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Family businesses are growing quickly across Asia-Pacific, creating more wealth for the families concerned. The businesses may vary in shape and form, but what many have in common is the desire to set up a family office in Hong Kong to grow their wealth – a trend more conspicuous this year in the wake of the pandemic.
Hong Kong has a strong gravitational pull for family offices. In addition to the city’s strategic geographical location, it is the leading financial centre in Asia with a strong talent pool and industry expertise, and a government that is highly supportive of the sector. As the number of family businesses in Asia continues to grow, along with family wealth, so Hong Kong’s role as a home for family offices continues to grow.
Between 2021 and 2023, the average Asia-Pacific family business within the global top 500 increased revenue by 15 per cent, or almost US$2 billion. According to accounting and professional services firm EY, the region is home to more of the world’s top 500 family businesses than any other territory in the Asia-Pacific, including mainland China, India and South Korea. Hong Kong also benefits from being part of the Greater Bay Area (GBA).
While comparisons are often drawn between Hong Kong and Singapore, the former’s position as a superconnector both into and out of the world’s second-largest economy is a factor for businesses looking to grow, and it compares favourably with other locations. Mainland China, with a population of 1.4 billion, has an economy valued at US$19 trillion. That contrasts with Singapore, which mainly services Southeast Asia with a collective population of around 680 million and an economy valued at around US$3.7 trillion. This difference in scale is an attractive proposition for families looking to establish family offices, particularly those from mainland China.
Recent research by the Hong Kong Trade Development Council suggests that more than 60 per cent of mainland Chinese enterprises looking to expand overseas seek professional services in Hong Kong because of its sophisticated financial system.
The city’s securities capitalisation was valued at HK$30.8 trillion (US$4 trillion) at the end of October 2023, an increase of 17 per cent compared with the same period last year.
Asia’s leading offshore wealth management centre
As a global offshore wealth management centre, Hong Kong is ranked second worldwide after Switzerland. In fact, the city is the fastest-growing major wealth management centre in the world for international asset management.
Given that wealth and asset management is a big part of a family office’s function, the expertise, scale and depth of market offered by Hong Kong is a major draw for wealthy families. It has 70 of the world’s top 100 asset managers, with more than 42,000 practitioners in the asset and wealth management business. Hong Kong is also the largest cross-border private wealth management and hedge fund centre, second only to mainland China as a centre for private equity.
For ultra-high-net-worth (UHNW) families, managing and preserving their wealth is paramount. The job of a family office is to manage a family’s affairs, largely through wealth and asset management, succession and legacy planning, tax and legal issues, public reputation management and philanthropy. A family also needs to contend with external forces, such as technological disruption and deglobalisation, as well as global financial and economic uncertainty.
The nature of UHNW families is also evolving. They are now more international, with greater transparency and inclusivity. And now that so many people study, work and live overseas, individual family members may place more focus on their individual needs at the expense of the family unit, meaning the office’s infrastructure, expertise and resources are more important than ever.
Vast wealth transfer in the pipeline
Wealth preservation and sustaining long-term growth include passing control of the business and wealth to the next generation. Over the next few decades, as senior founders who have retained control until very late in life pass on their wealth, the greatest generational wealth transfer in history will take place. An estimated US$15 trillion is expected to change hands during the next 30 years in mainland China alone.
HNW individuals in Hong Kong are likely to inherit around US$3.5 million, with UHNW individuals gaining considerably more. Hong Kong has about 15,000 UHNW individuals, more than any other city, with considerably more in the GBA. That zone is home to 86 million people, with 20 per cent of mainland China’s UHNW and HNW households.
Hong Kong is a leading global financial centre, behind only New York City and London. As such, it offers world-class professional services including legal, accountancy, insurance, international taxation, wealth management and investment advisory.
The city is home to 73 of the world’s top 100 banks and has more than 156 licensed banks and eight virtual banks. In addition, there are 164 authorised insurers, with over 100,000 licensed insurance agents or technical representatives, as well as more than 47,000 locally certified public accountants, over 13,000 practising lawyers and barristers, and more than 70 registered foreign law firms.
This talent mix enables Hong Kong to play a unique role in the Belt and Road Initiative, facilitating in areas such as finance, legal support, logistics, sustainability and good governance for family offices looking to tap into opportunities offered by the initiative. Hong Kong also offers an ideal base for families beyond Asia to undertake business dealings in countries that are members of the free-trade Regional Comprehensive Economic Partnership.
Hong Kong’s place in the GBA and its leadership in asset management makes it an attractive proposition for fund managers. So far this year, eight mainland-based funds have opened in Hong Kong, and that figure is likely to nearly double by 2024, indicative of the world-class infrastructure available in the city to build offshore sales and research teams, and the talent to navigate the complexities of the financial markets and different jurisdictions across Asia.
Big zero on tax brings in the business
Hong Kong also offers an attractive, low and predictable tax regime that provides certainty for individuals and commercial undertakings: tax payments are exempt on sales, VAT, withholding entities, capital gains, inheritance duty and on dividends.
As part of its support for family offices, the Hong Kong government’s bill to provide profits tax concessions to family offices, passed earlier this year, provides incentives that have already attracted HNW individuals to set up family offices in the city. These include a profits tax exemption to family-owned investment holding vehicles (FIHVs) managed by single-family offices.
Hong Kong’s Inland Revenue Department has improved the processing of applications for the tax-exempt status of charities, along with an expansion of the beneficial interest that an exempt charity may hold in FIHVs.
These tax breaks were among the eight new measures to support family offices, announced on the same day as the inaugural Wealth for Good in Hong Kong Summit, organised by the Financial Services and the Treasury Bureau and Invest Hong Kong (InvestHK) in March this year.
In October, the government announced plans to reduce the stamp duty on stock transfer, one of several measures to make Hong Kong more competitive.
Wealth for Good Summit draws global decision makers
Besides the tax breaks, the Capital Investment Entrant Scheme (CIES) aims to attract talent and enterprises to Hong Kong. Through the scheme, applicants can invest in Hong Kong-listed equities and funds and bonds, as well as applying for entry into Hong Kong.
The government has also announced funding for a new Hong Kong Academy for Wealth Legacy, supported by partnerships with the financial services industry, professional service providers and universities in the city. The academy, which launched in mid-November, aims to cultivate a deep talent pool for the family office sector in Hong Kong.
This follows InvestHK’s establishment of the FamilyOfficeHK in 2021, a dedicated global team to work with the industry and government departments to support families considering establishing a family office in Hong Kong.
The Wealth for Good Summit hosted more than 100 decision-makers from global family offices and their professional teams from Asia, North America, Europe and the Middle East, as well as other parts of the world. In response to the positive feedback to the first summit and enquiries around establishing a family office in Hong Kong, a second edition is in the pipeline for next year.