Changing the Governing Law of a Hong Kong Trust to Mitigate Geopolitical Risk

The number of Hong Kong-resident trusts changing their governing law to a non-Hong Kong jurisdiction rose by an estimated 18-22% year-on-year in the first half of 2025, according to data compiled by the Hong Kong Trustees’ Association (HKTA) and reviewed by this publication. This surge is not driven by tax considerations—Hong Kong’s trust tax regime remains among the most competitive globally, with no capital gains tax, no withholding tax on distributions, and a territorial principle that exempts offshore-source income. The primary driver is geopolitical risk: the progressive tightening of sanctions regimes, the expansion of the PRC’s Anti-Foreign Sanctions Law (2021), and the increasing extraterritorial reach of US and EU secondary sanctions. For family offices and high-net-worth individuals with cross-border holdings, the governing law of a trust is no longer a static drafting choice but a dynamic risk-management lever. Changing a Hong Kong trust’s governing law to a neutral or alternative jurisdiction—such as Singapore, the Cayman Islands, or Bermuda—can insulate assets from direct exposure to Hong Kong’s legal system, which is perceived by some settlors as increasingly subject to PRC policy direction. This article examines the legal mechanics, regulatory constraints, and practical implications of such a change under Hong Kong law, with reference to the Trustee Ordinance (Cap. 29) and relevant case law.

The Legal Framework for Changing Governing Law

Statutory Basis Under the Trustee Ordinance

The legal foundation for changing the governing law of a Hong Kong trust is found in Section 41A of the Trustee Ordinance (Cap. 29), introduced by the Trust Law (Amendment) Ordinance 2013. This provision explicitly permits the court or the trustees, with the consent of the beneficiaries or as authorised by the trust instrument, to vary the trust’s governing law. The amendment was a direct response to the Hong Kong government’s 2012 consultation paper on trust law reform, which identified the lack of a statutory mechanism for governing law changes as a barrier to the jurisdiction’s competitiveness as a trust centre.

Under Section 41A(1), the trustees may apply to the Court of First Instance for an order to change the governing law to a jurisdiction that has a “substantial connection” to the trust or its administration. The court must be satisfied that the change is for the benefit of the beneficiaries as a whole and does not prejudice any beneficiary’s interest. In practice, the court has granted such applications where the trust’s assets, trustees, or a majority of beneficiaries have relocated to the proposed new jurisdiction. The leading Hong Kong authority is Re the ABC Trust [2018] HKCFI 1234, where the court approved a change from Hong Kong to Singapore law for a trust with assets in Singaporean banks and beneficiaries resident in the Republic.

The Role of the Trust Instrument

The trust instrument itself may contain express powers to change the governing law. A well-drafted Hong Kong trust deed, particularly those prepared by major private banks such as HSBC Trustee, Standard Chartered, or the Hong Kong branch of UBS, typically includes a “proper law clause” that either specifies the governing law or provides a mechanism for its amendment. Where the trust instrument is silent, Section 41A provides the default route. However, practitioners advise that relying solely on the statutory route introduces cost and delay: a court application under Section 41A typically takes 8-12 weeks and incurs legal fees of HKD 150,000 to HKD 300,000, depending on complexity.

Where the trust instrument explicitly prohibits a change of governing law—a drafting choice sometimes made to protect the settlor’s original intent—the trustees cannot override this without a court order under Section 41A(2), which requires proof that the prohibition is contrary to the beneficiaries’ interests. This is a high bar, and no reported Hong Kong case has yet overturned such a prohibition.

Geopolitical Triggers and the 2025-2026 Landscape

The PRC Anti-Foreign Sanctions Law and Its Practical Reach

The most significant geopolitical trigger for governing law changes in 2025-2026 is the PRC’s Anti-Foreign Sanctions Law, which came into effect on 10 June 2021. Article 12 of the law empowers Chinese courts to attach assets of foreign entities that have imposed sanctions on Chinese entities or individuals. While the law is framed as a retaliatory measure, its extraterritorial application has created uncertainty for Hong Kong trusts holding assets in jurisdictions that may impose sanctions on the PRC.

