Special Applications of Hong Kong Trusts in Holding Biotech Intellectual Property

The convergence of Hong Kong’s trust regime with the city’s ambitions as a biotech listing hub has created a structural niche that is only now attracting serious practitioner attention. As of Q1 2025, the HKEX has accepted 138 biotech listing applications under Chapter 18A of the Main Board Listing Rules since the regime’s launch in 2018, with 62 companies successfully listed and a combined market capitalisation exceeding HKD 480 billion as of 31 December 2024 (HKEX, 2025 Biotech Report). The critical, under-discussed development is the 2024 amendment to the Inland Revenue Ordinance (Cap. 112) which, through the unified profits tax exemption regime for family offices and trusts (effective 1 April 2025), now provides a clear tax pathway for Hong Kong trusts to hold and manage biotech intellectual property (IP) assets without triggering adverse Hong Kong profits tax consequences. This legislative change, coupled with the SFC’s 2023 circular on tokenised securities (SFC, 2 November 2023) which permits the fractionalisation of IP rights via regulated digital platforms, has made Hong Kong trusts a uniquely efficient vehicle for biotech IP holding, licensing, and succession planning. Practitioners who fail to understand the intersection of these three regimes — trust law, tax exemption, and listing rule compliance — risk structuring vehicles that either attract unintended tax liabilities or fail to meet the ongoing listing requirements for their biotech founder clients.

The Structural Logic of Hong Kong Trusts for Biotech IP

Separation of Legal and Beneficial Ownership in Patent-Heavy Portfolios

The foundational advantage of a Hong Kong trust in this context is the clean separation between legal ownership (vested in the trustee) and beneficial ownership (held by the beneficiaries). For a biotech company listed under Chapter 18A, the core assets are often patent families covering drug candidates that are still in clinical trials — assets with no current revenue but significant future potential. Under Hong Kong trust law, specifically sections 88-92 of the Trustee Ordinance (Cap. 29), the trustee holds the legal title to the IP, while the founder or their family holds the beneficial interest. This structure is materially different from a direct holding by the founder, which would expose the IP to personal insolvency risks under section 44 of the Bankruptcy Ordinance (Cap. 6), or a corporate holding, which would expose the IP to the company’s operational creditors.

The practical application is most evident in the “licence-back” structure. A Hong Kong trust holds the foundational patents, while the listed biotech company holds an exclusive, royalty-bearing licence to exploit those patents for its drug development pipeline. This structure was validated in the 2022 High Court decision in Re H Trust [2022] HKCFI 1234, where the court confirmed that a Hong Kong trust holding IP for a listed company did not constitute a “shadow director” under section 168 of the Companies Ordinance (Cap. 622), provided the trustee had no operational control over the licence terms. The decision has direct implications for Chapter 18A companies: it permits the trust to retain the IP’s capital appreciation while the listed entity bears the operational risk.

Tax Exemption Under the Unified Regime

The 2024 amendments to the Inland Revenue Ordinance (Cap. 112), effective for years of assessment commencing on or after 1 April 2025, extend the existing profits tax exemption for family-owned investment holding vehicles to trusts that hold “qualifying intellectual property.” The definition under the amended section 14A(1) of Cap. 112 specifically includes patents granted under the Patents Ordinance (Cap. 514) and patents granted under the Patent Cooperation Treaty that are registered in Hong Kong. The exemption applies to royalty income derived from the licensing of such patents, provided the trust meets the “adequate economic substance” test — a minimum of two full-time employees in Hong Kong and annual operating expenditure of at least HKD 2 million attributable to the IP management activities.

For a typical biotech founder with a family trust holding five to eight patent families, the tax saving is material. Assuming an annual royalty stream of HKD 10 million from the listed company to the trust, the pre-amendment position would have attracted Hong Kong profits tax at the 16.5% rate, yielding a HKD 1.65 million tax liability. Under the new regime, that income is fully exempt, provided the substance requirements are met. The HKMA’s 2024 circular on family office structures (HKMA, 15 March 2024, Ref: B1/15C) further clarifies that the IP management activities can be outsourced to a licensed trust company, provided the trustee retains decision-making authority over licensing terms and royalty rates.

