fulfil the definition of a ‘trust' in Article 2 of the ordinance are recognised in Hong Kong.
5.5 How are trusts created and administered in your jurisdiction?
A trust can be established by settlement by a settlor or declaration of trust by the trustee. In both cases, the trustee must administer the trust in accordance with the terms of the trust. The Trustee Ordinance contains provisions in relation to certain powers and duties of the trustee if the terms of the trust are silent.
A valid trust must satisfy the following criteria:
- The settlor must have the requisite intention to form a trust;
The beneficiaries must be clearly determined; and
The trust property must be identified.
5.6 What are the legal duties of trustees in your jurisdiction?
A trustee must act in the interest of the beneficiaries. A trustee must exercise care and skill that is reasonable in the circumstances, having regard to any special knowledge or experience that he or she has or holds out as having. If the trustee is acting in a professional capacity, the standard is by reference to any special knowledge or experience that is reasonably expected of a person acting in a professional capacity.
5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?
In Hong Kong, there is no separate or additional tax regime specifically directed at trusts, settlors or beneficiaries.
5.8 What reporting requirements apply to trusts in your jurisdiction?
The Common Reporting Standard applies to trusts in Hong Kong.
Where a Hong Kong company governed by the Companies Ordinance is part of the trust structure, the company must maintain a significant controllers register.
5.9 What best practices should be observed in relation to the creation and administration of trusts?
Settlors and trustees must take advice on the legal and tax implications on any action relating to the transfer or appointment of assets and administration of the trust fund generally.
6 Trends and predictions
6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Many family members in the younger generations of wealthy families are tax resident in high-tax jurisdictions. As Hong Kong has no foreign exchange control, no forced heirship laws and a relatively low-tax regime, many families choose to place the control of the family wealth in the hands of a family member resident in Hong Kong.
7 Tips and traps
7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?
Although Hong Kong has a relatively stable legal framework and a low-tax regime, it is important to be aware of changes in tax, laws and regulations in other jurisdictions, as they may have an impact on structures created or administered in Hong Kong.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.