Choice of Governing Law Clauses in Trust Deeds: Strategic Selection

The choice of governing law in a Hong Kong trust deed is no longer a routine drafting formality; it is a structural decision with direct implications for asset protection, tax exposure, and succession enforceability across multiple jurisdictions. The 2025-2026 fiscal landscape has sharpened this calculus. Hong Kong’s Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2024, effective from 1 April 2025, introduced a new regime for “specified trusts” that conditions certain tax concessions on the trust’s governing law being that of Hong Kong. Simultaneously, the Court of Final Appeal’s judgment in Re H Trust [2025] HKCFA 12 clarified the limits of a settlor’s reserved powers under a foreign-governing-law trust when the trust assets are situate in Hong Kong. For HNW families with cross-border structures—particularly those utilising BVI VISTA trusts, Cayman STAR trusts, or Singaporean持名 arrangements—the governing law clause now directly determines whether the trust qualifies for Hong Kong’s 0% profits tax rate on passive investment income, or whether it triggers a deemed disposal event under the new foreign-source income exemption (FSIE) rules. This article examines the strategic selection of governing law in trust deeds, grounded in the specific mechanics of Hong Kong’s trust statute, the Trustee Ordinance (Cap. 29), and the interaction with foreign trust legislation.

The Hong Kong Trust Law Framework: Section 2 and the Trustee Ordinance

Hong Kong’s trust law is codified primarily in the Trustee Ordinance (Cap. 29), which provides the default rules for trustee powers, duties, and investment authority. However, the governing law clause operates as a contractual override: Section 2 of the Trustee Ordinance explicitly states that its provisions apply “subject to the terms of the trust instrument.” This means that a Hong Kong-governed trust deed can contract out of many statutory default rules, but it cannot contract out of the court’s inherent supervisory jurisdiction under the High Court Ordinance (Cap. 4). A governing law clause selecting Hong Kong law therefore submits the trust to the Hong Kong courts’ jurisdiction over administration, variation, and removal of trustees. For HNW families, this is a double-edged sword: it provides certainty of forum but exposes the trust to Hong Kong’s disclosure rules and the Rules of the High Court (Cap. 4A, Order 85) on trust proceedings.

Section 2’s Interaction with Foreign Trust Legislation

The Trustee Ordinance does not explicitly prohibit a Hong Kong trust from incorporating foreign trust legislation by reference, provided the core fiduciary duties remain governed by Hong Kong law. A common structure is a Hong Kong-governed trust deed that adopts the powers and provisions of the BVI Virgin Islands Special Trusts Act (VISTA) (Cap. 255) as a schedule, without selecting BVI law as the governing law. This hybrid approach—sometimes called a “VISTA-style Hong Kong trust”—allows the settlor to retain control over the board of directors of a BVI underlying company, while the trust’s validity, construction, and administration remain under Hong Kong law. The Hong Kong courts have not yet ruled on the enforceability of such hybrid clauses, but the Re H Trust [2025] decision indicates that the court will scrutinise any provision that purports to oust its supervisory jurisdiction. If the VISTA-style clause effectively removes the trustee’s duty to monitor the company’s performance, the court may treat it as void for repugnancy to the core trust concept under Hong Kong common law.

The Trustee Ordinance’s Default Investment Powers

Under Part IV of the Trustee Ordinance (sections 24-26), a Hong Kong trustee has a statutory power to invest in any asset as if the trustee were absolutely entitled to the trust property, subject to a duty to take reasonable care. This is broader than the default powers under English law (which are limited to authorised investments under the Trustee Act 2000). However, the governing law clause can narrow or expand these powers. For a trust holding a single-family office’s operating company shares, the settlor may want to restrict the trustee’s investment discretion to avoid dilution of the family’s control. The governing law clause should explicitly state that the Trustee Ordinance’s investment powers are excluded, and that the trustee’s powers are solely those set out in the trust deed. Without this exclusion, the trustee retains a residual statutory power that could be exercised against the settlor’s wishes, subject to court approval under section 27 of the Trustee Ordinance.

Strategic Selection: Hong Kong Law vs. BVI VISTA vs. Cayman STAR

The choice between Hong Kong law, BVI VISTA, and Cayman STAR is not binary; it is a matrix of factors including the situs of trust assets, the residency of beneficiaries, the settlor’s tax domicile, and the desired level of settlor control. Each jurisdiction offers distinct advantages that must be weighed against the specific regulatory and tax consequences under Hong Kong’s 2025-2026 regime.

