Tax Exemption Policies for Trusts: A Comparative Study Between Hong Kong and New Zealand

The 2025-2026 Hong Kong budget, delivered by Financial Secretary Paul Chan on 26 February 2025, proposed a significant expansion of the territory’s family office and trust tax concession regime. Specifically, the government signalled its intent to extend the 0% profits tax rate for qualifying family-owned investment holding vehicles (FIHVs) to cover trusts—a move that directly aligns Hong Kong’s offering with the existing structure in New Zealand, where trusts have enjoyed a 0% corporate tax rate on certain passive income for decades. This policy shift, expected to be codified in the Inland Revenue (Amendment) (Family-owned Investment Holding Vehicles) Bill 2025, comes at a critical juncture. With Singapore’s 13O and 13U tax incentive schemes under review and the OECD’s Pillar Two global minimum tax of 15% taking effect in 2024, high-net-worth families are actively recalibrating their cross-border structures. For Hong Kong trust practitioners, the proposed changes represent the most material tax-driven opportunity since the introduction of the unified profits tax exemption for offshore funds in 2006. This comparative analysis examines the mechanics of the Hong Kong proposal against New Zealand’s long-standing framework, focusing on the specific legal and regulatory distinctions that will determine which jurisdiction offers superior outcomes for different family profiles.

The Hong Kong Proposal: Mechanics and Scope

The core of the Hong Kong proposal is an amendment to Section 14 of the Inland Revenue Ordinance (Cap. 112, IRO) to explicitly include trusts within the definition of a qualifying FIHV. Currently, the concession—introduced in the 2023-2024 budget as part of the broader family office push—applies only to corporations. The proposed extension would treat a trust as a separate taxpayer for the purposes of the 0% rate on its assessable profits derived from qualifying transactions, provided the trust’s central management and control (CMC) is exercised in Hong Kong.

Qualifying Conditions and the CMC Test

The critical condition is the CMC test. For a trust to benefit, its trustees—whether individual or corporate—must exercise CMC in Hong Kong. This is a stricter requirement than the New Zealand model, which does not impose a residency test on the trustee for the trust to be tax-transparent. Under the Hong Kong proposal, the trust must be a Hong Kong resident trust for tax purposes, defined under Section 2 of the IRO as a trust where the trustee is a Hong Kong resident or, in the case of multiple trustees, a majority are Hong Kong residents. This effectively limits the regime to trusts administered by Hong Kong-licensed trust companies or individual trustees who are ordinarily resident in Hong Kong.

Qualifying Transactions and Excluded Activities

The 0% rate applies only to “qualifying transactions,” defined in Schedule 16C of the IRO. These include dealings in securities, futures contracts, foreign exchange contracts, and deposits with authorized institutions. Critically, the exemption does not extend to income from direct real estate holdings (unless held through a qualifying special purpose vehicle) or from trading activities that constitute a business in Hong Kong. For a trust holding a diversified portfolio of listed equities, bonds, and private equity fund interests, the vast majority of its income would be covered. However, a trust that directly owns a commercial building in Central and collects rental income would not qualify—the rental income would be subject to the standard 16.5% profits tax rate.

The Single Family Office Requirement

A structural prerequisite is that the trust must be part of a “single family office” structure. The IRD’s interpretation, as outlined in Departmental Interpretation and Practice Notes (DIPN) No. 61, requires that the FIHV be wholly owned by one family and that the family office managing it provides services exclusively to that family. This precludes multi-family office structures or trusts with unrelated beneficiaries from accessing the 0% rate. For a Hong Kong trust established by a patriarch for his children and grandchildren, this is straightforward. For a pooled investment trust with multiple settlors, it is not.

New Zealand’s Trust Tax Framework: A Proven Model

New Zealand’s trust tax regime, codified in the Income Tax Act 2007, offers a starkly different architecture. Since 1988, New Zealand has applied a 0% tax rate to the trustee income of a “complying trust” that is not derived from a business carried on in New Zealand. This is not a concessionary incentive but a structural feature of the tax system, reflecting the country’s long-standing policy of taxing trusts on a “beneficiary attribution” basis rather than at the entity level.

