Cross-Border Tax Advisor Essential: Impact Assessment of Global Minimum Tax on Trusts

The OECD’s global minimum tax framework, Pillar Two, is no longer a theoretical projection for multinational enterprises; it has crystallised into enforceable domestic legislation across key jurisdictions, directly impacting the structures that underpin many high-net-worth (HNW) trusts. As of 1 January 2025, the European Union’s Pillar Two implementation directive is fully effective, with the UK, Japan, South Korea, and Australia having already enacted their own versions of the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). For private trust structures—particularly those employing VISTA trusts in the BVI, STAR trusts in the Cayman Islands, or Hong Kong hold-name arrangements—the core question has shifted from whether the rules apply to how the effective tax rate (ETR) of constituent entities is calculated and reported. The Hong Kong Inland Revenue Department (IRD) has confirmed via its 2024 consultation paper that the territory will implement a domestic minimum top-up tax (DMTT) for in-scope groups with annual consolidated revenue exceeding EUR 750 million, effective for fiscal years beginning on or after 1 January 2025. This creates an immediate compliance obligation for any trust structure that holds operating companies or investment vehicles meeting this revenue threshold, regardless of the trust’s underlying purpose.

The Mechanics of Pillar Two and Trust Structures

The global minimum tax operates through two primary mechanisms: the IIR, which imposes a top-up tax on a parent entity when a constituent entity’s ETR falls below 15%, and the UTPR, which serves as a backstop by allocating top-up tax to other group entities. For a private trust, the critical issue is determining whether the trust itself, or a trustee acting in a fiduciary capacity, qualifies as a “constituent entity” of an MNE group.

Defining the “Group” in a Trust Context

Under the OECD’s GloBE Model Rules (2021), a group is defined by the ultimate parent entity (UPE) that holds a controlling interest in other entities. For a standard corporate structure, this is straightforward: a holding company in a low-tax jurisdiction controls its operating subsidiaries. For a trust, the analysis centres on the settlor’s retained powers and the trustee’s discretion.

The OECD’s Administrative Guidance (February 2023) clarified that a trust is treated as a “flow-through entity” for GloBE purposes unless it is subject to a tax liability in its own right. In Hong Kong, a typical hold-name trust—where the trustee holds legal title but the beneficiary has a vested interest—is generally tax-transparent under the Inland Revenue Ordinance (IRO) Cap. 112. This means the trust’s income is attributed to the settlor or beneficiary, not the trust itself. However, if the trust is a discretionary trust where the trustee has full investment discretion, the IRD may treat the trust as a separate taxpayer, particularly if it holds assets that generate Hong Kong-sourced profits. The Hong Kong IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 55 (2023) on the taxation of trusts explicitly states that the tax treatment depends on the “substance of the arrangement,” not merely the legal form.

The EUR 750 Million Revenue Threshold

The most immediate filter for any trust structure is the consolidated revenue test. If the trust holds, directly or indirectly, entities whose combined annual revenue exceeds EUR 750 million in at least two of the four preceding fiscal years, the entire group falls within scope. For a family office trust managing a portfolio of operating companies, this threshold is often met. Data from the Hong Kong Monetary Authority (HKMA)’s 2024 Family Office Survey indicated that 34% of single-family offices in Hong Kong manage assets exceeding USD 500 million, with a significant portion held through trust structures. The HKMA’s survey, published in March 2024, further noted that 22% of these family offices had direct or indirect ownership of operating businesses with global revenue above the EUR 750 million mark.

The Safe Harbour Provisions

The OECD has introduced transitional safe harbours to ease compliance. The most relevant for trust structures is the “Simplified Calculations Safe Harbour” (SCSH), which allows a group to avoid full GloBE calculations if its ETR in a jurisdiction exceeds a specified threshold—15% for the 2025-2026 period. However, this safe harbour requires the group to have a “qualified domestic minimum top-up tax” (QDMTT) in that jurisdiction. Hong Kong’s proposed DMTT, as outlined in the IRD’s December 2024 legislative proposal, will apply a 15% minimum tax on constituent entities of in-scope MNE groups. For a trust operating through a Hong Kong holding company, this means the Hong Kong entity itself must pay top-up tax if its ETR falls below 15%, eliminating the need for a foreign parent to apply the IIR. This effectively shifts the compliance burden from the offshore trustee to the onshore operating entity.

Impact on VISTA, STAR, and Hold-Name Trusts

Each trust type creates a distinct ownership and control structure, which directly affects how the GloBE rules apply. The BVI VISTA trust, the Cayman STAR trust, and the Hong Kong hold-name trust each present unique challenges.

BVI VISTA Trusts: Control Without Ownership

The Virgin Islands Special Trusts Act (VISTA), 2003, allows a settlor to retain control over the management of a company’s shares held in trust, with the trustee having no duty to intervene in the company’s affairs. For Pillar Two purposes, the critical question is whether the BVI trust itself is a “constituent entity” or a “flow-through entity.” The BVI’s Business Companies Act (BCA) 2004 treats a VISTA trust as a separate legal entity, but the BVI has not enacted a domestic minimum top-up tax. This means that if the VISTA trust holds a BVI company that, in turn, holds operating subsidiaries in low-tax jurisdictions, the entire structure may be subject to top-up tax under the IIR of the jurisdiction where the ultimate parent entity is located.

