The Role of Hong Kong Trusts in Responding to the Global Minimum Corporate Tax Reform

The OECD’s GloBE (Global Anti-Base Erosion) rules, effective from fiscal years beginning on or after 31 December 2023, have shifted the calculus for multinational enterprises (MNEs) with consolidated revenues exceeding EUR 750 million. The introduction of a 15% effective minimum tax rate under Pillar Two directly challenges the utility of low-tax jurisdictions, including Hong Kong’s territorial tax system, which previously allowed effective tax rates (ETR) below this threshold for certain offshore profits. For family offices, private trust companies, and high-net-worth individuals who have structured their holding vehicles through Hong Kong trusts, this reform is not a distant policy debate but a present compliance reality. The Hong Kong Inland Revenue Department (IRD) has signalled its intent to implement the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR) by 2025, per the government’s 2024-25 Budget announcement. This article examines how Hong Kong trusts—specifically their ability to segregate legal and beneficial ownership, accumulate income, and distribute capital—can serve as a defensive or adaptive mechanism within this new tax architecture. The analysis focuses on the structural interplay between trust law, the Inland Revenue Ordinance (IRO), and the OECD’s GloBE Model Rules, drawing on specific provisions of the Trustee Ordinance (Cap. 29) and the IRO to assess whether trusts offer a viable path to maintaining tax efficiency without triggering CFC (Controlled Foreign Company) or anti-avoidance provisions.

The Mechanics of GloBE and Its Impact on Hong Kong Trust Structures

The GloBE rules operate through a complex system of charging provisions that target the ultimate parent entity (UPE) of an MNE group. Under the IIR, the UPE is required to pay top-up tax on the profits of its constituent entities that have an ETR below 15% in any jurisdiction. The UTPR acts as a backstop, allocating top-up tax to group entities in jurisdictions that have adopted the rule where the UPE is not subject to the IIR. For a Hong Kong trust structure, the critical question is whether the trust itself—or the underlying operating company—is considered a “constituent entity” of an MNE group, and who bears the liability for the top-up tax.

Identifying the Constituent Entity in a Trust Structure

The OECD’s GloBE Model Rules define a “constituent entity” broadly as any entity that is part of an MNE group, including any permanent establishment. A trust, under Hong Kong law, is not a separate legal entity but a relationship between trustee and beneficiary. However, the Inland Revenue Ordinance (IRO) treats a trust as a separate person for tax purposes only in specific circumstances, such as under section 88A for charitable trusts. For non-charitable trusts, the IRD generally assesses tax on the trustee as the legal owner of the trust property, applying the ordinary rules of residence and source.

This creates a classification gap. Under the GloBE rules, a trust that holds shares in an operating company could be classified as a “flow-through entity” (FTE) if it is not subject to tax at the entity level. The OECD’s Administrative Guidance (February 2023) clarifies that an FTE is an entity that is not subject to a covered tax on its income. If the Hong Kong trust is not taxed on its investment income (e.g., dividends and capital gains) because the IRD does not assess it as a person, the trust would likely be treated as an FTE. The consequence is that the top-up tax liability flows through to the beneficiaries or the UPE, depending on the ownership chain. This directly undermines the traditional use of Hong Kong trusts to hold passive investment assets for tax-free accumulation.

The Deemed Distribution Trap and the CFC Rule Interaction

A second critical interaction is between trust distributions and Hong Kong’s CFC rules, which are currently not fully enacted but are anticipated in response to the EU’s tax good governance criteria. Under the IRO, a trust’s accumulation of income is not a distribution; the beneficiaries are only taxed on actual distributions received, and then only if the source of the income is Hong Kong. The GloBE rules, however, look through the trust to the underlying economic substance. If the trust holds a Hong Kong operating company that has an ETR below 15%, the trust’s accumulation of that income does not shield the group from the top-up tax. The UPE (likely a holding company in a low-tax jurisdiction like the BVI or Cayman Islands) would be liable under the IIR.

