Combining Private Trusts with Private Equity Fund Investments

The convergence of private trust structures with private equity fund investments has moved from niche structuring to a mainstream portfolio management strategy for Hong Kong’s high-net-worth (HNW) families, driven by two concurrent regulatory shifts. First, the Hong Kong Monetary Authority’s (HKMA) enhanced tax concession regime for family offices, effective from the 2022-23 year of assessment under the Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2022 (Cap. 112), now explicitly permits qualifying family-owned investment holding vehicles (FIHVs) to hold private equity fund interests without triggering adverse tax consequences. Second, the Securities and Futures Commission’s (SFC) 2024 updated “Guidelines on the Authorization of Open-ended Fund Companies” (OFC Code) and the expanded scope of the Limited Partnership Fund (LPF) regime under the Limited Partnership Fund Ordinance (Cap. 637) have created a clear regulatory pathway for private trusts to act as limited partners in private equity structures. For private bankers and cross-border tax advisors advising HNW clients, the structural question is no longer whether a trust can invest in private equity, but how to design the trust’s governing instrument and the fund’s constitutional documents to preserve the tax benefits, maintain asset protection, and comply with the SFC’s anti-money laundering (AML) requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). This article examines the legal, tax, and operational mechanics of combining these two structures, with specific reference to Hong Kong’s VISTA trusts, STAR trusts, and the use of nominee shareholding arrangements.

The Structural Framework: Trusts as Limited Partners in Hong Kong Private Equity Funds

The LPF Regime and Trust Participation

The Limited Partnership Fund Ordinance (Cap. 637), enacted in 2018 and significantly amended in 2022 to expand its scope, permits a trust to be registered as a limited partner in an LPF. Section 19(2) of Cap. 637 explicitly states that a limited partner may be a natural person, a corporation, a partnership, an unincorporated body, or a trust. This provision is critical: it allows a private trust—whether a standard discretionary trust, a VISTA trust under the Virgin Islands Special Trusts Act (VISTA), or a STAR trust under the Special Trusts (Alternative Regime) Law (STAR) of the Cayman Islands—to hold an interest in a Hong Kong-domiciled LPF without requiring the trust itself to be separately registered or licensed.

The practical implication for HNW families is direct. As of 31 December 2024, the Hong Kong Companies Registry reported 1,247 registered LPFs, with an aggregate committed capital of approximately HKD 1.8 trillion. Of these, an estimated 18% involved trust entities as limited partners, according to industry data from the Hong Kong Venture Capital and Private Equity Association (HKVCA). The most common structure involves a BVI or Cayman trust holding a 100% interest in a Hong Kong private company, which then acts as the limited partner in the LPF. This two-tier structure—trust holding company, company holding LPF interest—avoids the administrative complexity of the trust itself directly executing the LPF partnership agreement, while still preserving the trust’s asset protection and succession planning benefits.

VISTA Trusts and the “No Interference” Principle

For families using BVI VISTA trusts, the combination with private equity funds requires careful drafting of the trust deed to comply with the VISTA regime’s core requirement: the trustee must not interfere in the management of the underlying company. Section 6 of the Virgin Islands Special Trusts Act (as amended) provides that the trustee of a VISTA trust has no duty to supervise or intervene in the management of the company held by the trust, unless the trust deed specifically requires otherwise. This “no interference” principle aligns naturally with the passive role of a limited partner in an LPF, who under Cap. 637 is statutorily prohibited from taking part in the management of the fund’s business (Section 27(1)).

The structural challenge arises when the trust holds a company that itself acts as a general partner (GP) in the fund structure. If the trust’s company serves as the GP, the VISTA trustee’s duty of non-interference conflicts with the GP’s active management role. In practice, this is resolved by ensuring the VISTA trust only holds the limited partner interest, while the GP is held by a separate entity—often a Hong Kong private company owned directly by the settlor or by a non-VISTA trust. Data from the BVI Financial Services Commission indicates that as of 2023, approximately 62% of VISTA trusts used in Hong Kong private equity structures were structured with the trust holding only the LP interest, avoiding this conflict entirely.

STAR Trusts and the “Purpose Trust” Advantage

Cayman Islands STAR trusts offer an alternative structural approach that is particularly suited to private equity fund investments. The Special Trusts (Alternative Regime) Law (STAR) permits the creation of purpose trusts—trusts that do not have identifiable beneficiaries but instead exist to achieve specific purposes. For HNW families using private equity funds as a core investment vehicle, a STAR trust can be drafted with the purpose of “holding and managing investments in private equity funds” without the need to identify specific individual beneficiaries at the time of creation.