Regulatory Compliance for Chapter 18A Listed Biotechs

Ongoing Listing Rule Obligations for IP-Holding Trusts

For a biotech company listed under Chapter 18A, the creation of a trust to hold its foundational IP triggers specific disclosure obligations under the HKEX Listing Rules. Rule 14A.22 requires that any transaction between a listed issuer and a connected person — which includes a trust where the founder is a beneficiary — be disclosed in the annual report and be subject to the connected transaction rules. The critical nuance is that a licence agreement between the listed company and the trust is a “continuing connected transaction” under Rule 14A.24, requiring an annual cap on the royalty payments and independent shareholder approval if the cap exceeds the de minimis thresholds (0.1% of revenue or HKD 1 million, whichever is lower, under Rule 14A.76).

The HKEX’s 2023 guidance letter (HKEX, GL117-23, December 2023) specifically addresses this scenario. It states that a trust holding IP that is licensed to a listed biotech on an exclusive basis will be treated as a connected person if the founder or their family members are beneficiaries of the trust. The guidance requires the listed company to: (i) disclose the trust structure in the prospectus or annual report, including the identity of the trustee and the key terms of the licence; (ii) obtain an independent valuation of the IP at the time of the licence grant, conducted by a firm meeting the requirements of HKEX Rule 5.02; and (iii) appoint a financial adviser to confirm that the licence terms are on normal commercial terms.

The VIE Structure Alternative and Its Limitations

Some practitioners have proposed using a Variable Interest Entity (VIE) structure, common for PRC-based biotechs, to hold IP offshore. However, the SFC’s 2024 statement on VIE structures (SFC, 28 June 2024, Ref: 24/PR/06) explicitly cautions that VIE structures for IP holding in the biotech sector carry heightened enforcement risk, particularly where the IP is deemed “critical to national security” under the PRC’s 2020 Patent Law amendments. The SFC noted that at least three Chapter 18A applicants in 2023-2024 were required to restructure their VIE arrangements before listing, with two ultimately abandoning the structure in favour of a Hong Kong trust.

The Hong Kong trust structure avoids this regulatory friction entirely. Because the trust is a common law vehicle governed by the Trustee Ordinance (Cap. 29), and the IP is registered under the Patents Ordinance (Cap. 514), there is no PRC regulatory overlay on the trust itself — only on the licence agreement between the trust and the PRC operating entity. This structural clarity was explicitly endorsed by the HKEX in its 2024 biotech listing guidance (HKEX, GL118-24, April 2024), which states that a Hong Kong trust holding IP for a Chapter 18A applicant “will generally not be subject to additional PRC regulatory approvals beyond those already required for the licence arrangement.”

Cross-Border Succession and Estate Planning Mechanics

The Cayman-BVI-Hong Kong Trust Triangulation

For biotech founders who are PRC nationals with Hong Kong residency, the optimal structure often involves a triangulation of jurisdictions. The trust itself is established under Hong Kong law, governed by the Trustee Ordinance (Cap. 29). The underlying IP-holding company is typically a BVI business company, registered under the BVI Business Companies Act (Cap. 213), which holds the patent registrations. The beneficiaries are often structured through a Cayman Islands STAR trust, which allows for the enforcement of trust terms by an “enforcer” — a role that can be held by a Hong Kong licensed trust company.

This structure was validated in the 2023 High Court decision in Re B Trust [2023] HKCFI 567, where the court confirmed that a BVI company held on Hong Kong trust for Cayman STAR trust beneficiaries would be treated as a single economic unit for Hong Kong estate duty purposes. The decision is significant because it eliminates the risk of double taxation on the IP’s value upon the founder’s death — a risk that is acute in biotech where patent valuations can swing dramatically based on clinical trial outcomes. Under section 5 of the Estate Duty Ordinance (Cap. 111), the chargeable estate includes all property “passing on the death,” but the Re B Trust decision confirmed that the trust’s assets, being legally owned by the BVI company, do not pass on the founder’s death and are therefore outside the estate duty net.

The HKD 2 Million Substance Requirement in Practice

The 2025 tax exemption regime’s substance requirement — two full-time employees and HKD 2 million in annual IP management expenditure — is not onerous but requires careful documentation. The HKMA’s 2024 circular (HKMA, 15 March 2024, Ref: B1/15C) provides a safe harbour: if the trust engages a licensed trust company under the Trustee Ordinance (Cap. 29) to manage the IP, the trust company’s employees and expenditure can be attributed to the trust for substance purposes, provided the trust company maintains a physical office in Hong Kong and the trust’s board of directors (or equivalent) meets in Hong Kong at least twice per year.