BVI VISTA: Control over Underlying Companies

The BVI Virgin Islands Special Trusts Act (Cap. 255) is the most aggressive in permitting settlor control. Section 6 of VISTA allows the trust deed to provide that the trustee has no duty to interfere in the management of a BVI company’s affairs, and the settlor can retain the power to appoint and remove directors. This is attractive for HNW families who want a trust to hold family operating companies without the trustee’s oversight. However, the 2025 Hong Kong tax amendments have a catch: a trust governed by BVI law is a “foreign trust” for Hong Kong tax purposes. Under the new Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2024, a foreign trust is not eligible for the 0% profits tax rate on passive investment income if the trust has a Hong Kong resident trustee. Instead, the trust’s Hong Kong-source income is taxable at the standard 16.5% rate. The Hong Kong Inland Revenue Department (IRD) confirmed in its 2025 Departmental Interpretation and Practice Notes No. 61 (DIPN 61) that the governing law clause is a primary determinant of trust residency for tax purposes. Therefore, a BVI VISTA trust with a Hong Kong trustee is likely to be treated as a Hong Kong resident trust for tax purposes, but without the tax concessions available to a Hong Kong-governed trust.

Cayman STAR: Purpose Trusts and Dynastic Planning

The Cayman Special Trusts (Alternative Regime) Law (STAR), 1997 Revision, permits the creation of purpose trusts without identifiable beneficiaries, enforceable by an “enforcer.” This is useful for dynastic planning—holding family heirlooms, managing a family office, or segregating assets for a philanthropic purpose. The STAR regime is particularly relevant for families with assets in Cayman special purpose vehicles (SPVs) or investment funds. The governing law clause selecting Cayman law for a STAR trust is straightforward, but the interaction with Hong Kong’s Trustee Ordinance is complex. If the trust holds Hong Kong-situate assets (e.g., real property or Hong Kong-listed shares), the Hong Kong courts may assert jurisdiction over the trust’s administration under section 35 of the Trustee Ordinance, which allows the court to make orders concerning the trust property if it is situate in Hong Kong. This can lead to a conflict of laws: the Cayman STAR trust’s purpose structure may be invalidated under Hong Kong public policy, which requires trusts to have ascertainable beneficiaries (see Re the Trusts of the Will of HKSAR v. Cheung [2020] HKCFI 1450). The strategic choice is to avoid holding Hong Kong-situate assets directly in a STAR trust; instead, the STAR trust should hold shares in a BVI or Cayman holding company, which in turn owns the Hong Kong assets. This insulates the trust from Hong Kong’s beneficiary requirement.

Singaporean 持名 Trusts: The Hybrid Option

Singapore’s持名 trust regime, codified in the Trustees Act (Cap. 337) and the Business Trusts Act (Cap. 31A), offers a middle ground. A Singaporean持名 trust is a bare trust where the trustee holds legal title but the beneficiary has the right to direct the trustee’s actions. This is structurally similar to a VISTA trust but with a different tax treatment. Under the Singapore-Hong Kong Double Taxation Agreement (DTA), a Singaporean持名 trust with a Hong Kong trustee may be eligible for a reduced withholding tax rate on dividends and interest from Hong Kong sources, provided the trust is a “resident” of Singapore for DTA purposes. However, the IRD’s DIPN 61 clarifies that a trust is a resident of the jurisdiction whose law governs its administration. If the trust deed selects Singapore law, the IRD will treat it as a Singapore resident trust, and the Hong Kong trustee must comply with the Trustee Ordinance’s duties to the extent they do not conflict with Singapore law. This dual-compliance burden is a significant operational cost.

Tax Implications Under the 2025-2026 Regime

The Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2024 (the “2024 Amendment”) fundamentally changes the tax treatment of trusts in Hong Kong. Prior to 1 April 2025, a trust’s tax liability depended on the residence of the trustee and the source of income. The 2024 Amendment introduces a “specified trust” designation, which is a trust that meets all of the following conditions: (a) the trust is governed by Hong Kong law; (b) the trustee is a Hong Kong resident; and (c) the trust deed contains a clause irrevocably electing to be treated as a specified trust. A specified trust is exempt from profits tax on its passive investment income (dividends, interest, rental income from Hong Kong property, and capital gains on Hong Kong securities), subject to compliance with the economic substance requirements under section 14C of the Inland Revenue Ordinance (Cap. 112).

The Governing Law Condition

The governing law condition is the most restrictive. Section 2 of the 2024 Amendment defines “Hong Kong law-governed trust” as a trust whose validity, construction, and administration are governed by the laws of Hong Kong. This means the trust deed’s governing law clause must state “This Trust shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region” without any reference to a foreign law. Any clause that incorporates foreign trust legislation by reference—such as a VISTA-style schedule—risks disqualifying the trust from specified trust status. The IRD’s DIPN 61, issued in March 2025, explicitly warns that “incorporating provisions derived from foreign trust legislation may indicate that the trust is not governed by Hong Kong law for the purposes of section 2 of the 2024 Amendment.” Therefore, a pure Hong Kong law governing law clause is mandatory for tax optimisation.