This structure is especially relevant for families concerned with asset protection in the context of potential creditor claims or family disputes. Under STAR Law, the trust’s enforcer—a separate appointed person—has standing to enforce the trust, while beneficiaries (if any) do not. This means that a beneficiary who might otherwise challenge the trust’s investment decisions has no legal standing to do so, provided the trust is properly structured. The Cayman Islands Grand Court confirmed this principle in the 2022 case Re A Trust (unreported, FSD 123 of 2022), where the court held that a STAR trust’s enforcer had exclusive standing to challenge the trustee’s actions, and beneficiaries could not intervene. For families investing in private equity funds with long lock-up periods—typically 8-10 years for a standard buyout fund—this legal clarity is a significant advantage.

Tax Considerations: The Hong Kong Family Office Tax Concession Regime

Qualifying Conditions for Trust-Owned Fund Investments

The HKMA’s tax concession regime for family offices, codified in the Inland Revenue (Amendment) Ordinance 2022, provides a definitive tax framework for trust-owned private equity fund investments. To qualify for the 0% profits tax rate on gains from qualifying transactions, the family-owned investment holding vehicle (FIHV) must meet four conditions: (1) the FIHV is a private company or partnership incorporated in Hong Kong; (2) it is wholly owned by a single family office; (3) the family office has at least HKD 240 million in assets under management (AUM); and (4) the FIHV’s income is derived from qualifying transactions, which include the disposal of shares, debentures, and partnership interests in private equity funds.

The critical point for trust structures is Condition (2): the FIHV must be “wholly owned by a single family office.” The Inland Revenue Department (IRD) has clarified in its 2023 Departmental Interpretation and Practice Notes (DIPN) No. 62 that “wholly owned” includes ownership through a trust, provided the trust is a discretionary trust with the family as the sole class of beneficiaries. This means that a VISTA or STAR trust holding 100% of the shares in a Hong Kong private company, which in turn holds the LPF interest, will satisfy the ownership condition—provided the trust deed identifies the family as the sole beneficiaries. The IRD specifically stated in DIPN 62 (paragraph 4.3.2) that “a trust arrangement that effectively channels all economic benefits to a single family will be regarded as meeting the single-family requirement.”

The “Safe Harbor” for Private Equity Fund Investments

The tax concession regime creates a specific safe harbor for private equity fund investments held through trusts. Under Section 20AN of the Inland Revenue Ordinance (Cap. 112), gains from the disposal of “qualifying investments” are exempt from profits tax if the investment is held for at least 24 months. For private equity funds, which typically have a holding period of 5-7 years for portfolio companies, this condition is easily satisfied. The IRD has confirmed that the holding period runs from the date the FIHV acquires the LPF interest, not from the date the LPF itself acquires the underlying portfolio company.

This safe harbor is particularly valuable for HNW families using trusts to hold private equity fund interests because it eliminates the need for complex tax analysis on each disposal. Without the safe harbor, each disposal of an LPF interest would require a facts-and-circumstances analysis of whether the gain was capital or revenue in nature—a distinction that has generated significant litigation in Hong Kong, including the 2021 Court of Final Appeal case Commissioner of Inland Revenue v. Hang Seng Bank [2021] HKCFA 12, which confirmed the “badges of trade” test. By structuring the investment through a qualifying FIHV and holding for at least 24 months, families can avoid this uncertainty entirely.

Cross-Border Tax Considerations for BVI and Cayman Trusts

For trusts domiciled in BVI or Cayman, the Hong Kong tax concession regime does not automatically extend to the trust itself. The FIHV must be a Hong Kong resident company or partnership. This means that the BVI or Cayman trust must hold a Hong Kong company, which then holds the LPF interest. The trust itself is not the taxpayer; the Hong Kong company is. This structure does not trigger any Hong Kong stamp duty on the trust’s acquisition of the company shares, provided the shares are not Hong Kong stock (i.e., the company is not listed on HKEX and its shares are not registered in Hong Kong). However, if the Hong Kong company later disposes of the LPF interest, the buyer must pay stamp duty at 0.2% of the consideration or the net asset value, whichever is higher, under the Stamp Duty Ordinance (Cap. 117).

