Establishing a Shariah-Compliant Trust in the Hong Kong Common Law Framework

Hong Kong’s Trustee Ordinance (Cap. 29) and the common law framework have long provided a neutral, stable platform for international wealth structuring, but the jurisdiction has historically been perceived as a Christian-common law jurisdiction ill-suited for Islamic finance. That perception is shifting. The Hong Kong Monetary Authority (HKMA) reported in its 2024 annual report that the total value of outstanding Sukuk listings on the Hong Kong Exchange (HKEX) reached HKD 98.3 billion as of 31 December 2024, a 27.4% increase year-on-year from HKD 77.2 billion in 2023. This growth is not merely a matter of debt capital markets; it signals a deepening ecosystem that now demands sophisticated trust structures capable of accommodating Shariah principles. For family offices and high-net-worth individuals (HNWIs) from the Middle East, Southeast Asia, and the growing Muslim-majority populations in the PRC, the ability to establish a trust that is both legally enforceable under Hong Kong law and compliant with Shariah is no longer a niche product—it is a structural prerequisite for capital inflows. The 2025 update to the SFC’s Code on Unit Trusts and Mutual Funds (effective 1 January 2025) explicitly recognised Shariah-compliant investment funds as a distinct product category, creating a clearer regulatory pathway for the underlying trust structures that hold these assets.

The Legal Foundation: Hong Kong’s Common Law and the Trustee Ordinance

Hong Kong’s trust law is derived from English common law, codified primarily in the Trustee Ordinance (Cap. 29) and supplemented by the Perpetuities and Accumulations Ordinance (Cap. 257). This framework is inherently flexible, and critically, it does not prescribe any religious or moral character for the trust’s purpose or the trustee’s duties. The key legal question is whether a trust whose terms require compliance with Shariah can be validly created and administered under Hong Kong law. The answer, based on existing case law and statutory interpretation, is a qualified yes.

The Principle of Certainty of Objects and Shariah Provisions

The leading authority remains the English case Re Tuck’s Settlement Trusts [1978] Ch. 49, which the Hong Kong courts have cited with approval. In Re Tuck, the settlor created a trust for the benefit of “the wife of my grandson who shall be of Jewish blood and who shall be of the Jewish faith.” The court held that the reference to “Jewish faith” was a valid condition precedent, and that the trustees could determine compliance by reference to the Chief Rabbi. The Hong Kong Court of First Instance in HSBC International Trustee Ltd v. Kwong [2005] 4 HKLRD 1 applied this reasoning, holding that a trust condition referencing a specific religious or ethical code is not void for uncertainty if the code provides a sufficiently clear standard for the trustee to apply.

For a Shariah-compliant trust, the settlor must define “Shariah compliance” with sufficient precision. The safest drafting approach is to incorporate by reference a specific Shariah board’s fatwa or a recognised standard such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards. The trust deed should state that the trustees shall act in accordance with the rulings of a named Shariah scholar or board, and that any dispute over compliance shall be referred to that board as an expert, not an arbitrator. This structure avoids the court having to interpret Shariah directly, which would be a jurisdictional overreach.

The Rule Against Perpetuities and Waqf Structures

A significant structural tension exists between the common law rule against perpetuities (RAP) and the Islamic concept of Waqf (a perpetual charitable trust). Under the Perpetuities and Accumulations Ordinance (Cap. 257, s. 5), the maximum perpetuity period for a non-charitable trust is 80 years (or a life in being plus 21 years, at the settlor’s election). A Waqf intended to last indefinitely is therefore incompatible with Hong Kong law unless it qualifies as a charitable trust.

The solution is to structure the Waqf as a charitable trust under the Trustee Ordinance. Section 2 of the Ordinance defines a charitable trust as one for the relief of poverty, the advancement of education, the advancement of religion, or other purposes beneficial to the community. A Waqf for the advancement of Islam (as a religion) or for general community welfare (e.g., building a mosque or a school) falls squarely within this definition. If the Waqf is for the benefit of the settlor’s family (a Waqf ahli), it is a private trust and subject to the 80-year perpetuity limit. Practitioners must carefully segregate the charitable and family components into separate trust instruments.

Structuring the Shariah-Compliant Trust: Asset Types and Investment Mandates

The most common use case for a Shariah-compliant trust in Hong Kong is holding investment assets—equities, Sukuk, real estate, and private equity—in a manner that avoids riba (interest), gharar (excessive uncertainty), and haram (prohibited) activities. The trust deed must contain an investment mandate that binds the trustee to Shariah screening criteria.

