GPS Legal | Setting up private trust companies in Hong Kong

What is a Private Trust Company

A PTC is a company established to act as a trustee to certain assets. Upon establishment of the trust, the original owner of the assets (the “Settlor”) transfers the legal and beneficial title of the assets to the PTC. It is worth noting that these assets can include shares in an operating business. The PTC would then hold the legal title to the assets on behalf of the named beneficiaries, who derives beneficial title from this construct.

A PTC is formed for the sole purpose of acting as trustee for a single trust or a group of related trusts. By comparison, institutional trustees that offer trust and fiduciary services are professional trustees that may be licensed with the Hong Kong Monetary Authority, the Securities & Futures Commission (“SFC”) and/or the Companies Registry depending on the scope of their services.

Typically, a PTC that operates as a vehicle for a family office would not be subject to licensing requirements. See sections under “Regulation” and “Words of caution” below for further details.

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Benefits of a PTC

Like all trusts, there are a number of advantages to having a PTC in place, including asset protection from creditors of the Settlor, succession/estate planning (for example, it avoids the need to apply for probate upon the death on the Settlor), confidentiality and potential tax benefits. As Hong Kong law recognises separation of ownership, any assets held by a trustee do not form part of the trustee’s beneficially owned assets.

Since the PTC is a company, there can be flexibility in the ownership and management of the PTC. Shares in the PTC may be held by the Settlor and/or family member(s) trusted by the Settlor, who in turn elect the board of directors of the PTC. Just with any company, the business of the PTC – being the management of assets held by the PTC – will be administered through the direction of the board.

A Settlor who wishes to maintain control over the assets and the day-to-day running of a family business would commonly be a key member of the board so as to be able to exert the desired level of control. The board may also have trusted advisers, close family members and independent professionals, who are able to provide the necessary trust expertise and ensure that the structure complies with any relevant regulatory regimes.

What is unique about a PTC is that it does owe fiduciary duties to all its beneficiaries. This means that each board member must make decisions in the best interests of all beneficiaries as a whole and cannot simply be motivated by his/her self-interest and personal circumstances. One way to avoid the perception of self-interest, and avoid future disputes, is to also appoint professional directors. Such professional directors would be appointed and paid by the PTC, usually out of trust assets, in accordance with the trust deed.

When compared with institutional trustees, PTCs are less costly and more flexible. Institutional trustees, being professional service providers, may pass on costs associated with maintenance of their licences. Furthermore, they may have strict guidelines on what types of assets they are willing to administer, as well as stringent vetting processes in relation to undertaking instructions. PTCs are not subject to these restrictions.

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Setting up a PTC

A PTC can be set up in Hong Kong in the form of a (1) private company limited by shares, or (2) a company limited by guarantee.

Briefly, a private company limited by shares is a company whose members’ liabilities are limited to the unpaid amount on their shares. On the other hand, a company limited by guarantee is a company whose members’ liabilities are limited to the amount agreed by them to be contributed in the event of the company’s winding up.

Another significant difference is that, where a PTC is set up as a company limited by guarantee, such PTC would need to do annual financial reporting in accordance with the requirements of the Companies Ordinance (Cap. 622 of the laws of Hong Kong). Such reporting will be made public, which would reveal the management and finances of the PTC. This may not be ideal for clients who place a high value on privacy and confidentiality.

Which structure is more suitable would depend on the factual situation at hand.

As with all forms of businesses operating in Hong Kong, upon commencement a business registration is required. This serves as a notice to the Inland Revenue Department regarding future tax reporting.

Once the PTC is established, the next step is to create the trust relationship through a trust deed. After that, the Settlor’s assets can be transferred to the PTC under that framework. Any additional documentation required depends on the nature of the asset itself. For example, if it is a transfer of shares in a private company, the transfer will need to be formalised by proper share transfer documentation which will need to be stamped by the Inland Revenue Department.

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Constituting the Trust under the Trust Deed

The trust deed is the main document for governing the trust relationship between the PTC, the Settlor and the beneficiaries. It is to be entered between the PTC and the Settlor and the beneficiaries. The Settlor can either be an individual or a corporate entity (provided that its constitutional documents permit entry into a trust). Similarly so, the beneficiaries may be individuals or corporate entities. The trust deed is essentially the document setting out the scope in which the PTC should deal with the trust assets and spells out the PTC’s powers and duties with respect to the trust, and should be put in place to avoid any implications that the trust is not treated as a PTC.

It is prudent that a trust deed is properly prepared in order to validly constitute the trust, otherwise the trust may be subject to attack due to a number of reasons:

The trust deed is not sufficiently certain, namely, (1) the Settlor’s intention to create a trust is unclear; (2) the subject matter of the trust, being the trust assets, has not been clearly identified; or (3) the objects of the trust, being the beneficiaries, have not been clearly identified.
The trust is a “sham”, in that the Settlor purports to create a trust but, in reality, will retain control of the assets for their own benefit. As such, notwithstanding that the Settlor can retain a certain level of control, the trust should be carefully created to avoid being seen as created with an intention to deceive and/or that the Settlor had no intention to pass the beneficial interest in the assets.
The trust is constituted for the purpose of avoiding a financial claim on divorce.
The trust is constituted to put assets out beyond the reach of creditors.

In addition to ensuring that the trust deed itself is properly prepared, it is also important to ensure that the trust deed is duly executed. As a deed, the trust document regarding individuals should be executed by wet signatures in the presence of witnesses. Further requirements apply where the signatory is a Hong Kong corporate entity, in which case its constitution documents may have requirements; for example, application of the company seal is sometimes required, otherwise rules within the section 127 of the Companies Ordinances may be applied. In the case of foreign corporate entities, execution requirements are governed by the laws under which that entity is established.

Legal advice is always recommended to ensure that the trust is properly constituted, lest it becomes subject to attack due to the aforementioned risks. Depending on the trust assets in question, a Settlor may also want to obtain tax advice.

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Regulation

In contrast to a conventional trust or an institutional trustee, a PTC typically does not provide trust services to the general public and is limited to managing assets for beneficiaries connected to the Settlor. As such, PTCs are usually not subject to the rigorous licensing regime that the former must follow.

On 7 January 2020, the SFC issued a circular that elaborated on its position on licensing family offices, stating in relation to family offices established as trusts that:

“[…] in cases where a family appoints a trustee to hold its assets of a family trust, and the trustee operates a family office as an internal unit to manage the trust assets, the family office will not need a license because it will not be providing asset management services to a third party.

Similarly, if the family office is established as a separate legal entity which is wholly owned by a trustee or a company that holds the assets of the family, it will not need a license as it will qualify for the intra-group carve-out as full discretionary investment manager of the securities or futures contracts portfolio. The family office is not required to be licensed for Type 9 regulated activity if it provides asset management services solely to related entities, which are defined as its wholly-owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly-owned subsidiaries. […]”

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Words of caution

The nature of the trust services provided by the PTC needs careful consideration. For example, if the family office (i.e., the PTC) is set up as a business to manage assets which include securities or futures contracts it may be required to hold a Type 9 Regulated Activity (“RA”) licence. One must consider whether the intended activities might give rise to the need to be licensed with the SFC for other RAs, such as Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) or Type 5 (advising on futures contracts).

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How we can help

We have close relationships with financial advisers who have extensive experience in preserving client wealth for future generations. We would be delighted to further discuss the suitability of using a PTC for your assets. We can assist in the establishment of such structures to ensure that your needs are met and that they comply with all Hong Kong legal requirements.

If you would like further information and/or assistance with respect to the setting up of a PTC, please contact us.

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