Tax Transparency and Beneficiary Attribution

The core principle is that a trust is a flow-through vehicle. Trustee income that is not distributed to beneficiaries is taxed at a flat 33% rate (the trustee rate). However, income that is distributed to beneficiaries is taxed at the beneficiary’s marginal rate, which can be as low as 10.5% for the first NZD 14,000 of income. Critically, capital gains are generally not taxed in New Zealand, unless the trust is deemed to be a trader. This means that for a trust holding a growth-oriented portfolio of global equities, the capital appreciation accrues tax-free at the trust level. Only realized dividends and interest are subject to attribution.

No Residency Requirement on the Trustee

Unlike the Hong Kong proposal, New Zealand does not require the trustee to be a New Zealand resident for the trust to be tax-transparent. A New Zealand trust can be administered by a trustee in Singapore, London, or the Cayman Islands, provided the trust’s CMC is not in New Zealand. This is a critical distinction for families seeking a neutral jurisdiction. A Caymanian trustee administering a New Zealand trust for a Hong Kong family can achieve tax efficiency in New Zealand without the trustee being physically present there.

The Foreign Trust Regime

For non-resident settlors, New Zealand offers an even more attractive structure: the “foreign trust” regime. Under Section HC 26 of the Income Tax Act 2007, a trust with a non-resident settlor is generally exempt from New Zealand tax on all foreign-sourced income, including dividends, interest, and capital gains. The only income subject to New Zealand tax is New Zealand-sourced income, such as rental income from a New Zealand property. This regime has been a cornerstone of New Zealand’s private wealth management industry, attracting an estimated 12,000 foreign trusts as of 2023, according to data from the New Zealand Inland Revenue Department.

Comparative Analysis: Key Divergences

The Hong Kong and New Zealand models diverge on three critical dimensions: tax rate on distributed income, treatment of capital gains, and structural flexibility for cross-border families.

Tax Rate on Distributed Income

Hong Kong’s 0% rate applies only to the trust’s own assessable profits from qualifying transactions. When the trust distributes income to beneficiaries, those distributions are generally not subject to further Hong Kong tax, as beneficiaries are not considered to be receiving Hong Kong-sourced income unless they are resident in Hong Kong and the distribution is from a Hong Kong trust. This creates a single layer of taxation at the trust level. In New Zealand, the 0% rate applies only to capital gains and to foreign-sourced income for foreign trusts. For domestic trusts with New Zealand-resident beneficiaries, distributed income is taxed at the beneficiary’s marginal rate, which can be as high as 39% (the top personal rate introduced in 2021). For a Hong Kong family with New Zealand-resident children, the New Zealand model can result in a higher effective tax rate on distributed income than the Hong Kong model.

Treatment of Capital Gains

Hong Kong has no capital gains tax. A trust holding shares in a private company and realizing a capital gain on disposal is not subject to Hong Kong profits tax, regardless of whether the trust qualifies for the 0% FIHV rate. The 0% concession primarily addresses recurring income (dividends, interest, trading profits). New Zealand, by contrast, has no general capital gains tax, but it does tax capital gains if the asset was acquired with the intention of resale (the “trading intention” test) or if the trust is deemed to be a trader. For a family office trust that actively trades a portfolio of securities, the New Zealand model could expose the trust to tax on trading profits, whereas the Hong Kong model, if the trust qualifies as an FIHV, would apply the 0% rate to those same trading profits.

Structural Flexibility for Cross-Border Families

The Hong Kong model requires the trustee to be a Hong Kong resident. This is a significant limitation for families with settlors or beneficiaries in jurisdictions that impose their own tax on foreign trusts (e.g., the United States, which taxes its citizens on worldwide income regardless of trust situs). A US citizen settlor establishing a Hong Kong trust would trigger US grantor trust rules, potentially making the trust’s income taxable in the US at the settlor’s marginal rate. New Zealand’s foreign trust regime, by contrast, offers greater flexibility because the trustee can be located in a jurisdiction that is tax-neutral for the settlor’s home country. A US settlor can establish a New Zealand foreign trust with a trustee in the Cook Islands, achieving asset protection and tax neutrality in New Zealand without triggering US grantor trust rules, provided the settlor does not retain certain powers.

