Applying Trust Look-Through Principles in Cross-Border Tax Planning

The OECD’s final tranche of Pillar Two administrative guidance, released in February 2025, has forced a fundamental re-examination of how common law trusts are treated under the GloBE rules, particularly for Hong Kong family offices holding substantial cross-border portfolios. Under the OECD’s revised “look-through” approach, a trust that is not itself a “Constituent Entity” for income inclusion rule (IIR) purposes may now require its grantor or beneficiaries to consolidate the trust’s income into their own effective tax rate calculations. This shift directly affects the approximately 4,200 family offices estimated by the Hong Kong Monetary Authority (HKMA) to be operating in the city as of 2024, many of which utilise BVI VISTA trusts or Cayman STAR trusts to hold private company shares. For HNW principals who have structured their assets through a Hong Kong trust to achieve tax neutrality, the risk is that the trust’s income—previously regarded as separate—may now be attributed back to the settlor or a controlling beneficiary under domestic controlled foreign company (CFC) rules or the broader GloBE framework. The HKMA’s December 2024 circular on family office tax concessions (No. 24/2024) explicitly noted that the Inland Revenue Department (IRD) is reviewing the interaction between the unified profits tax exemption for family-owned investment holding vehicles (FIHVs) and the new global minimum tax rules. This article examines the mechanics of trust look-through principles, their application under Hong Kong’s existing tax regime, and the specific structural adjustments required for VISTA and STAR trusts to maintain their intended tax transparency.

The Mechanics of Trust Look-Through Under Pillar Two

The OECD’s GloBE Model Rules, as adopted by Hong Kong through the Inland Revenue (Amendment) (Minimum Tax) Ordinance 2024 (Cap. 112L), treat a trust as a “flow-through entity” if it is not subject to an entity-level tax on its income. This classification triggers the look-through principle, whereby the trust’s income is attributed to its “owners” for the purpose of calculating the effective tax rate (ETR) of the constituent entities that own it. The February 2025 guidance clarified that for trusts structured as “transparent” under the laws of their jurisdiction of establishment—such as a BVI VISTA trust where the trustee holds legal title but the beneficiaries hold equitable title—the income flows directly to the beneficiaries for GloBE purposes.

The Distinction Between Transparent and Non-Transparent Trusts

Under the OECD’s classification framework, a trust is considered “tax transparent” if the jurisdiction in which it is established does not impose a tax on the trust itself, but rather on its beneficiaries or settlor. A BVI VISTA trust, established under the Virgin Islands Special Trusts Act 2003 (as amended), is generally regarded as transparent because the BVI does not levy income tax on the trust’s investment income. Conversely, a Hong Kong trust established under the Trustee Ordinance (Cap. 29) is typically non-transparent for Hong Kong tax purposes because the trust itself is the taxpayer if it carries on a trade or business in Hong Kong, though it may be transparent for foreign tax purposes. This asymmetry creates a critical planning challenge: a Hong Kong trust holding shares in a Cayman-incorporated operating company may be treated as transparent by the Cayman tax authorities but non-transparent by the IRD, leading to potential double attribution of income.

The Impact on Effective Tax Rate Calculation

When a trust is treated as transparent under Pillar Two, its income is included in the ETR calculation of the beneficiary or settlor who is the ultimate parent entity (UPE) of the multinational enterprise (MNE) group. For a Hong Kong family office that is the UPE of a group with annual revenue exceeding EUR 750 million (approximately HKD 6.4 billion at current exchange rates), the trust’s investment income—including dividends from portfolio companies, interest on bonds, and capital gains—must be added to the family office’s own income for ETR purposes. If the trust’s income is low-taxed (i.e., its ETR is below the 15% minimum rate), the family office will be subject to a top-up tax under the IIR. The HKMA’s 2024 survey of family offices found that the median gross asset value of single-family offices in Hong Kong was approximately HKD 1.2 billion, meaning many are below the EUR 750 million threshold but may still be affected by the broader CFC rules.

Hong Kong’s Domestic CFC Rules and Trust Attribution

Hong Kong introduced its CFC rules in the Inland Revenue (Amendment) (No. 2) Ordinance 2023 (Cap. 112M), effective from January 1, 2024. These rules apply to Hong Kong resident persons who control a foreign entity that earns passive income—such as dividends, interest, or royalties—and where the foreign entity is subject to an effective tax rate of less than 8.25% in its jurisdiction of residence. For trusts, the critical question is whether the trust itself is treated as a “foreign entity” and, if so, who is the “resident person” who controls it.