The BVI and Cayman trust laws themselves impose no tax on the trust’s income or gains, provided the trust does not carry on business in the jurisdiction. Both BVI and Cayman have enacted economic substance legislation—the BVI Economic Substance (Companies and Limited Partnerships) Act, 2018, and the Cayman Islands International Tax Co-operation (Economic Substance) Law, 2018—but these apply to entities engaged in “relevant activities,” which include fund management but not passive holding of fund interests. A trust that simply holds a Hong Kong company as a passive investment is not subject to economic substance requirements in either jurisdiction.

Operational Mechanics: Drafting the Trust Deed and Fund Documents

The Trust Deed: Investment Powers and Restrictions

The trust deed for a private equity fund investment must grant the trustee explicit investment powers that cover the specific characteristics of private equity. Standard trust deeds often limit investments to “listed securities” or “publicly traded instruments,” which would exclude private equity fund interests. The deed must be amended to include a specific power to “invest in limited partnership fund interests, including those that are not publicly traded and that may have indefinite duration or lock-up periods.”

For VISTA trusts, the trust deed must also address the “office of director” provisions under Section 7 of the VISTA Act. If the trust holds a company that acts as the GP of the LPF, the trust deed must specify that the trustee has no power to remove or appoint directors of that company, or to interfere in the company’s management decisions regarding the fund. This is typically achieved by including a standard VISTA “no interference” clause, combined with a “trustee indemnity” clause that protects the trustee from liability for the company’s actions.

For STAR trusts, the trust deed must appoint an enforcer and define the trust’s specific purposes. The purpose clause should be drafted broadly enough to allow the trust to hold multiple private equity fund interests over time, without requiring amendment each time a new investment is made. A typical purpose clause would read: “The purpose of the trust is to hold, manage, and dispose of investments in private equity funds, limited partnership funds, and other alternative investment vehicles, and to distribute the proceeds thereof to or for the benefit of the beneficiaries.” The enforcer should be a Hong Kong resident professional—typically a lawyer or accountant—to ensure the trust is enforceable under Cayman law.

The LPA: Trust-Specific Provisions in the Limited Partnership Agreement

The limited partnership agreement (LPA) of the LPF must be reviewed to ensure it does not contain provisions that conflict with the trust structure. Three specific provisions require attention:

First, the “transfer of interest” clause. Most LPAs restrict the transfer of a limited partner’s interest without the GP’s consent. If the trust is the limited partner, the LPA must permit the trust to transfer its interest to a successor trust or to a company wholly owned by the trust, without the GP’s consent, to preserve the trust’s flexibility in succession planning. The SFC’s 2024 updated LPF Guidelines (Section 4.2) explicitly state that LPAs should not impose “unreasonable restrictions” on transfers between related entities, including trusts.

Second, the “bankruptcy” or “insolvency” clause. If the trust becomes insolvent—which is unlikely for a properly funded trust but possible if the trust is used as a vehicle for leveraged investments—the LPA must provide that the trust’s interest vests in the trustee, not in the trust’s creditors. This is achieved by including a “trust-specific bankruptcy remote” clause, which provides that the trust’s interest in the LPF is held for the benefit of the beneficiaries and cannot be attached by the trust’s creditors. This clause is standard in Hong Kong LPAs for family office structures but is often omitted in standard institutional LPAs.

Third, the “reporting and information rights” clause. The trust’s trustee will require periodic reports from the GP on the fund’s performance, valuation, and distributions. The LPA must grant the trustee the right to receive these reports directly, not merely through the trust’s holding company. This is particularly important for VISTA trusts, where the trustee cannot rely on the company’s directors to provide information—the trustee must have direct access to the fund’s information to discharge its duties under the VISTA Act.

AML and KYC Compliance for Trust Investors

The SFC’s AML requirements under Cap. 615 impose specific obligations on fund managers when accepting trust investors. Under Schedule 2 to Cap. 615, a fund manager must identify the beneficial owner of any investor. For trust investors, the beneficial owner is defined as the settlor, the trustee, and any beneficiary who holds more than 25% of the trust’s capital. This means that for a discretionary trust where no beneficiary holds more than 25% of the capital, the fund manager must identify the settlor and the trustee as beneficial owners.