Practical Implications for Trust Practitioners

The 2025 Hong Kong proposal is a direct response to the growing demand for a tax-efficient trust jurisdiction in Asia. For families whose wealth is primarily in Hong Kong-listed securities, Hong Kong dollar deposits, or Hong Kong-based private equity funds, the 0% FIHV rate offers a compelling value proposition. The administrative burden is relatively low: the trust must file an annual tax return with the IRD, but the compliance requirements are standard for Hong Kong corporate taxpayers.

For families with a global portfolio, particularly those with assets in jurisdictions that impose withholding tax on dividends and interest, New Zealand’s foreign trust regime may still offer superior outcomes. New Zealand’s network of double tax agreements (DTAs) is extensive, covering 40 jurisdictions as of 2025, including all major Asian economies. Hong Kong’s DTA network, while growing, is smaller, covering 47 jurisdictions as of 2025. For a trust holding US equities, the US-Hong Kong DTA allows for a reduced withholding tax rate of 15% on dividends, compared to the standard 30% rate. The US-New Zealand DTA provides a similar 15% rate. The difference is marginal for US equities, but for dividends from a jurisdiction like Japan (which has a DTA with New Zealand but not with Hong Kong), the New Zealand trust could achieve a lower withholding tax rate.

Cost and Compliance Considerations

The cost of establishing and maintaining a Hong Kong trust is generally lower than a New Zealand trust. A Hong Kong trust company will charge an annual administration fee of approximately HKD 50,000 to HKD 150,000, depending on complexity. A New Zealand corporate trustee, particularly one specializing in foreign trusts, will charge between NZD 10,000 and NZD 30,000 per annum (approximately HKD 47,000 to HKD 141,000). The compliance burden for a New Zealand foreign trust is higher: the trust must file an annual disclosure with the New Zealand Inland Revenue, including a full statement of assets and liabilities, and must engage a New Zealand-based auditor if the trust’s assets exceed NZD 10 million.

Regulatory Risk and Political Stability

Hong Kong’s tax regime is subject to annual legislative change. The 0% FIHV rate is a concessionary measure, meaning the government can amend or repeal it at any time. New Zealand’s trust tax regime, by contrast, has been in place for over 35 years and enjoys broad political consensus. The Labour government’s 2021 increase of the trustee rate from 33% to 39% was a notable exception, but the core principles of the foreign trust regime remained intact. For families with a long-term horizon (30+ years), the political stability of the New Zealand regime may outweigh the short-term cost advantages of Hong Kong.

Actionable Takeaways

1. For Hong Kong-resident families with a portfolio of listed securities and no US or UK tax exposure, the 2025 FIHV extension to trusts offers a straightforward path to a 0% tax rate on investment income, provided the trustee is a Hong Kong resident and the trust is part of a single family office structure.

2. For families with New Zealand-resident beneficiaries, the Hong Kong model is likely superior, as distributions from a Hong Kong FIHV trust are not subject to further Hong Kong tax, whereas New Zealand would tax those distributions at the beneficiary’s marginal rate of up to 39%.

3. For US citizen settlors or families with significant US situs assets, New Zealand’s foreign trust regime remains the preferred structure, as it can be structured to avoid US grantor trust rules while achieving tax neutrality in New Zealand.

4. Trust practitioners should model the effective tax rate under both regimes for a specific family’s asset mix, including the impact of withholding taxes under the respective DTA networks, before recommending a jurisdiction.

5. The 2025 Hong Kong proposal is not a substitute for New Zealand’s regime for cross-border families—it is a complementary tool that is best deployed for families whose economic nexus is primarily in Hong Kong and the Greater Bay Area.