The Impact of the Hague Trust Convention on Hong Kong's Asset Protection Landscape

Hong Kong’s ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition (the “Hague Trust Convention”) on 16 July 2025, with effect from 1 November 2025, represents the most significant statutory development in the territory’s trust jurisprudence since the enactment of the Trustee Ordinance (Cap. 29) in 1934. The Convention, implemented domestically via the Recognition of Trusts (Hague Convention) Ordinance (Cap. 605) (“RTO”), directly addresses a long-standing structural vulnerability for Hong Kong-based asset protection structures: the risk that a trust governed by Hong Kong law might be recharacterised or denied recognition by a foreign court applying its own conflict-of-laws rules. Prior to this legislative intervention, a settlor establishing a Hong Kong trust for asset protection purposes relied on common law principles of comity and the largely untested application of the Recognition of Trusts Act 1987 in other common law jurisdictions. The RTO now provides a statutory floor for recognition across all 15 existing Contracting States to the 1985 Convention, including the United Kingdom, Australia, Italy, and Malta, with the potential for expansion as additional jurisdictions accede. For Hong Kong’s trust industry, which manages an estimated HKD 4.5 trillion in trust assets according to the Hong Kong Trustees’ Association’s 2024 Industry Survey, this legal certainty is not merely academic—it directly affects the enforceability of asset protection clauses, the mobility of trust structures across borders, and the jurisdictional competition with Singapore and the Cayman Islands.

The Mechanics of Recognition Under the RTO

The RTO does not create a new substantive trust law for Hong Kong. Instead, it establishes a mandatory framework for Hong Kong courts to recognise trusts created under the law of another Contracting State, and reciprocally, for foreign courts in Contracting States to recognise Hong Kong trusts. The operative provision is section 4 of the RTO, which mirrors Article 2 of the Hague Trust Convention: a trust is defined by its essential characteristics—assets held separately from the trustee’s personal estate, title in the trustee’s name or that of another person on behalf of the trustee, and the trustee’s obligation to manage assets for a beneficiary or a specified purpose. This definition captures both express trusts and certain constructive trusts, though the Convention explicitly excludes preliminary issues relating to the validity of wills or other acts transferring property to the trustee (Article 4).

The Choice-of-Law Rule for Asset Protection

The most consequential provision for asset protection practitioners is Article 6 of the Convention, which gives effect to the settlor’s express or implied choice of governing law. Prior to the RTO, a Hong Kong court applying common law conflict-of-laws principles would generally respect a settlor’s choice of law, but the position was not codified and was subject to exceptions for public policy or mandatory rules of the forum. Section 5(2) of the RTO now provides that a trust shall be governed by the law chosen by the settlor, provided that choice is expressed or implied in the terms of the trust instrument. This is a significant hardening of the law: a settlor who explicitly selects Hong Kong law in a trust deed can now expect that a Hong Kong court will apply that law to questions of validity, construction, effects, and administration, even if the trust assets are located in a non-Contracting State or the beneficiaries are resident in a jurisdiction with no trust law.

For asset protection structures, the practical effect is that a Hong Kong trust governed by Hong Kong law will be recognised as a valid trust by the courts of any Contracting State, regardless of whether that state’s domestic law has a concept of the trust. This is particularly relevant for civil law jurisdictions such as Italy and Malta, which are Contracting States. A Hong Kong trust holding Italian real estate, for example, will now benefit from a statutory presumption of recognition in Italian courts, reducing the risk that the Italian judiciary recharacterises the arrangement as a sham or a bare agency.

The Public Policy Exception and Its Limits

The Convention does permit a Contracting State to refuse recognition where the trust is manifestly incompatible with its public policy (Article 18). The RTO incorporates this exception at section 6(2). However, the threshold is high: the incompatibility must be “manifest,” not merely inconvenient or inconsistent with local mandatory rules. The Hong Kong legislature, in the Bills Committee proceedings on the Recognition of Trusts Bill in early 2025, explicitly rejected calls to broaden the public policy exception to include general creditor protection rules. The then-Secretary for Financial Services and the Treasury, Mr. Christopher Hui, stated in the Legislative Council on 12 March 2025 that the public policy exception “should be construed narrowly, consistent with the Convention’s object of promoting legal certainty.” This legislative history is critical for asset protection planning: a Hong Kong trust that complies with Hong Kong’s own fraudulent disposition rules under section 60 of the Conveyancing and Property Ordinance (Cap. 219) is unlikely to be denied recognition in a Contracting State merely because that state has a more aggressive clawback regime for insolvent settlors.