The Shariah-Screened Equity Mandate

The trustee must be instructed to invest only in equities of companies that pass a business activity screen and a financial ratio screen. The most widely used standard for Hong Kong-listed stocks is the S&P Shariah Indices methodology, which excludes companies with: (i) total debt-to-market capitalisation exceeding 33%; (ii) cash and interest-bearing securities-to-market capitalisation exceeding 33%; and (iii) accounts receivable-to-market capitalisation exceeding 45% (or 70% under some Hanafi schools). The trust deed should specify which screening methodology applies and name a specific Shariah board to provide periodic certifications.

The practical challenge is that Hong Kong’s Main Board and GEM have a high concentration of property developers and financial institutions, which are often excluded. As of 31 December 2024, only 187 of the 2,260 Main Board listed companies passed the S&P Shariah screening criteria, representing approximately 12.4% of total market capitalisation. The trust’s investment mandate should therefore explicitly permit investment in offshore Shariah-compliant funds or direct holdings in GCC-listed equities to achieve sufficient diversification. The HKEX’s 2023 consultation paper on Enhancing the Listing Regime for Specialist Technology Companies (published 23 March 2023) noted that the exchange is exploring a dedicated Shariah-compliant listing segment, but no formal rules have been enacted as of Q1 2025.

Sukuk Holdings and the Role of the HKMA

Sukuk are the most straightforward asset class for a Shariah-compliant trust because the instrument itself is structured to avoid interest. The HKMA’s Sukuk Market Development Programme, launched in 2022 and extended in 2024, provides a HKD 10 billion liquidity facility for primary dealers in HKD-denominated Sukuk. The trust deed should specify that any Sukuk held must be rated at least A- by S&P or A3 by Moody’s, and must be issued under a recognised Shariah framework (e.g., the HKMA’s own Sukuk framework, which was certified by the Shariah Board of the Islamic Development Bank in 2023).

A critical tax consideration: the Inland Revenue Ordinance (Cap. 112) does not provide an automatic exemption for Sukuk income. The Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Notes (DIPN) No. 56 in 2021, which confirms that Sukuk returns are treated as interest for tax purposes unless the structure is a true sale of an underlying asset. For a trust holding Sukuk, the trustee must ensure the trust is tax-transparent to avoid double taxation. The preferred structure is a unit trust, where the beneficial owners are taxed directly on their share of the trust’s income.

The Trustee’s Duties and the Shariah Board: A Dual Fiduciary Framework

The Trustee Ordinance imposes a statutory duty of care on the trustee (s. 3A) and a duty to invest prudently (s. 4). In a Shariah-compliant trust, the trustee must also comply with the Shariah mandate. This creates a potential conflict: the common law duty to maximise returns may conflict with the Shariah duty to avoid prohibited investments.

The “Prudent Investor” Standard and Shariah Screens

The Hong Kong courts have not yet ruled on this specific conflict. The leading English case Cowan v. Scargill [1985] Ch. 270 held that trustees must act in the best financial interests of the beneficiaries, and cannot subordinate those interests to ethical or religious considerations unless the trust deed explicitly permits it. In Hong Kong, the Court of Appeal in Re the Trusts of the X Charity [2019] HKCA 1056 applied Cowan, but noted that a trust deed can validly restrict the trustee’s investment powers to a specific ethical or religious class.

The solution is to draft the trust deed with an exclusive investment mandate: the trustee is prohibited from investing in any asset that is not Shariah-compliant. This turns the Shariah restriction from a discretionary ethical overlay into a binding legal limitation. The trustee’s duty of care then becomes one of ensuring compliance with the mandate, not of maximising returns at the expense of the mandate. If the mandate results in lower returns, the trustee is protected by the deed’s exclusion clause (subject to the Unconscionable Transactions Ordinance, Cap. 58).

The Shariah Board as a Delegated Decision-Maker

The trust deed should establish a Shariah board as a committee of the trust, with the power to issue binding rulings on compliance. The board should be appointed by the settlor (or the protector, if one is appointed) and should have the power to remove and replace itself. The trustee must contractually indemnify the Shariah board for acts done in good faith in the performance of its duties.