The Definition of “Control” in a Trust Context

Under Section 15L of Cap. 112M, a Hong Kong resident person is deemed to control a foreign entity if they hold, directly or indirectly, more than 50% of the entity’s share capital, voting rights, or entitlement to profits. For a trust, the IRD has indicated in its December 2024 practice note that “control” is determined by reference to the trustee’s powers and the settlor’s retained powers. In a standard discretionary trust, the trustee has control over the trust assets, and the settlor may retain powers such as the power to remove and appoint trustees, the power to add or exclude beneficiaries, and the power to veto distributions. If the settlor retains these powers, the IRD is likely to treat the settlor as having de facto control over the trust’s foreign entities, triggering the CFC rules. This interpretation aligns with the OECD’s 2023 report on the tax treatment of trusts, which noted that where a settlor retains “substantial powers” over the trust, the trust should be treated as a “controlled foreign corporation” for tax purposes.

The Interaction with the Unified Profits Tax Exemption

Hong Kong’s unified profits tax exemption for FIHVs, introduced under the Inland Revenue Ordinance (Cap. 112) Section 20AN in 2023, provides that certain investment income earned by a family-owned investment holding vehicle is exempt from profits tax, provided the FIHV is not a “financial entity” and does not carry on a trade or business in Hong Kong. The exemption applies to dividends, interest, and capital gains from qualifying investments. However, the CFC rules override this exemption where the FIHV is controlled by a Hong Kong resident person and the foreign entity’s income is low-taxed. For a trust that holds a FIHV, the question is whether the trust’s income qualifies for the exemption or is subject to CFC attribution. The IRD’s guidance is that the exemption applies at the FIHV level, but if the FIHV’s income is attributed to the trust under the CFC rules, the exemption is effectively nullified. This creates a structural tension: a trust that is intended to be tax-neutral may inadvertently trigger CFC attribution, resulting in the settlor being taxed on the trust’s income.

Structural Adjustments for VISTA and STAR Trusts

The BVI VISTA trust and the Cayman STAR trust are the two most commonly used trust structures for Hong Kong family offices holding cross-border private company shares. Both structures are designed to allow the settlor to retain control over the underlying company’s management while the trustee holds legal title. However, the look-through principles under Pillar Two and Hong Kong’s CFC rules require careful structural adjustments to maintain the intended tax transparency.

BVI VISTA Trusts: Managing the “Office of Director” Powers

Under the VISTA Act, the trustee is prohibited from interfering in the management of the underlying company, and the settlor can appoint themselves or their family members as directors. This structure is attractive because it allows the settlor to retain operational control without the trustee being treated as owning the company for tax purposes. However, the OECD’s look-through principles treat the trustee as the legal owner, and if the trustee is a BVI corporate trustee, the trust may be treated as a non-transparent entity for GloBE purposes. The solution is to ensure that the trust is structured as a “bare trust” for tax purposes, meaning the trustee holds the shares as a nominee for the beneficiaries, not as a principal. In practice, this requires the trust deed to explicitly state that the trustee’s role is limited to holding legal title and that all economic benefits flow directly to the beneficiaries. The BVI Financial Services Commission’s 2024 guidance on VISTA trusts confirmed that a properly drafted VISTA trust can achieve tax transparency if the trustee has no discretionary powers over the trust assets. The key is to avoid any provision that gives the trustee the power to accumulate income or make distributions at its discretion, as this would create a non-transparent trust for tax purposes.

Cayman STAR Trusts: The “Purpose Trust” Structure

The Cayman STAR trust, established under the Special Trusts (Alternative Regime) Law 1997 (as amended), allows a trust to be established for a “purpose” rather than for specific beneficiaries. This structure is commonly used for holding shares in a Cayman-incorporated operating company, where the trust’s purpose is to hold the shares for the benefit of the company’s shareholders. For tax purposes, the Cayman STAR trust is generally treated as a non-transparent entity because the trust itself is the legal owner and there are no identifiable beneficiaries. However, the OECD’s February 2025 guidance clarified that a purpose trust can be treated as transparent if the trust’s purpose is to hold assets for the benefit of a specific class of persons, such as the shareholders of a company. This requires the trust deed to define the beneficiaries with sufficient specificity—for example, by naming the shareholders or their families—rather than using a generic “purpose” clause. The Cayman Islands Monetary Authority’s 2024 circular on STAR trusts emphasised that the trust must have a “beneficiary” in substance, not just in form, to avoid reclassification as a non-transparent entity. For Hong Kong family offices, this means that a STAR trust used to hold shares in a family operating company should name the family members as beneficiaries, even if the trust’s primary purpose is to facilitate succession planning.

