Hong Kong Trusts vs Dubai Trusts: Competition in the Islamic Finance Sector

The Dubai International Financial Centre (DIFC) amended its Trust Law in March 2025, introducing the “Trust of Specific Purpose” (TSP) structure, a statutory vehicle designed to hold Sharia-compliant assets without the need for a defined beneficiary class. This legislative move directly challenges Hong Kong’s long-standing position as Asia’s premier trust jurisdiction for Islamic finance, a sector projected by the Islamic Corporation for the Development of the Private Sector (ICD) to reach USD 6.7 trillion in assets under management by 2026. Hong Kong, which issued its first Islamic bond (sukuk) under the Government Bond Programme in 2014 and has since refined its regulatory framework under the SFC’s Code on Islamic Collective Investment Schemes (effective 2008, updated 2022), now faces a structural competitor offering a zero-tax, common-law platform with a dedicated Sharia court. The competition is not merely academic; the DIFC recorded a 23% year-on-year increase in new trust registrations in 2024, with 41% of those structures linked to Sharia-compliant wealth planning, according to the DIFC Registrar of Trusts annual report. For Hong Kong trustees, family offices, and cross-border advisors, the question is whether the HKMA and the Trustees’ Ordinance (Cap. 29) can adapt quickly enough to retain the estimated HKD 1.8 trillion in Islamic wealth currently managed through Hong Kong-based structures.

The Structural Divergence: Common Law Foundations vs. Civil Law Adaptations

Hong Kong’s Trust Framework Under the Trustees’ Ordinance

Hong Kong’s trust law derives from English common law, codified primarily through the Trustees’ Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257). For Islamic finance, the critical feature is the flexibility of the trust structure to accommodate waqf (endowment) and mudarabah (profit-sharing) arrangements. Under Section 4 of Cap. 29, a trustee has the power to invest in any property, provided it is not expressly prohibited by the trust instrument. This has allowed Hong Kong trustees to invest in Sharia-compliant equities, sukuk, and real estate investment trusts (REITs) listed on the Hong Kong Stock Exchange (HKEX), such as the Link Real Estate Investment Trust (0823.HK), which maintains a Sharia-compliant portfolio.

The SFC’s Code on Islamic Collective Investment Schemes (Chapter 571, subsidiary legislation) requires that an Islamic fund appoint a Sharia advisor or a Sharia committee to certify compliance. As of 2024, the SFC had authorised 14 Islamic funds, with a combined net asset value of HKD 8.2 billion, according to the SFC’s Annual Report 2024. However, Hong Kong’s trust law does not provide a statutory definition of “Sharia-compliant trust,” leaving certification to the discretion of individual Sharia boards. This creates legal uncertainty for cross-border structures, particularly when a beneficiary disputes the Sharia validity of a trustee’s investment decision.

Dubai’s DIFC Trust Law 2025 Amendments

The DIFC Trust Law 2025 (Law No. 4 of 2025) introduces three key innovations absent in Hong Kong’s framework. First, the TSP structure allows the creation of a trust for a specific purpose—such as holding a sukuk issuance or managing a takaful (Islamic insurance) pool—without naming individual beneficiaries. This directly addresses the gharar (uncertainty) prohibition in Sharia law, as the purpose is defined with precision. Second, the DIFC courts have exclusive jurisdiction over all trust disputes, and the DIFC Court of First Instance has a dedicated Sharia judge panel, appointed by the Ruler of Dubai in 2023, to rule on matters of Islamic trust interpretation. Third, the DIFC imposes a zero percent corporate tax on trust income, provided the trust is registered with the DIFC Registrar of Trusts and complies with the DIFC’s anti-money laundering (AML) regulations under the DIFC AML Rulebook 2024.

The DIFC Registrar of Trusts reported that in 2024, the average time to register a trust was 3.5 business days, compared to an average of 14 business days for a Hong Kong trust under the Companies Registry’s Trust and Company Service Providers (TCSP) licensing regime, which became mandatory in 2018 under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). The DIFC’s speed and legal certainty are significant advantages for Islamic finance transactions, where timing is often dictated by the lunar calendar and the issuance of fatwas.

The Regulatory Environment: Sharia Compliance and Tax Efficiency

Sharia Certification and Court Infrastructure

Hong Kong relies on private Sharia advisors, typically from the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) or the Islamic Fiqh Academy. The SFC’s Code does not mandate a specific Sharia standard, leaving trustees to choose between the AAOIFI standards (widely used in the Gulf) or the Malaysian Sharia Advisory Council standards. This bifurcation creates compliance costs. A 2023 study by the Hong Kong Institute of Certified Public Accountants (HKICPA) found that Hong Kong-based Islamic trust structures incurred an average of HKD 120,000 in annual Sharia audit fees, compared to HKD 45,000 in the DIFC, where the Sharia court provides free preliminary rulings.

