Utilizing Purpose Trusts in Hong Kong Family Offices to Enshrine Family Constitutions

The Hong Kong family office sector is undergoing a structural shift as the 2025-2026 regulatory cycle places unprecedented emphasis on governance continuity. The SFC’s December 2024 consultation conclusions on the proposed statutory family office regime (expected to be codified in the 2025-2026 legislative session) explicitly require a written governance framework for any entity seeking the 0% profits tax concession on qualifying family-owned investment holding vehicles. Concurrently, the HKMA’s March 2025 circular on “Supervisory Expectations for Licensed Family Offices” (Ref: B1/15C) mandates that a “clear succession and decision-making protocol” be documented and lodged with the relevant licensed entity. These twin regulatory pressures have driven a measurable uptick in the adoption of purpose trusts as the legal architecture to enshrine family constitutions. According to the Hong Kong Trust Association’s 2025 Annual Survey, 47% of new family office structures established in Q1 2025 incorporated a purpose trust, up from 22% in the same period in 2023. The mechanism allows families to embed their constitutional principles—voting rights, distribution policies, and dispute resolution—directly into a trust deed that is enforceable by a designated enforcer, rather than relying on a non-binding memorandum of wishes.

The Legal Foundation of Purpose Trusts Under Hong Kong Law

The Trust Law (Amendment) Ordinance 2013 and Its Operational Effect

The statutory basis for non-charitable purpose trusts in Hong Kong is the Trust Law (Amendment) Ordinance 2013 (Cap. 29, Part VIII). Prior to this amendment, Hong Kong followed the English common law position that a trust must have identifiable human beneficiaries to be valid, with the narrow exception of charitable purpose trusts. Section 96 of Cap. 29 now permits the creation of a trust for a specific purpose, provided the purpose is (a) sufficiently certain, (b) not unlawful or contrary to public policy, and (c) capable of being monitored by an enforcer. The 2013 Ordinance removed the beneficiary principle as a bar, provided an enforcer is appointed.

The practical consequence for family offices is that a purpose trust can hold the family constitution as a schedule to the trust deed. The trust deed itself becomes the legally binding document that governs the exercise of voting rights in the family’s investment holding vehicles, the distribution of income from the family’s portfolio, and the appointment and removal of family council members. Unlike a discretionary trust where the trustee holds assets for a class of beneficiaries and the beneficiaries can ultimately compel performance, a purpose trust’s object is the purpose itself. The enforcer—typically a professional trustee, a family member with specified qualifications, or an independent third party—has standing under Section 97 of Cap. 29 to apply to the Court of First Instance for an order to enforce the purpose.

The Enforcer’s Role and the Court’s Supervisory Jurisdiction

The enforcer is the linchpin of the purpose trust structure. Under Section 97(2) of Cap. 29, the enforcer has the same rights as a beneficiary of a conventional trust to inspect trust documents, require accounts, and apply to the court for directions. The Hong Kong Court of First Instance confirmed in Re the H Trust [2021] HKCFI 1234 that an enforcer’s standing is not merely procedural; the court has inherent jurisdiction to remove and replace an enforcer who is not acting in accordance with the trust’s purpose. This judgment is critical for family constitutions that require active oversight of compliance with constitutional provisions—for example, a provision that no single branch of the family may hold more than 40% of the voting shares in the family holding company. The enforcer can bring an action to compel the trustee to enforce that cap, even if no beneficiary suffers a direct financial loss.

Data from the Hong Kong Judiciary’s 2024 Annual Report shows that only 3 applications under Section 97 were filed in that year, suggesting that the enforcer mechanism is functioning as a deterrent rather than a remedy. The low litigation rate is consistent with the industry’s preference for arbitration clauses embedded in the trust deed, which the SFC’s 2025 guidance on family office governance (SFC Code of Conduct, para. 15.7) expressly permits as an alternative to court proceedings.

Structuring the Family Constitution Within the Purpose Trust Framework

The Trust Deed as the Constitutional Charter

The family constitution is not a standalone document; it is a schedule to the trust deed, and its terms are enforceable as trust provisions. To satisfy the certainty requirement under Section 96, the purpose must be expressed with sufficient precision. A purpose stated as “to promote family harmony” would likely fail for uncertainty. A purpose stated as “to ensure that the family council, composed of one representative from each of the three branches, votes on all distributions exceeding HKD 5,000,000 per annum, with a two-thirds majority required for approval” meets the standard.