The OECD’s CFC rules under Pillar Two (Article 7 of the Model Rules) further complicate matters. A trust that controls a low-taxed subsidiary may be treated as a CFC, and the trust’s income may be attributed to its beneficiaries for top-up tax purposes. Hong Kong’s existing CFC rules (IRO Part 9A, effective from 2023) apply only to certain passive income of foreign corporations controlled by Hong Kong residents. A trust that is a Hong Kong resident for tax purposes may trigger these rules if it holds a foreign subsidiary with passive income. The interaction between the Hong Kong CFC regime and the GloBE IIR is not yet harmonised, creating a risk of double taxation or double non-taxation.

Structural Adaptations: Using Trusts to Manage ETR and Substance

Given the classification risks, the value of a Hong Kong trust in the post-GloBE environment lies not in tax avoidance but in tax management and compliance facilitation. The trust’s legal framework can be used to create the necessary substance and to optimise the ETR calculation for the group.

Substance Creation Through the Trustee’s Functions

The GloBE rules require that top-up tax is calculated based on the jurisdictional ETR, which is the sum of covered taxes divided by the GloBE income of all constituent entities in that jurisdiction. For a Hong Kong trust holding an operating company, the trust’s own costs—trustee fees, legal expenses, compliance costs—are deductible for Hong Kong profits tax purposes under IRO section 16. If the trust is structured to incur significant local costs (e.g., employing a dedicated trust officer, maintaining a physical office, engaging Hong Kong-based advisors), these costs reduce the net income of the trust’s underlying company, thereby potentially lowering the GloBE income base. The effect is to increase the ETR by reducing the denominator, not by increasing the tax paid.

The Trustee Ordinance (Cap. 29) requires trustees to exercise the standard of care of an ordinary prudent person of business (section 3A). This standard can be met by demonstrating active management of the trust’s assets, which aligns with the OECD’s substance requirements. A trust that merely holds shares passively, without any trustee decision-making, risks being classified as a shell entity under the GloBE’s substance-based carve-outs. The carve-out for substance-based income exclusion (SBIE) under Article 5.3 of the Model Rules allows MNEs to exclude a fixed return on tangible assets and payroll from the top-up tax calculation. If the trust’s underlying operating company has significant tangible assets and payroll in Hong Kong, the SBIE can reduce the top-up tax exposure. The trust structure itself does not generate SBIE, but it can be used to ring-fence the qualifying assets and payroll from other group entities.

The Use of Private Trust Companies (PTCs) for Governance

A Private Trust Company (PTC) is a company incorporated in Hong Kong (or another jurisdiction) that acts as trustee for a single trust or a family of trusts. The PTC is typically owned by the family and governed by a board of directors that includes family members and professional advisors. Under the GloBE rules, the PTC is a legal entity and would be a constituent entity of the MNE group if it is part of the group’s ownership chain. This classification is critical because the PTC’s own income (e.g., fees for trustee services) is subject to Hong Kong profits tax at the standard 16.5% rate. If the PTC charges arm’s length fees to the underlying operating company, those fees are deductible by the operating company (reducing its GloBE income) and taxable in the PTC’s hands at 16.5%. This creates a net ETR on the fee income that is above the 15% minimum, thereby reducing the group’s overall top-up tax liability.

The IRD’s practice note on transfer pricing (DIPN 46, revised 2023) requires that intra-group transactions, including trustee fees, be at arm’s length. A PTC that charges fees without demonstrable value-added services risks a transfer pricing adjustment, which would increase the operating company’s taxable profits and lower the ETR. The PTC must therefore have real decision-making authority and incur actual costs to justify the fee. This aligns with the OECD’s guidance on substance, which requires that the entity performing the function bears the related risks.

The Impact on Cross-Border Trust Structures: BVI, Cayman, and Hong Kong

The GloBE rules have a disproportionate impact on structures that rely on BVI or Cayman Islands holding companies, which typically have a 0% corporate tax rate. A Hong Kong trust that holds a BVI company as the intermediate holding vehicle for a Hong Kong operating company will now face top-up tax on the BVI company’s profits. The Hong Kong trust itself may not be the UPE, but the BVI company is a constituent entity with an ETR of 0%, triggering a top-up tax liability at the level of the UPE (likely a Cayman or Bermuda holding company).