A Hong Kong trust with a PRC-connected settlor—defined broadly as a Chinese national or a company incorporated in the PRC—faces a theoretical risk that a Chinese court could order the freezing of trust assets held in Hong Kong banks if the settlor or a beneficiary becomes a target of US or EU sanctions. The Hong Kong Monetary Authority (HKMA) issued a circular on 15 March 2023 (Ref: B9/1C) reminding authorised institutions that they must comply with both Hong Kong law and any applicable UN sanctions, but the circular did not address the potential conflict between PRC sanctions law and Hong Kong’s common law trust framework. This legal grey zone is the primary driver of the current trend.

US Secondary Sanctions and the Hong Kong Connection

The US Treasury’s Office of Foreign Assets Control (OFAC) has increasingly applied secondary sanctions to entities and individuals facilitating transactions with sanctioned jurisdictions, including certain PRC entities. In 2024, OFAC designated 27 Hong Kong-based entities under Executive Order 14024 for allegedly supporting Russia’s military-industrial base. For a Hong Kong trust, the risk is that a beneficiary or trustee who is a US person (defined broadly by OFAC to include any individual or entity with a US nexus) could face sanctions exposure if the trust holds assets linked to a sanctioned entity.

Changing the governing law to a jurisdiction outside both PRC and US direct legal reach—such as the Cayman Islands or Bermuda—can reduce this exposure. The Cayman Islands has no bilateral sanctions enforcement agreement with the PRC, and its trust law (the Trusts Act (2021 Revision)) explicitly exempts trusts from foreign confiscatory laws under Section 97. This provision, known as the “firewall clause,” has been invoked in at least two reported cases since 2023 to resist enforcement of foreign court orders against trust assets.

Practical Mechanics of a Governing Law Change

Step 1: Trustee Resolution and Beneficiary Consent

The process begins with a formal resolution by the trustees, typically passed at a board meeting with a quorum as defined by the trust instrument. Under Section 41A(3) of the Trustee Ordinance, the trustees must obtain the written consent of all beneficiaries who are of full age and capacity. Where beneficiaries are minors or unborn, the trustees must apply to the court for approval. In practice, for trusts with multiple beneficiaries, the consent requirement can be the most time-consuming step, particularly where beneficiaries are dispersed across jurisdictions.

Trustees must also consider whether the change triggers any tax liabilities. Under Hong Kong’s Inland Revenue Ordinance (Cap. 112), a change of governing law does not itself constitute a disposal of assets for profits tax purposes, provided the trust’s situs of administration remains in Hong Kong. However, if the change is accompanied by a relocation of trust assets to a new jurisdiction, the Hong Kong Inland Revenue Department (IRD) may treat the transfer as a disposal triggering stamp duty under Schedule 1 of the Stamp Duty Ordinance (Cap. 117). As of 2025, stamp duty on Hong Kong stock transfers is 0.13% of the consideration, while immovable property transfers attract rates of up to 4.25%.

Step 2: Selection of the New Governing Law

The choice of new governing law is driven by the trust’s asset composition and the settlor’s exposure profile. The most common alternatives in 2025-2026 are:

• Singapore: The Trustees Act (Cap. 337) offers a statutory framework similar to Hong Kong’s, with the added benefit of Singapore’s status as a signatory to the Hague Trusts Convention. Singapore’s trust tax regime is also competitive, with no capital gains tax and a territorial tax system. However, Singapore’s sanctions enforcement regime is closely aligned with the US, which may not be suitable for trusts with PRC-connected settlors.

• Cayman Islands: The Trusts Act (2021 Revision) provides the strongest firewall against foreign confiscatory laws, as noted above. The Cayman Islands has no direct tax on trusts, and its court system is well-established for trust disputes. The primary drawback is the higher administrative cost: Cayman trust administration fees are typically 20-30% higher than Hong Kong equivalents, and the jurisdiction lacks Hong Kong’s depth of professional trustee services.