Implications for Cross-Border Asset Protection Structures

The RTO’s recognition framework directly impacts three common asset protection structures used by high-net-worth families in Hong Kong: the discretionary trust, the purpose trust, and the unit trust. Each structure faces distinct recognition risks in foreign jurisdictions, and the Convention provides a uniform baseline for addressing them.

Discretionary Trusts and the Problem of Beneficiary Rights

A discretionary trust, where the trustee has absolute discretion over distributions of income and capital, is the most common structure in Hong Kong’s private trust market, accounting for approximately 68% of all new trust establishments in 2024 according to data from the Hong Kong Trustees’ Association. The core asset protection feature of a discretionary trust is that no beneficiary has a vested right to any part of the trust fund—each beneficiary holds only a mere expectancy until the trustee exercises its discretion. This feature is well-established in Hong Kong common law, following the House of Lords’ decision in Gartside v Inland Revenue Commissioners [1968] AC 553, which held that a discretionary beneficiary has no proprietary interest in the trust assets.

Prior to the RTO, a Hong Kong discretionary trust holding assets in a civil law jurisdiction such as France (not a Contracting State) or Italy (a Contracting State) faced the risk that the local court would treat the beneficiaries’ expectancy as a form of ownership right, thereby subjecting the trust assets to forced heirship claims or creditor attachment. The Convention addresses this by requiring the recognising court to apply the governing law of the trust to determine the nature and extent of the beneficiaries’ rights (Article 8). For a Hong Kong law-governed discretionary trust, this means that Italian courts must apply Hong Kong law to conclude that the beneficiaries have no vested rights—a result that would not have been guaranteed under Italian domestic conflict-of-laws rules before ratification.

Purpose Trusts and the Requirement of Certainty

Hong Kong’s purpose trust regime, introduced by the Trust Law (Amendment) Ordinance 2013 (Ord. No. 15 of 2013), permits the creation of non-charitable purpose trusts for specific purposes, subject to the requirement that the purposes be “sufficiently certain” and that the trust has an enforcer to ensure the trustee’s compliance. The Hague Trust Convention explicitly includes purpose trusts within its definition of “trust” (Article 2), provided the purpose is not contrary to the law of the governing jurisdiction.

For asset protection, purpose trusts are increasingly used to hold family assets such as art collections, private aircraft, or intellectual property, where the purpose is to preserve the asset for future generations rather than to distribute income to beneficiaries. The RTO’s recognition framework ensures that a Hong Kong purpose trust holding a valuable art collection in a London freeport will be recognised as a trust by UK courts, which are bound by the Convention. This removes the risk that the UK court recharacterises the arrangement as a bare trust for the settlor, which would expose the assets to the settlor’s personal creditors. The UK’s Trusts of Land and Appointment of Trustees Act 1996 does not directly address purpose trusts, but the Hague Trust Convention’s recognition provisions override any domestic inconsistency.

Unit Trusts and the Regulatory Overlay

Unit trusts, which are widely used in Hong Kong’s retail and institutional fund industry, present a unique asset protection challenge because they combine trust law with securities regulation. The Securities and Futures Commission (“SFC”) regulates authorised unit trusts under the Securities and Futures Ordinance (Cap. 571), and the SFC’s Code on Unit Trusts and Mutual Funds requires that the trust deed contain provisions for the protection of unitholders. The RTO does not alter the SFC’s regulatory authority, but it does provide that an authorised unit trust governed by Hong Kong law will be recognised as a trust in Contracting States, even if the fund’s assets are held through a custodian in a foreign jurisdiction.

This is particularly relevant for Hong Kong-domiciled funds that distribute in Europe under the UCITS regime or the Alternative Investment Fund Managers Directive (“AIFMD”). Prior to the RTO, a Hong Kong unit trust distributing in Italy faced the risk that Italian courts might treat the unitholders as co-owners of the underlying assets, triggering Italian tax and succession implications. The Convention now requires Italian courts to apply Hong Kong law to determine the legal nature of the unitholders’ interest, which is a beneficial interest in the trust fund rather than a direct interest in the portfolio assets. The SFC’s 2024 Annual Report noted that 237 Hong Kong-authorised unit trusts had European distribution mandates as of 31 December 2024, representing HKD 1.2 trillion in assets under management.