The BVI-Hong Kong Chain: A Case Study in Top-Up Tax Exposure

Consider a typical structure: a Cayman Islands UPE holds a BVI holding company, which in turn holds a Hong Kong operating company. The Hong Kong operating company has an ETR of 16.5% (the standard profits tax rate), which is above the 15% minimum. The BVI holding company, however, has no taxable profits in the BVI because it receives dividends from Hong Kong that are exempt from BVI tax. Under the GloBE rules, the BVI holding company’s GloBE income is the dividend received from Hong Kong, but its covered taxes are zero. The jurisdictional ETR for the BVI is therefore 0%, and the top-up tax is 15% of the BVI’s GloBE income. If the BVI company is a “flow-through entity” under the GloBE rules (because it is not subject to BVI tax), the top-up tax liability flows to the Cayman UPE. The Hong Kong trust, if it holds the BVI company directly, would be the intermediate entity, but the trust’s legal status as a non-entity does not shield the group.

A Hong Kong trust can be used to replace the BVI holding company. If the trust directly holds the Hong Kong operating company, the trust’s income is the dividends from the Hong Kong company. Under the IRO, dividends received by a Hong Kong resident are exempt from profits tax (IRO section 26). The trust’s GloBE income would be the dividend, but its covered taxes would be zero (no Hong Kong tax on the dividend). The jurisdictional ETR for the trust (as a constituent entity) would be 0%, triggering the same top-up tax. The trust does not solve the problem; it merely shifts the low-tax entity from BVI to Hong Kong.

The Role of the Trust in Managing the Transitional Safe Harbours

The OECD has introduced transitional safe harbours for jurisdictions with a corporate income tax rate of at least 20% (the CbCR safe harbour) and for jurisdictions with a nominal rate of at least 15% (the transitional UTPR safe harbour). Hong Kong’s 16.5% rate qualifies for the transitional UTPR safe harbour for fiscal years beginning before 31 December 2026, provided the Hong Kong entity has not been artificially structured to avoid tax. A Hong Kong trust that holds a Hong Kong operating company can qualify for this safe harbour if the trust’s structure does not involve any artificial arrangements to shift profits out of Hong Kong. The IRD’s anti-avoidance provisions under IRO section 61A (the general anti-avoidance rule) would apply if the trust is created primarily to obtain a tax benefit. The trust must have a genuine commercial purpose beyond tax planning, such as asset protection, succession planning, or family governance.

Conclusion: Actionable Takeaways for Trust Practitioners

The GloBE reform does not eliminate the utility of Hong Kong trusts, but it fundamentally alters the tax planning assumptions that have underpinned their use for cross-border structures. Trusts remain effective for non-tax purposes—asset protection, succession, and family governance—but their tax advantages in the context of MNE groups are significantly constrained. The following five takeaways are specific to trustees, family offices, and their advisors operating in the Hong Kong market.

1. Reclassify all existing trust structures that form part of an MNE group with EUR 750 million in consolidated revenue, assessing whether the trust itself is a constituent entity or a flow-through entity under the GloBE Model Rules, and determine the resulting top-up tax liability at the UPE level.

2. Evaluate the feasibility of converting passive holding trusts into Private Trust Companies (PTCs) that charge arm’s length trustee fees, thereby generating taxable income in Hong Kong at 16.5% and increasing the jurisdictional ETR above the 15% minimum, while ensuring compliance with DIPN 46 on transfer pricing.

3. Review the substance of the trust’s operations against the OECD’s substance-based income exclusion (SBIE) criteria, ensuring that the underlying operating company has sufficient tangible assets and payroll in Hong Kong to qualify for the carve-out, and that the trust itself demonstrates active management under the Trustee Ordinance (Cap. 29) section 3A.

4. Analyse the interaction between the trust’s distribution policy and Hong Kong’s CFC rules under IRO Part 9A, particularly for trusts that hold foreign subsidiaries with passive income, to avoid a double tax hit from both the CFC regime and the GloBE IIR.

5. **Prepare for the IRD’s implementation of the IIR and UTPR by 2025 by modelling the trust’s ETR under the transitional safe harbours, and by documenting the trust’s commercial purpose to withstand scrutiny under IRO section 61A, ensuring that the trust is not viewed as a tax avoidance scheme.