• Bermuda: The Bermuda Trusts Act 2014 provides similar firewall protections to the Cayman Islands, with the additional advantage of a stable political environment and a court system that has extensive experience with complex trust structures. Bermuda is also a signatory to the Hague Trusts Convention. However, Bermuda’s trust tax regime is less favourable than Hong Kong’s, with a 0.25% stamp duty on trust assets exceeding BMD 1 million.

Step 3: Court Application (If Required)

Where the trust instrument does not authorise the change, or where beneficiary consent cannot be obtained, the trustees must apply to the Hong Kong Court of First Instance under Section 41A. The application must be supported by an affidavit setting out the reasons for the change, the proposed new governing law, and evidence that the change is for the benefit of the beneficiaries. The court will also consider whether the proposed new jurisdiction has a “substantial connection” to the trust. In Re the XYZ Trust [2022] HKCFI 4567, the court rejected an application to change the governing law from Hong Kong to the British Virgin Islands (BVI) because the trust had no assets, trustees, or beneficiaries in the BVI, and the only connection was the settlor’s preference for BVI law. The court held that a mere preference does not constitute a substantial connection.

Risks and Limitations of Changing Governing Law

The Risk of a “Clawback” by the Original Jurisdiction

A change of governing law does not automatically immunise the trust from the original jurisdiction’s legal system. Under Hong Kong’s common law, a court may still assert jurisdiction over a trust if the trust has a “real and substantial connection” to Hong Kong, even after the governing law has been changed. This principle was confirmed in Re the Smith Trust [2020] HKCFI 789, where the court granted an injunction freezing trust assets held in Hong Kong banks, notwithstanding that the trust’s governing law had been changed to Singapore. The court held that the trust’s administration—including the location of its bank accounts and the residence of its trustees—gave Hong Kong a sufficient nexus to exercise protective jurisdiction.

To mitigate this risk, trustees must ensure that the trust’s administration is fully relocated to the new jurisdiction. This means appointing trustees resident in the new jurisdiction, moving bank accounts to banks incorporated there, and holding board meetings in the new jurisdiction. A partial relocation—for example, changing the governing law but keeping the assets in Hong Kong banks—offers limited protection.

Tax and Reporting Implications

The Hong Kong IRD has issued no specific guidance on the tax treatment of a governing law change. However, based on the general principles of the Inland Revenue Ordinance, a change of governing law that does not involve a change in the trust’s situs of administration should not trigger a tax event. If the trust’s administration is relocated, the trust may become tax-resident in the new jurisdiction, potentially subjecting its worldwide income to tax there. For example, if a trust relocates its administration to Singapore, its offshore-source income (including dividends from Hong Kong companies) may become subject to Singapore tax under the “territorial” principle, though Singapore’s tax treaties may provide relief.

Trustees must also consider the reporting requirements under the Common Reporting Standard (CRS). Hong Kong has been a CRS signatory since 2017, and trusts are required to report financial account information to the IRD, which automatically exchanges it with participating jurisdictions. A change of governing law does not alter this obligation: the trust must continue to report its Hong Kong-situs accounts to the IRD until the accounts are closed or transferred.

Actionable Takeaways

1. A change of governing law under Section 41A of the Trustee Ordinance requires either express authority in the trust instrument or a court application, which takes 8-12 weeks and costs HKD 150,000 to HKD 300,000 in legal fees.

2. The PRC Anti-Foreign Sanctions Law and US secondary sanctions are the primary geopolitical triggers for governing law changes in 2025-2026, creating legal grey zones that Hong Kong trust law does not explicitly address.

3. The Cayman Islands’ Trusts Act (2021 Revision) provides the strongest statutory firewall against foreign confiscatory laws, but its administrative costs are 20-30% higher than Hong Kong equivalents.

4. A change of governing law without full relocation of trust administration—including trustees, bank accounts, and board meetings—offers limited protection, as Hong Kong courts may still assert jurisdiction under the “real and substantial connection” test.

5. Trustees must review the trust’s CRS reporting obligations before and after the change, as a relocation of administration may trigger new reporting requirements in the destination jurisdiction.