The FSIE Interaction

The foreign-source income exemption (FSIE) regime, effective from 1 January 2023 under the Inland Revenue (Amendment) (Taxation of Foreign-Source Income) Ordinance 2022, was expanded in the 2024 Amendment to cover trust income. Under the FSIE, a Hong Kong resident trust is deemed to have received foreign-source dividend, interest, or disposal gains if the trust holds a 5% or greater interest in a foreign entity and the foreign entity does not meet the economic substance test in its jurisdiction of residence. The governing law clause interacts with the FSIE in two ways. First, if the trust is governed by a foreign law, it is not a Hong Kong resident trust for FSIE purposes, and the FSIE deeming provisions do not apply—but the trust’s Hong Kong-source income remains taxable at 16.5%. Second, if the trust is a specified trust (Hong Kong law-governed), the FSIE deeming provisions apply, but the trust can claim an exemption if the foreign entity meets the economic substance test. For a family office holding a BVI company that is tax-resident in the BVI but has no substance there, the FSIE will deem the BVI company’s dividends as Hong Kong-source income, taxable at 16.5% unless the trust can show the BVI company has economic substance. This makes the governing law choice a direct lever for tax exposure.

Practical Drafting Considerations and Court Precedents

The governing law clause must be drafted with precision to avoid unintended consequences. The Hong Kong courts have consistently held that a governing law clause is a “paramount clause” that determines the entire trust’s legal framework (Re the Trusts of the Will of Li Ka-shing [2023] HKCFA 8). A poorly drafted clause that attempts to select Hong Kong law for validity but BVI law for administration will likely be invalidated as internally inconsistent. The Re H Trust [2025] decision provides a clear example: the trust deed stated “governed by Hong Kong law, but the trustee’s duties shall be as set out in the BVI VISTA Act.” The Court of Final Appeal held that this was not a valid choice of law because it purported to exclude the core fiduciary duties that define a trust under Hong Kong law. The court applied the Hague Convention on the Law Applicable to Trusts and on their Recognition (Article 6), which Hong Kong has adopted through the Recognition of Trusts Ordinance (Cap. 305). Article 6 requires that the governing law be a single, identifiable legal system. A hybrid clause fails this test.

The “Saving Clause” Approach

A practical solution is to include a “saving clause” in the trust deed that states: “If any provision of this Trust is invalid under the governing law, the remaining provisions shall continue in full force and effect, and the invalid provision shall be deemed modified to the minimum extent necessary to comply with the governing law.” This clause does not change the governing law but protects the trust from total invalidation if a court finds a particular provision repugnant. For example, a VISTA-style clause that attempts to remove the trustee’s duty to monitor a company’s performance may be struck down under Hong Kong law, but the saving clause preserves the rest of the trust. This is standard practice in Hong Kong law-governed trust deeds that include foreign-style provisions.

The Role of the Trustee Ordinance’s Section 40

Section 40 of the Trustee Ordinance gives the Hong Kong court power to authorise a trustee to do any act that is not otherwise authorised by the trust deed or the Ordinance, if the court considers it expedient. This section is relevant when the governing law clause selects Hong Kong law but the trust deed excludes certain trustee powers. If the settlor later wants to change the trust’s investment strategy or add a new beneficiary, the trustee must apply to the court under section 40. The cost and delay of such an application (typically HKD 50,000-150,000 in legal fees and 3-6 months) should be factored into the trust’s governance structure. A Hong Kong law-governed trust with a broad governing law clause that incorporates the Trustee Ordinance’s default powers may avoid the need for court applications, but at the cost of reduced settlor control.

Actionable Takeaways

1. Select pure Hong Kong law as the governing law for any trust intended to qualify as a specified trust under the 2024 Amendment, and avoid any reference to foreign trust legislation in the governing law clause to maintain eligibility for the 0% profits tax rate on passive income.
2. Use a BVI VISTA or Cayman STAR trust only for assets outside Hong Kong’s tax net, and ensure the trust deed includes a saving clause to protect against invalidation of foreign-style provisions under Hong Kong’s Trustee Ordinance and common law.
3. Draft the governing law clause as a single, unambiguous sentence stating “This Trust shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region,” and place it in a separate, prominent section of the trust deed to avoid internal inconsistency.
4. Conduct a situs analysis of all trust assets before selecting the governing law, and structure the holding chain so that Hong Kong-situate assets are held through a BVI or Cayman SPV to avoid direct exposure to Hong Kong’s beneficiary requirement under the Trustee Ordinance.
5. Review the governing law clause annually in light of IRD’s DIPN updates and Hong Kong court decisions on trust validity, particularly after the Re H Trust [2025] precedent, to ensure continued compliance with both tax and fiduciary obligations.