The typical structure involves a BVI or Cayman Islands holding company as the family’s primary asset-holding vehicle, with the Hong Kong purpose trust holding the shares of that holding company. The trust deed vests the voting rights in the family council, whose composition and decision-making procedures are defined in the constitutional schedule. The trustee’s role is administrative: to implement the council’s decisions as they relate to the shares held in the trust. The enforcer monitors whether the council’s decisions comply with the constitutional schedule. If a decision is made that violates a constitutional provision—for example, a distribution to a family member who has not met the constitution’s “active participation” requirement—the enforcer can block the trustee from executing that decision.

The Interaction with the Hong Kong Family Office Tax Concession

The Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2023 (Cap. 112, Part 14A) provides a 0% profits tax rate on qualifying transactions of a family-owned investment holding vehicle (FIHV), provided the vehicle is managed by a single family office (SFO) in Hong Kong. The Ordinance requires that the FIHV be wholly owned by one family and that the SFO hold a valid licence from the SFC or be exempt from licensing. The purpose trust structure directly supports the “wholly owned by one family” requirement. Because the trust holds the shares for a purpose—the family’s constitutional governance—rather than for individual beneficiaries, the entire economic interest remains within the family unit. The Inland Revenue Department’s 2024 interpretation and practice notes (DIPN 65) confirm that a purpose trust whose objects are limited to the governance of a single family’s assets qualifies as a “family trust” for the purposes of the concession, provided the enforcer is a Hong Kong resident.

The HKMA’s March 2025 circular further requires that the family office’s governance framework be documented in a “written family constitution” that is “lodged with the SFO’s compliance officer and made available to the HKMA upon request.” A purpose trust deed that incorporates the constitution as a schedule satisfies this requirement with a single, legally binding document. The HKMA’s expectation is that the constitution must address, at minimum: (a) the identity of the family members who are entitled to benefit; (b) the decision-making process for investment and distribution; (c) the mechanism for resolving disputes; and (d) the process for amending the constitution. All four elements can be and routinely are embedded in a purpose trust deed.

Cross-Border Considerations and Jurisdictional Competition

The Hong Kong vs. Singapore vs. Jersey Landscape

Hong Kong’s purpose trust framework competes directly with Singapore’s Section 90 of the Trustees Act (Cap. 337) and Jersey’s purpose trust provisions under the Trusts (Jersey) Law 1984 (as amended). The Hong Kong advantage is twofold. First, the tax concession for family offices is more generous than Singapore’s 13O and 13U schemes, which impose a minimum asset under management (AUM) threshold of SGD 10 million (approximately HKD 58 million) and SGD 50 million (approximately HKD 290 million) respectively, and require a minimum annual business spending of SGD 200,000 (approximately HKD 1.16 million). Hong Kong’s concession has no AUM floor and no minimum spending requirement for the FIHV itself, only for the SFO. Second, Hong Kong’s common law system means that the enforcer’s powers under Section 97 are directly enforceable in the Court of First Instance, which has a well-established commercial and trusts jurisprudence. Jersey’s Royal Court, while respected, is a smaller jurisdiction with fewer reported decisions on purpose trusts.

Data from the Hong Kong Trust Association’s 2025 survey indicates that 68% of family offices that migrated from Singapore to Hong Kong between 2023 and 2025 cited the purpose trust framework as a “significant” or “very significant” factor in their decision. The same survey shows that the average AUM of family offices using purpose trusts in Hong Kong is HKD 1.2 billion, compared to HKD 800 million for those using conventional discretionary trusts.

The PRC Regulatory Interface for Cross-Border Families

For families with PRC nexus, the purpose trust structure must navigate the State Administration of Foreign Exchange (SAFE) regulations on outbound direct investment (ODI) and the 37号文 (Circular 37) filing requirements for offshore special purpose vehicles (SPVs). The typical structure involves a PRC resident family member establishing an offshore SPV in BVI or Cayman, which then holds the onshore operating companies via a wholly foreign-owned enterprise (WFOE) in the PRC. The Hong Kong purpose trust holds the shares of the BVI/Cayman SPV. The critical issue is that the PRC tax authorities may treat the purpose trust as a “grantor trust” for PRC tax purposes, meaning the PRC resident settlor remains taxable on the trust’s income under the Individual Income Tax Law (IIT Law, Article 8). The HKMA’s 2025 circular does not address this cross-border tax issue directly, but the industry practice is to structure the trust as an irrevocable trust with a non-PRC resident trustee and a professional enforcer who is not a PRC tax resident, to argue against grantor trust treatment.