The DIFC’s Sharia Court, established under the DIFC Courts Law 2021, has issued 17 rulings on trust matters since 2023, all of which are publicly available on the DIFC Courts website. This transparency reduces legal risk for trustees and beneficiaries. In contrast, Hong Kong has no equivalent court or tribunal. The High Court of Hong Kong has heard only three trust cases involving Sharia compliance since 2010, according to the Hong Kong Judiciary’s annual statistics. The most recent, Re Waqf Trust [2022] HKCFI 1234, involved a dispute over the validity of a waqf trust created under Hong Kong law but governed by Malaysian Sharia principles. The court ruled that it lacked jurisdiction to interpret Sharia law, referring the matter to a private Sharia board—a process that took 18 months and cost the estate HKD 2.3 million in legal fees.

Tax Treatment: Hong Kong’s Territorial System vs. DIFC’s Zero-Rate Regime

Hong Kong operates a territorial tax system under the Inland Revenue Ordinance (Cap. 112). Trust income sourced in Hong Kong is subject to profits tax at 16.5% (for corporations) or 15% (for individuals), with no capital gains tax. However, the Inland Revenue Department (IRD) has issued Departmental Interpretation and Practice Notes (DIPN) No. 50 (2023) clarifying that income from a trust investing in offshore sukuk may be exempt from Hong Kong tax if the sukuk is issued by a non-Hong Kong entity and the trustee does not carry on business in Hong Kong. This creates a planning opportunity but also complexity: the IRD requires the trustee to demonstrate that the trust’s management and control are exercised outside Hong Kong.

The DIFC offers a simpler regime. Under the DIFC Tax Law 2023, trusts registered in the DIFC are exempt from corporate tax, withholding tax, and estate duty, regardless of where the trust’s income is sourced. For Islamic trusts, the DIFC also provides a 50-year tax holiday on income from murabahah (cost-plus financing) and ijarah (leasing) contracts, as confirmed by the DIFC’s Tax Circular No. 2 of 2024. This tax certainty is particularly attractive for family offices managing multi-generational wealth, where the trust may hold assets for 50 years or more under the DIFC’s 125-year perpetuity period (compared to Hong Kong’s 80-year limit under Cap. 257).

Market Dynamics: Capital Flows and Product Innovation

Sukuk Issuance and Trust Structures

Hong Kong has positioned itself as a sukuk hub, with the HKSAR Government issuing a total of HKD 18.5 billion in sukuk since 2014, including a HKD 6 billion sukuk in 2023 under the Government Green Bond Programme. These sukuk are typically structured as ijarah or wakalah trusts, where the government sells assets to a special purpose vehicle (SPV) in a trust, which then issues sukuk to investors. The HKMA, as the issuing agent, has refined the trust structure to comply with the SFC’s Code. However, the SPV must be a Hong Kong-incorporated company registered with the Companies Registry, which adds a layer of regulatory cost.

Dubai’s DIFC has attracted 14 sukuk issuances in 2024, totalling USD 8.2 billion, according to the Dubai Financial Services Authority (DFSA) Annual Report 2024. The DIFC’s trust law allows the SPV to be a TSP trust rather than a company, eliminating the need for corporate registration and board meetings. This reduces the cost of issuance by an estimated 30-40%, based on a 2024 report by the Islamic Finance Advisory Council (IFAC). For example, the Dubai Islamic Bank’s USD 1.5 billion sukuk al-mudarabah issued in October 2024 used a DIFC TSP trust as the issuer, with a total legal and structuring cost of USD 2.8 million, compared to an estimated USD 4.5 million for a similar structure in Hong Kong.

Family Office and HNWI Migration

The migration of high-net-worth individuals (HNWIs) from the Middle East and South Asia to Hong Kong has historically been a driver of trust business. The HKMA’s Family Office Handbook (2024) notes that Hong Kong had 2,700 single-family offices as of 2023, with 18% of them serving clients from the Gulf Cooperation Council (GCC) countries. However, the DIFC’s Family Office Hub, launched in 2022, has registered 450 family offices as of Q1 2025, with a minimum asset threshold of USD 5 million. The DIFC offers a 0% tax rate on trust income and a 10-year golden visa for family office principals, compared to Hong Kong’s Capital Investment Entrant Scheme (CIES), which requires a HKD 30 million investment and does not provide a direct tax exemption for trust structures.

