Articles
Taxation of trusts in Hong Kong
Dear Members,
We are writing to you to draw to your attention an important matter of Hong Kong tax law.
As you are aware, the general charge to profits tax in Hong Kong is contained in section 14 of the Inland Revenue Ordinance. It states that a person is taxable in Hong Kong if and to the extent that it carries on a trade, profession or business in Hong Kong and derives Hong Kong source profits from that trade, profession or business. Section 2 defines a taxable person as including a trustee. Although the case law considering the question of whether profits are Hong Kong source is complex and extensive, the consensus view, which is accepted by the Hong Kong Inland Revenue Department (“IRD”), is that one looks to what the taxpayer has done to earn its profits and where it has done it, discounting purely antecedent or incidental transactions.
As a professional trustee, you may carry on the trade or business of being a professional trustee in Hong Kong, and derive profits by virtue of remuneration paid to you for acting as trustee. We trust that you have already taken all necessary and desirable measures to ascertain and, where required, discharge your administrative and substantive tax obligations in Hong Kong with respect to your trade or business as a professional trustee.
There are however certain cases in which you may agree to carry on a trade, business or profession on behalf of a trust of which you are the trustee for the benefit of the beneficiaries or objects of the same. For example, you may agree to act as trustee of a trust that administers a family business, or actively trades in shares listed on the Hong Kong Stock Exchange. Under those circumstances, you could be carrying on more than one trade or business: first, you would carry on the trade or business of being a professional trustee, and you would further carry on the trade or business you administer on behalf of the trust. This communication is concerned with that second trade or business: a trade or business conducted by the trustee for the benefit of the trust.
We understand that there has been some academic debate on the subject of whether a trustee is taxable in Hong Kong on the profits of a trade or business carried on for the benefit of the trust (as distinct from its own business as a professional trustee). For example, it has been suggested that because the section 14 charge to profits tax refers to a charge to tax on “his [i.e., the taxpayer’s] profits”, a trustee cannot be taxed with respect to trust profits because the profits of a trade or business carried on for the benefit of a trust are not beneficially “his profits”, being held for the beneficiaries or objects of the trust.
We note that this is apparently not the view of the IRD and, more relevantly, it was not apparently the view of the Legislative Council when it enacted the specific tax legislation to include a trustee within the definition of a taxable person. In order to raise awareness on the matter of the taxation of trusts, we enclose an article that we consider comprehensively addresses the technical issues, republished for your reference by kind permission of the Asia-Pacific Tax Bulletin. We would suggest that you read this carefully, with a view to better understanding your tax obligations as a professional trustee in Hong Kong, and take any such measures as you consider necessary or desirable in response.
Please note that the article we have enclosed is a scholarly article, and not professional advice. It should not be relied upon in any circumstances as legal or tax advice. If you are in doubt about your tax obligations, we would recommend that you promptly instruct your professional advisors. The Hong Kong Trustees’ Association does not provide legal or tax advice; we are accordingly unable to assert a formal opinion in this matter. We are, however, committed to ensuring that our members comply with all applicable Hong Kong laws and regulations.
We would further note that the article we have enclosed is copyrighted material. Unauthorised dissemination or reproduction of the same is strictly prohibited. We should accordingly be grateful if you would refer to the article, but otherwise not copy or disseminate it (whether electronically or in hard copy) without prior, express consent in writing from the Executive Committee.
We are always grateful for feedback from our members and welcome any comments and observations you may have.
Yours sincerely,
Michael Shue
Chairman, HKTA
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