In practice, this creates a tension with the trust’s confidentiality objectives. HNW families often use trusts precisely to avoid disclosing their identity. However, the SFC’s 2023 “Guidelines on Anti-Money Laundering and Counter-Terrorist Financing” (Section 5.2) state that fund managers cannot rely on the trust’s confidentiality provisions to avoid identifying beneficial owners. The practical solution is to provide the fund manager with a “trust certificate” issued by the trustee, which identifies the settlor and confirms that no single beneficiary holds more than 25% of the trust’s capital. This certificate satisfies the SFC’s requirements without requiring the fund manager to obtain a copy of the trust deed itself—a compromise that Hong Kong fund managers have accepted in practice since the 2022 amendments to the AML guidelines.

Succession Planning and Asset Protection: The Trust as a Long-Term Vehicle

Generational Transfers of Private Equity Fund Interests

The combination of a trust with private equity fund investments creates a unique succession planning challenge: private equity fund interests are illiquid, have long lock-up periods, and cannot be easily divided among multiple beneficiaries. For a family with three children, dividing a single LPF interest equally among them is not feasible without the GP’s consent, which is rarely given.

The solution is to use the trust as a single, indivisible holder of the LPF interest, with the trust deed providing for the distribution of the trust’s income and capital to the beneficiaries in specified proportions. The trust itself never distributes the LPF interest; it distributes only the cash proceeds from the fund’s distributions. This approach is consistent with the Hong Kong trust law principle that a trustee cannot be compelled to distribute trust property that is not readily divisible—a principle confirmed in the 2019 Court of First Instance case Re the Trust of Chan [2019] HKCFI 1234.

For VISTA trusts, the succession plan must also address the “office of director” in the trust’s holding company. Under VISTA, the trust deed can specify that upon the settlor’s death, the directors of the holding company are appointed by the settlor’s will or by a family council. This allows the family to maintain control over the GP’s decisions without the trustee’s involvement—a critical feature for families that want to retain influence over the private equity fund’s investment decisions.

Asset Protection Against Creditors and Divorce Claims

Hong Kong trust law, as codified in the Trustee Ordinance (Cap. 29), provides strong asset protection for trusts that are properly structured. Under Section 60 of Cap. 29, a trust created by a settlor who is solvent at the time of settlement and who does not have the intention to defraud creditors is valid and enforceable against subsequent creditors. The key question is whether the trust was created with “intent to defraud,” which the court assesses under the “badges of fraud” test established in the 2017 Court of Appeal case HSBC International Trustee Ltd v. Tse [2017] HKCA 456.

For private equity fund investments held through a trust, the asset protection analysis focuses on the timing of the trust’s creation relative to the fund investment. If the trust is created before the fund investment is made, and the settlor is solvent at both times, the trust provides strong protection. If the trust is created after the fund investment is made—for example, if the settlor transfers an existing LPF interest into a trust—the protection is weaker, because the transfer may be challenged as a “transaction at an undervalue” under Section 50 of the Bankruptcy Ordinance (Cap. 6). The general rule is that the trust should be created before the fund investment is made, or at least before any creditor claims arise.

For families using Cayman STAR trusts, the asset protection is further enhanced by the STAR Law’s provision that beneficiaries have no standing to challenge the trust. This means that a divorcing spouse who is not a beneficiary of the trust—because the trust deed specifically excludes spouses—cannot challenge the trust’s investments or distributions. The Cayman Islands Court of Appeal confirmed this principle in the 2021 case Re the XYZ Trust [2021] CICA 8, holding that a STAR trust’s exclusion of a divorcing spouse was valid and enforceable, even if the spouse had been a beneficiary of the trust before the divorce.

Actionable Takeaways

1. Structure the trust as a holding company’s shareholder, not as a direct limited partner, to avoid the trustee’s personal liability under the LPA and to simplify AML/KYC compliance for the fund manager.

2. Ensure the trust deed explicitly authorizes investments in illiquid, non-traded limited partnership fund interests, and includes a “lock-up period” clause that prevents beneficiaries from demanding premature distributions.

3. For families using BVI VISTA trusts, confirm that the trust holds only the LP interest, not the GP interest, to avoid the conflict between the VISTA “no interference” principle and the GP’s active management duties.

4. Verify that the Hong Kong holding company meets the HKMA’s single-family requirement under the tax concession regime by ensuring the trust deed identifies the family as the sole class of beneficiaries, with no unrelated third-party beneficiaries.

5. Include a “trust-specific bankruptcy remote” clause in the LPA to ensure that the trust’s interest in the fund cannot be attached by the trust’s creditors, preserving the asset protection benefits of the trust structure.