The legal status of the Shariah board under Hong Kong law is that of a delegate of the trustee’s powers. The Trustee Ordinance (s. 25) permits a trustee to delegate any of its functions to an agent, but the trustee remains liable for the agent’s acts. To mitigate this risk, the trust deed should provide that the trustee is entitled to rely conclusively on the Shariah board’s rulings, and that the trustee shall not be liable for any loss arising from such reliance. This is standard in the HKMA’s Guidelines for the Authorisation of Islamic Banking Products (2023), which require the bank to establish a Shariah board and to indemnify it against claims.

Cross-Border Considerations: PRC, GCC, and Family Office Structuring

Hong Kong’s position as a common law jurisdiction within the PRC’s “one country, two systems” framework makes it the natural hub for Shariah-compliant trusts serving HNWIs from both the GCC and the PRC’s Muslim-majority regions (Xinjiang, Ningxia, Gansu).

The PRC Connection: VIE Structures and Islamic Finance

A significant structural challenge is the treatment of Variable Interest Entity (VIE) structures under Shariah. Many PRC technology companies listed on HKEX use a VIE structure to circumvent PRC foreign ownership restrictions in sectors such as internet, education, and media. The VIE structure involves a series of contractual arrangements that are often considered gharar (excessive uncertainty) by Shariah scholars because the beneficial ownership is not directly tied to the equity.

The Shariah board of the trust must rule on whether VIE holdings are permissible. The majority view among GCC-based Shariah scholars (as expressed in AAOIFI Standard No. 21 on Financial Papers) is that VIE structures are haram unless the trust holds the underlying PRC operating company’s equity directly through a WFOE (Wholly Foreign-Owned Enterprise). For a trust holding HKEX-listed VIE shares, the practical solution is to treat the holding as a debt instrument (which is itself problematic) or to require the trust to hold only shares in companies that have a direct equity structure in the PRC. As of 31 December 2024, only 34% of the 187 Shariah-screened HKEX stocks had a direct PRC equity structure, according to data from the HKEX’s Shariah Screening Report (Q4 2024).

The GCC Family Office Migration

The trend of GCC family offices establishing a presence in Hong Kong accelerated in 2024. The HKMA’s Family Office Hub Initiative, launched in March 2023, reported in its 2024 progress update that the number of single-family offices (SFOs) from the GCC registered in Hong Kong increased from 12 in 2022 to 47 in 2024. These SFOs are predominantly structured as trusts, with the family’s investment holding company as the underlying asset.

For a GCC family office, the trust structure must accommodate the Waqf component (for charitable purposes) and the Mudarabah or Musharakah structures for the family’s investment business. The trust deed should appoint a GCC-based Shariah board and a Hong Kong-based professional trustee. The Hong Kong trustee should be a licensed trust company under the Trustee Ordinance (Cap. 29, s. 77), which requires a minimum paid-up capital of HKD 3 million and compliance with the HKMA’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615).

Conclusion and Actionable Takeaways

The establishment of a Shariah-compliant trust under Hong Kong law is legally viable, provided the trust deed is drafted with sufficient precision to define the Shariah mandate and to resolve the inherent tensions between common law fiduciary duties and Islamic principles. The market infrastructure—from the HKMA’s Sukuk programme to the SFC’s recognition of Shariah funds—is now mature enough to support these structures at scale. The primary risk is not legal uncertainty but drafting inadequacy.

1. Draft the trust deed with an exclusive investment mandate that prohibits the trustee from holding any non-Shariah-compliant asset, and incorporate by reference a specific Shariah screening standard (e.g., AAOIFI or S&P Shariah Indices) to satisfy the common law certainty of objects requirement.

2. Appoint a Shariah board as a committee of the trust with binding decision-making authority, and ensure the trustee is contractually entitled to rely conclusively on the board’s rulings to avoid personal liability under the Trustee Ordinance.

3. Separate any charitable Waqf component from the family trust to comply with the Perpetuities and Accumulations Ordinance’s 80-year limit for private trusts, and register the charitable trust with the Inland Revenue Department for tax exemption.

4. For trusts holding HKEX-listed equities, conduct a pre-acquisition Shariah screening using the HKEX’s quarterly Shariah Screening Report and require the trustee to rebalance the portfolio within 30 days of any stock being removed from the approved list.

5. For GCC family offices, ensure the trust’s investment mandate explicitly excludes VIE structures unless the Shariah board has issued a specific fatwa permitting them, and require the trustee to hold direct equity in PRC operating companies through a WFOE where possible.