This article was written by Kazuhiko Shimizu. It appeared first on the Bloomberg Terminal.
With some family office and wealth management businesses fleeing Hong Kong for Singapore, the Chinese territory is proposing a new tax exemption regime to fight back.
Hong Kong began formal consultations in March, seeking comments from the family office industry and tax firms on a proposed profit tax exemption. The exemption, proposed in February’s budget, would be retroactive to April 1. It is meant to help the former British colony win back some of the family offices that have left and hold on to those that remain.
Family offices are private wealth management advisory firms tailored to the needs of ultra-high-net-worth individuals (UHNWIs). While Chinese UHNWIs have largely driven the regional boom in family offices, both Singapore and Hong Kong attract interest from around the world. One example of that phenomenon: The family office of Google co-founder Sergey Brin in 2021 set up a branch in Singapore, joining the rush of uber-wealthy clans to the Southeast Asian financial hubs.
Singapore, while still trailing, had been gaining millionaires at Hong Kong’s expense, amid concerns about Beijing’s growing role in Hong Kong’s economy and political life—even before the latest covid disruptions. The number of Singapore UHNWIs—defined as those with wealth of at least $30 million—rose 158% to 4,206 in the 2016-2021 period, according to the property consulting firm Knight Frank. In Hong Kong, the number rose “just” 88% to 6,050.
“A tax policy is always an effective measure to attract investments, and the proposed introduction of the tax exemption regime is a key part of the government’s strategy to attract family offices to be set up and operated in Hong Kong,” said Alice Leung, partner, private enterprise, for KPMG in China.
The Hong Kong proposal, which was the subject of discussions Monday in the territory’s Legislative Council, says eligible FIHVs managed by a single family office (SFO) in Hong Kong would be exempted from tax on profits earned from qualifying transactions and incidental transactions (subject to a 5% threshold).
Special purpose entities (SPE) established by eligible FIHVs also would be eligible for the tax exemption. Qualifying FIHVs and SPEs must have a minimum of H.K.$240 million (U.S.$31 million) in assets under management, or a three-year average value of specified assets held by the same family and managed by the same SFO.
Singapore also uses tax incentives to lure family offices, said Vikna Rajah, head of tax at Rajah & Tann Singapore LLP. He pointed to the Section 13D offshore fund tax exemption, the Section 13O onshore fund tax exemption, and the Section 13U enhanced tier fund tax exemption. To qualify for these fund tax exemptions, the general rule of thumb is that the fund must be managed by a Singapore-based fund manager, he said.
The Hong Kong industry doesn’t divulge the number of family offices, making comparison difficult, but a survey by Singapore’s Wealth Management Institute showed the number of Singapore family offices doubled in to 400 in 2020 from 2019, and that interest in professional certification programs associated with the industry was soaring.
Rajah cited the “good will” Singapore won with its handling of the pandemic as being a major draw. He said interest was strong among wealthy individuals from China including Hong Kong, India, Indonesia, Japan, and Korea.
Hong Kong will nonetheless continue to attract the super-rich, said Chi Man Kwan, chairman of the Family Office Association of Hong Kong, which boasts 40 members, and total assets under management of $57 billion as of February 2022. He cited its “stable and flexible capital market, abundant liquidity and free capital flow, sound legal system, and deep talent pool.”
Kwan said the proposed tax incentives, “in combination with Hong Kong’s existing favorable tax regime, can further elevate the city’s attractiveness to wealthy families in Asia and international family offices looking to set up satellite operations in the region.”
It’s not necessarily a zero-sum situation, said Stephen Banfield, partner and head of family office & private client, KPMG in Singapore. “Both jurisdictions remain attractive places to establish family offices amid the growth of wealth in Asia.”
Tax is only one of many factors that determine the location of a family office. Lifestyle and commercial considerations can sometimes outweigh tax concerns, he noted.