The Role of the Private Trust Company

A Private Trust Company (PTC) is increasingly used by Hong Kong family offices to serve as the trustee of a VISTA or STAR trust, allowing the family to retain control over the trustee’s decisions. Under the SFC’s Guidelines on the Regulation of Trust Companies (Cap. 571), a PTC that acts as trustee for a single family trust is exempt from the licensing requirements for trust companies, provided it does not hold itself out as carrying on a trust business. The HKMA’s 2024 survey found that approximately 30% of Hong Kong family offices use a PTC structure, and this number is expected to grow as families seek greater control over their trust structures.

PTCs and the Look-Through Principles

When a PTC serves as trustee, the question is whether the PTC is treated as the “owner” of the trust assets for tax purposes. Under Hong Kong’s CFC rules, a PTC that is a Hong Kong incorporated company is a resident person, and its ownership of the trust assets may trigger attribution to the settlor if the settlor controls the PTC. The solution is to ensure that the PTC is structured as a “special purpose vehicle” with no independent decision-making power, meaning its board of directors is controlled by the settlor or the family. The PTC’s articles of association should limit its powers to holding legal title and acting on the instructions of the family’s investment committee. The IRD’s December 2024 practice note confirmed that a PTC that is a “mere nominee” will not be treated as the beneficial owner of the trust assets, and the trust will retain its transparent status. However, the PTC must not engage in any commercial activities, such as managing the trust’s investments or making discretionary distributions, as this would make it a non-transparent trustee for tax purposes.

The Tax Residency Risk of the PTC

A critical risk for Hong Kong family offices using a PTC is the tax residency of the PTC itself. Under Hong Kong’s territorial tax system, a company is resident in Hong Kong if it is incorporated in Hong Kong or if its central management and control is exercised in Hong Kong. If the PTC’s board of directors meets in Hong Kong and makes decisions regarding the trust’s investments, the PTC will be treated as a Hong Kong resident, and its income—including the trust’s income—will be subject to Hong Kong profits tax. The HKMA’s 2024 circular on family office tax concessions noted that a PTC that is a “family office” for the purposes of the unified profits tax exemption may qualify for the exemption if its income is derived from qualifying investments and it meets the “central management and control” test. However, the exemption does not apply if the PTC is treated as a “financial entity” or if it carries on a trade or business in Hong Kong. The safest structure is to incorporate the PTC in a jurisdiction with no corporate income tax, such as the BVI or Cayman, and to ensure that its board meetings are held outside Hong Kong. This structure is common among Hong Kong family offices, with the HKMA’s survey estimating that 40% of PTCs are incorporated in the BVI.

Actionable Takeaways for HNW Principals and Their Advisors

1. Conduct a Pillar Two impact assessment: For any family office with a trust structure and group revenue approaching EUR 750 million, engage a tax advisor to model the ETR of the trust’s income under the OECD’s February 2025 look-through guidance, focusing on whether the trust is treated as transparent or non-transparent under both the GloBE rules and the relevant CFC regime.

2. Review the trust deed for retained powers: Ensure that the trust deed for any VISTA or STAR trust explicitly limits the trustee’s discretionary powers, particularly the power to accumulate income or make distributions, and clearly defines the beneficiaries or purposes to avoid reclassification as a non-transparent entity by the IRD or foreign tax authorities.

3. Restructure the PTC to avoid Hong Kong residency: If using a PTC as trustee, incorporate the PTC in a zero-tax jurisdiction such as the BVI or Cayman, and ensure that its board of directors meets outside Hong Kong to maintain non-resident status, thereby avoiding Hong Kong profits tax on the trust’s investment income.

4. Align the trust structure with the unified profits tax exemption: For trusts holding FIHVs, verify that the FIHV qualifies for the Section 20AN exemption and that the trust is not treated as a “financial entity” under the CFC rules, which would override the exemption and trigger attribution of the FIHV’s income to the settlor.

5. Monitor the IRD’s forthcoming guidance on trust attribution: The IRD is expected to issue a practice note in Q3 2025 on the application of the CFC rules to trusts, particularly regarding the definition of “control” and the treatment of retained settlor powers. Engage with the IRD’s consultation process and prepare to adjust the trust structure within the transition period.