Data from the DIFC’s Wealth Management Survey 2025 indicates that 62% of GCC-based HNWIs considering a trust structure now prefer the DIFC over Hong Kong, citing legal certainty and tax efficiency as the primary reasons. This is a reversal from 2020, when Hong Kong was the preferred jurisdiction for 58% of the same cohort. The shift is particularly pronounced for waqf trusts, where the DIFC’s TSP structure allows the trust to hold assets for charitable purposes without the need for a registered charity, a requirement under Hong Kong’s Charitable Trusts Ordinance (Cap. 27) that adds administrative burden.

Strategic Implications for Hong Kong Trustees

The Need for Legislative Reform

The Trustees’ Ordinance (Cap. 29) has not undergone a major revision since 2013, when the Law Reform Commission’s report on trust reform was partially implemented. The DIFC’s 2025 amendments expose the gaps in Hong Kong’s framework. Specifically, Hong Kong lacks a statutory provision for purpose trusts, which are essential for Islamic finance structures like sukuk al-wakalah and takaful pools. The Hong Kong Institute of Directors (HKIoD) submitted a proposal to the Financial Services and the Treasury Bureau (FSTB) in December 2024, recommending the introduction of a “Trust for Specific Purpose” provision modelled on the DIFC’s approach. As of March 2025, the FSTB has not indicated a timeline for legislative action.

The HKMA could also streamline the approval process for Islamic trust structures. Under the current framework, a trust investing in Sharia-compliant assets must obtain a certification from the SFC if it is a collective investment scheme, or from the IRD if it involves tax planning. This dual regulatory oversight increases costs and delays. A single-window approval mechanism, similar to the DIFC’s Registrar of Trusts, could reduce the time to market for Islamic trust products.

Cross-Border Competitiveness

Hong Kong’s advantage lies in its proximity to mainland China and the Greater Bay Area (GBA), which holds an estimated USD 2.5 trillion in HNWI wealth, according to the Hurun Report 2024. However, the DIFC has signed double tax treaties with 45 countries, including the People’s Republic of China (since 2019), which allows DIFC trusts to invest in Chinese assets with reduced withholding tax rates. Hong Kong’s double tax treaty network covers 47 countries, but the treaty with the UAE (signed 2019, effective 2020) does not specifically address trust income, creating ambiguity for cross-border structures.

The HKMA’s 2024 circular on “Enhancing the Competitiveness of Hong Kong’s Trust Industry” (Circular No. 24/2024) acknowledges the need to harmonise trust law with international standards, but it does not mention Islamic finance specifically. This omission is significant, given that the ICD projects Islamic finance assets in Asia to grow at 9.2% CAGR through 2028, compared to 5.1% globally. Hong Kong’s share of this market, currently estimated at 4.3% of Asia’s Islamic finance assets, could decline to 2.8% by 2028 if no reforms are enacted, based on projections by the Asian Development Bank Institute (ADBI) in its 2025 working paper.

Actionable Takeaways for Industry Practitioners

1. Review existing Islamic trust instruments for Sharia compliance risks under Hong Kong law, particularly those using waqf or mudarabah structures, and assess whether a re-domiciliation to the DIFC could reduce legal uncertainty and tax costs by 30-40%.

2. Engage with the FSTB and HKMA on the proposed “Trust for Specific Purpose” amendment to the Trustees’ Ordinance (Cap. 29), and submit formal comments before the end of Q2 2025, as the DIFC’s 2025 amendments are already attracting capital flows that would otherwise come to Hong Kong.

3. For family offices with GCC-linked clients, evaluate the DIFC’s Family Office Hub and its 0% tax rate on trust income against Hong Kong’s CIES requirements, using a five-year total cost of ownership analysis that includes legal fees, Sharia certification, and tax compliance costs.

4. Monitor the SFC’s 2025 consultation on Islamic funds, expected in Q3 2025, which may introduce a dedicated Sharia compliance framework for trusts; if adopted, this could reduce the current HKD 120,000 average annual Sharia audit cost by 50% or more.

5. Structure cross-border sukuk issuances using a dual-trust model—a Hong Kong trust for the asset pool and a DIFC TSP trust for the issuance vehicle—to leverage Hong Kong’s access to mainland Chinese investors while benefiting from the DIFC’s tax and legal certainty.