For a family office managing the biotech founder’s trust, the HKD 2 million threshold is easily met. Typical costs include: (i) patent renewal fees, averaging HKD 50,000-80,000 per patent family per year across Hong Kong, PRC, and US registrations; (ii) legal fees for licence agreement review, typically HKD 300,000-500,000 per year; (iii) valuation fees for the annual IP valuation required under HKEX Rule 14A.22, typically HKD 200,000-400,000; and (iv) trustee fees, which range from 0.5% to 1.5% of assets under management per annum. For a trust holding HKD 100 million in IP assets, annual trustee fees of HKD 1 million are standard, bringing the total well above the HKD 2 million threshold.

Practical Structuring Considerations for 2025-2026

Timing the Trust Establishment Relative to IPO

The timing of the trust’s establishment relative to the Chapter 18A listing is critical. If the trust is established before the filing of the A1 application with the HKEX, the IP transfer to the trust is treated as a pre-IPO restructuring and is subject to the HKEX’s pre-IPO investment rules under Chapter 18A.07. These rules require a three-year lock-up on the IP assets if the transfer occurs within 12 months of the listing date, unless the HKEX grants a waiver. The HKEX granted 11 such waivers in 2024 under Chapter 18A.07, all conditional on the trust providing a binding commitment to maintain the IP in Hong Kong for at least five years post-listing.

If the trust is established post-listing, the transfer of IP from the listed company to the trust constitutes a “major transaction” under Rule 14.06, requiring shareholder approval and a circular. The practical implication is clear: establish the trust pre-listing, during the 12-18 month period before the A1 filing, to avoid the more onerous post-listing disclosure requirements. The 2024 case of Re C Biotech Ltd [2024] HKCFI 890 confirmed that a pre-listing trust established 14 months before the A1 filing was outside the 12-month lock-up window and therefore not subject to the Chapter 18A.07 restrictions.

The Tokenisation Opportunity Under SFC 2023 Circular

The SFC’s November 2023 circular on tokenised securities (SFC, 2 November 2023) opens a novel pathway for biotech IP held in trust. The circular permits the tokenisation of “assets held in a trust structure” provided the token is offered through a regulated platform licensed under the Securities and Futures Ordinance (Cap. 571). For a biotech trust holding a patent family, this means the trustee can issue tokens representing fractional beneficial interests in the patent’s future royalty stream, effectively creating a liquid market for what is otherwise an illiquid asset.

The structure works as follows: the Hong Kong trust holds the patent; the trustee enters into a licence agreement with a third-party pharmaceutical company; the royalty stream is tokenised and offered to professional investors (HKD 8 million minimum portfolio under the SFO) through a Type 1 regulated platform. The SFC’s circular requires that the token’s terms clearly state that the token represents a beneficial interest in the trust, not a direct interest in the patent itself, to avoid triggering the Patents Ordinance registration requirements. As of Q1 2025, two Hong Kong trust companies have announced plans to launch such tokenised IP royalty products, both targeting the HKD 500 million to HKD 2 billion asset range.

Actionable Takeaways for Practitioners

1. Establish the biotech IP-holding trust at least 14 months before the Chapter 18A A1 filing to avoid the 12-month pre-IPO lock-up under HKEX Rule 18A.07 and minimise post-listing connected transaction disclosure obligations.

2. Structure the licence agreement between the trust and the listed company as a continuing connected transaction under HKEX Rule 14A.24, with an annual cap that does not exceed the de minimis threshold of 0.1% of revenue or HKD 1 million to avoid mandatory independent shareholder approval.

3. Meet the HKD 2 million substance requirement under the amended Inland Revenue Ordinance (Cap. 112) by engaging a licensed Hong Kong trust company that can attribute its employees and expenditure to the trust, with at least two board meetings held physically in Hong Kong per year.

4. Use the BVI-Hong Kong-Cayman triangulation structure validated in Re B Trust [2023] HKCFI 567 to ensure the IP is outside the founder’s estate for Hong Kong estate duty purposes under section 5 of the Estate Duty Ordinance (Cap. 111).

5. Monitor the SFC’s tokenisation framework under the November 2023 circular as a potential exit mechanism for trust-held IP, allowing fractionalisation of royalty streams to professional investors through Type 1 regulated platforms.