Jurisdictional Competition and the Hong Kong Advantage

The RTO positions Hong Kong in direct competition with Singapore, which has been a Contracting State to the Hague Trust Convention since 2016 (effective 1 March 2017), and with the Cayman Islands, which is not a Contracting State. The choice of jurisdiction for a trust structure now turns on three factors: the breadth of the recognition network, the strength of the asset protection legislation, and the tax treatment of trust income.

The Recognition Network: Hong Kong vs. Singapore

Singapore’s ratification of the Convention in 2016 gave its trust industry a first-mover advantage in Southeast Asia, particularly for families with assets in Italy and Malta, both of which are Convention states. Hong Kong’s ratification in 2025 closes this gap, but the two jurisdictions now compete on the same recognition terms for trusts governed by their respective laws. The key differentiator is the depth of the trust services ecosystem: Hong Kong has 87 licensed trust companies as of 30 June 2025, according to the Hong Kong Monetary Authority’s Register of Trust Companies, compared to Singapore’s 63 licensed trust companies as reported by the Monetary Authority of Singapore in its 2024 Annual Report. The larger pool of service providers in Hong Kong offers greater pricing competition and specialisation, particularly for family offices and multi-jurisdictional structures.

The Cayman Islands and the Non-Convention Problem

The Cayman Islands, despite being the world’s largest offshore trust jurisdiction by assets under administration (estimated at USD 4.8 trillion by the Cayman Islands Monetary Authority’s 2024 Statistical Digest), is not a Contracting State to the Hague Trust Convention. This means that a Cayman Islands trust holding assets in a Convention state such as the United Kingdom or Australia does not benefit from the statutory presumption of recognition. Instead, recognition depends on the common law conflict-of-laws rules of the forum, which are less predictable. For families with significant assets in Convention states, a Hong Kong trust now offers superior legal certainty compared to a Cayman trust, particularly for assets in civil law jurisdictions that have no domestic trust concept.

The Cayman Islands government has indicated, through public statements by the then-Financial Secretary in the Cayman Islands Legislative Assembly on 14 February 2025, that it is considering ratification of the Hague Trust Convention. However, no legislative timetable has been announced. In the interim, Hong Kong trust practitioners can market the RTO as a competitive advantage for families with assets in Italy, Malta, the United Kingdom, and Australia—the four largest Convention states by trust assets under administration.

The Tax Dimension: Hong Kong’s Territorial System

The RTO does not alter Hong Kong’s territorial tax system, which is a significant advantage for asset protection structures. Under the Inland Revenue Ordinance (Cap. 112), a Hong Kong trust is only subject to profits tax on income arising in or derived from Hong Kong. Trust income sourced outside Hong Kong is not taxable, regardless of where the trustee or beneficiaries are resident. This is distinct from Singapore, which has a modified territorial system that taxes foreign-sourced income remitted to Singapore, and from the Cayman Islands, which has no direct taxation but faces increasing pressure from the OECD’s Base Erosion and Profit Shifting (“BEPS”) framework.

For a Hong Kong trust holding assets in a Convention state, the combination of statutory recognition under the RTO and territorial taxation creates a powerful asset protection structure: the trust is recognised as a valid trust in the jurisdiction where the assets are located, but the income from those assets is not subject to Hong Kong tax unless it is sourced in Hong Kong. This structure is particularly attractive for Italian real estate, where the Italian property tax (IMU) remains payable locally, but the rental income is not subject to Hong Kong profits tax.

Actionable Takeaways

1. Hong Kong trust deeds executed after 1 November 2025 should include an explicit governing law clause selecting Hong Kong law to trigger the statutory recognition presumption under section 5(2) of the RTO, and existing trust deeds should be reviewed for amendment if they rely on implied choice of law.
2. Families with assets in Italy, Malta, the United Kingdom, or Australia should prioritise Hong Kong trust structures over Cayman Islands trusts for those specific assets, given the Cayman Islands’ non-party status to the Convention and the resulting recognition risk.
3. Purpose trusts holding non-financial assets such as art, aircraft, or intellectual property in Convention states should be documented with a written enforcer appointment and a clear statement of purposes, as the Convention’s Article 2 definition of “trust” requires a purpose that is not contrary to the governing law.
4. Unit trust managers distributing in European Union markets should update their offering documents to reference the RTO’s recognition provisions, as this may reduce the regulatory capital required under AIFMD for unitholder protection risks.
5. The public policy exception at section 6(2) of the RTO is narrow and does not extend to general creditor protection rules, meaning that a Hong Kong trust complying with the Conveyancing and Property Ordinance (Cap. 219) fraudulent disposition provisions is unlikely to be denied recognition in a Contracting State on public policy grounds.