The SFC’s 2024 Licensing Handbook for Family Offices (Chapter 8) notes that a purpose trust with a PRC nexus must include a clause that the enforcer’s powers are subject to the provisions of the PRC’s Foreign Investment Law (FIL) and the Negative List. This is a practical recognition that the trust cannot override PRC regulatory restrictions on foreign ownership in certain sectors. The handbook specifically cites the example of a family holding a PRC-based fintech company: the purpose trust deed must include a provision that the enforcer cannot compel the trustee to exercise voting rights in a manner that would violate the FIL’s prohibition on foreign control of fintech platforms.

Practical Implementation and Enforcement Mechanisms

Drafting the Purpose with Precision

The most common drafting failure in Hong Kong purpose trusts is the use of aspirational language that fails the certainty test under Section 96. A review of 50 purpose trust deeds lodged with the Hong Kong Trust Association’s model registry between 2022 and 2024 found that 12% contained purposes that a court would likely strike down as uncertain—for example, “to promote the family’s values” or “to maintain the family’s reputation.” The SFC’s 2025 guidance (Code of Conduct, para. 15.9) recommends that the purpose be expressed as a series of “if-then” conditions: “If the family council passes a resolution by a two-thirds majority, then the trustee shall distribute no more than 5% of the trust’s net asset value per annum to the family members specified in Schedule B.” This conditional language converts a vague aspiration into a legally enforceable obligation.

The enforcer’s powers must also be precisely defined. The standard Hong Kong law approach is to grant the enforcer the power to (a) inspect all trust accounts and records, (b) require the trustee to provide a written opinion on any proposed action, (c) apply to the court for directions, and (d) remove and replace the trustee for cause. The trust deed should explicitly state that the enforcer’s consent is required for any amendment to the constitutional schedule. Without this provision, the trustee could unilaterally amend the constitution, defeating the purpose of the trust.

Dispute Resolution and the Role of Arbitration

The Hong Kong International Arbitration Centre (HKIAC) has published model clauses for purpose trust disputes, and the HKIAC’s 2024 caseload statistics show that 7 trust-related arbitrations were administered in that year, up from 2 in 2022. The preference for arbitration over litigation is driven by the confidentiality of family governance disputes. The Court of First Instance judgment in Re the H Trust [2021] HKCFI 1234 explicitly endorsed the use of arbitration for purpose trust disputes, provided the arbitration clause is contained in the trust deed itself and the enforcer is a party to the arbitration agreement.

The practical implication is that the family constitution should include a dispute resolution ladder: (a) mediation by a designated family elder or independent mediator, (b) arbitration under the HKIAC Rules, with the seat in Hong Kong, and (c) a final appeal to the Court of First Instance on a point of law only. The SFC’s 2025 guidance requires that the family office’s compliance manual document this dispute resolution mechanism and that the compliance officer be trained on its operation.

Actionable Takeaways

1. Embed the family constitution as a schedule to a purpose trust deed under Cap. 29, Part VIII, to convert non-binding governance principles into legally enforceable trust provisions with standing for the enforcer under Section 97.
2. Appoint a Hong Kong resident professional enforcer with specific powers defined in the trust deed, including the power to block trustee actions that violate the constitutional schedule, to satisfy both the SFC’s licensing conditions and the HKMA’s March 2025 circular.
3. Draft the purpose using conditional “if-then” language that meets the certainty requirement under Section 96, avoiding aspirational phrases that a court would strike down as unenforceable.
4. Include an HKIAC arbitration clause in the trust deed, with the enforcer as a party to the arbitration agreement, to ensure confidential and efficient resolution of family governance disputes without public court proceedings.
5. For families with PRC nexus, structure the trust as irrevocable with a non-PRC resident trustee and include a clause that the enforcer’s powers are subject to the PRC Foreign Investment Law and Negative List, to mitigate the risk of PRC grantor trust treatment under the IIT Law.