For example, a VISTA trust with a BVI holding company that owns a Hong Kong operating subsidiary and a Singapore trading company would see the Hong Kong subsidiary’s ETR calculated under Hong Kong’s DMTT. If the Hong Kong subsidiary’s ETR is 8.25% (the standard profits tax rate for the first HKD 2 million of profits, under the two-tiered regime), the top-up tax would be 6.75% (15% minus 8.25%). The Hong Kong IRD’s DMTT proposal explicitly includes “constituent entities” that are tax-resident in Hong Kong, which would cover the Hong Kong subsidiary. The BVI holding company, however, would not be subject to Hong Kong’s DMTT, as it is not tax-resident in Hong Kong. The top-up tax on the BVI entity would then fall to the jurisdiction of the UPE—if the settlor is a U.S. person, the U.S. would apply its own IIR under the Tax Cuts and Jobs Act (TCJA) Section 951A (GILTI), though the U.S. has not yet adopted Pillar Two.

Cayman STAR Trusts: The Exempted Company Issue

The Cayman Islands Special Trusts (Alternative Regime) Law (STAR), 1997, allows a trust to have non-charitable purposes, making it a popular vehicle for holding shares in Cayman exempted companies. The Cayman Islands enacted the International Tax Co-operation (Economic Substance) Act (ES Act) in 2018, requiring entities with certain income types to demonstrate economic substance. For Pillar Two, the Cayman government has confirmed via its 2024 Budget Statement that it will not implement a domestic minimum top-up tax in 2025. This creates a direct exposure: any Cayman exempted company held by a STAR trust that has an ETR below 15% will be subject to top-up tax under the IIR of the jurisdiction where the UPE is located.

A practical scenario: a STAR trust holds a Cayman exempted company that owns a PRC operating subsidiary through a Hong Kong intermediate holding company. The PRC subsidiary pays dividends to the Hong Kong company, which are exempt from Hong Kong profits tax under the unified tax system (IRO Cap. 112, Section 26). The Hong Kong company’s ETR on its other income may be low, triggering top-up tax. The Cayman company, having no economic substance under the ES Act, would have no tax liability in the Cayman Islands, so its ETR is effectively 0%. The top-up tax of 15% would then be imposed by the PRC under its own UTPR rules, which China has indicated it will implement from 2025 onwards, as per the State Administration of Taxation’s (SAT) public consultation in October 2024.

Hong Kong Hold-Name Trusts: The Nominee Risk

A hold-name trust in Hong Kong typically involves a nominee shareholder holding legal title to shares for the benefit of a beneficiary. The Hong Kong IRD’s DIPN No. 55 (2023) clarifies that the nominee is not the beneficial owner for tax purposes. For Pillar Two, this means the nominee’s tax residence is irrelevant; the beneficial owner’s jurisdiction determines the IIR application. If the beneficiary is a Hong Kong resident individual, the trust’s income is attributed to that individual. However, if the trust is a discretionary trust where the trustee has control over distributions, the IRD may treat the trust as a separate taxpayer, particularly if the trust holds a controlling interest in a Hong Kong company.

The risk here is that the IRD’s DMTT will apply to the Hong Kong company as a constituent entity, regardless of the trust’s legal structure. The company’s ETR is calculated on its own profits, not the trust’s. If the company is a pure investment holding company with no active business, its profits may consist solely of dividends and interest, which are exempt from Hong Kong profits tax under the unified tax system. This results in an ETR of 0%, triggering a top-up tax of 15% on the company’s profits. The Hong Kong IRD’s December 2024 legislative proposal explicitly includes “investment holding companies” within the definition of constituent entities, closing a potential loophole.

Compliance and Reporting Obligations for Trustees

Trustees now face a dual compliance burden: maintaining the trust’s fiduciary duties while ensuring the underlying entities meet GloBE reporting requirements. The OECD’s GloBE Information Return (GIR) requires a standardised filing for each jurisdiction where the MNE group operates.

The GIR Filing Requirement

The GIR must be filed by the UPE or a designated entity. For a trust structure, the UPE is typically the settlor if the trust is treated as a flow-through entity, or the trust itself if it is a separate taxpayer. The filing deadline is 15 months after the end of the reporting fiscal year, with a transitional extension to 18 months for the first year (2025-2026). For a Hong Kong trust, the IRD has indicated that the GIR will be filed electronically through the “e-Tax” platform, with the first returns due by 30 June 2027 for a 31 December 2025 year-end.

Data Aggregation Challenges

The most significant operational challenge is data aggregation. A trust structure may hold multiple entities across different jurisdictions, each with its own accounting standards, tax treatments, and reporting currencies. The trustee must compile a consolidated financial statement for the entire MNE group, which requires access to the financial data of all underlying entities. For a discretionary trust where the trustee has limited control over the underlying companies—as is the case with a VISTA trust—this may be impossible without the settlor’s cooperation.

The OECD’s Administrative Guidance (July 2024) introduced a “data availability safe harbour” for groups where the UPE does not have access to the financial data of all constituent entities. This safe harbour allows the group to use “reasonable estimates” for the ETR calculation, provided the estimates are based on publicly available financial statements. For a private trust, where financial statements are not publicly available, this safe harbour is effectively unavailable. The trustee must either obtain the data directly or face penalties for non-compliance.

Penalty Regimes

Hong Kong’s proposed DMTT includes penalties for non-compliance. The IRD’s legislative proposal (December 2024) specifies a penalty of HKD 50,000 for failure to file the GIR on time, plus an additional HKD 10,000 per day for continued non-compliance. For a trust structure with multiple constituent entities, these penalties can accumulate rapidly. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 571 of the Laws of Hong Kong) also requires licensed trustees to maintain proper records and ensure compliance with all applicable tax laws. Failure to do so could result in disciplinary action, including licence suspension.

Actionable Takeaways for Cross-Border Tax Advisors

1. Conduct a revenue threshold audit immediately: Review the consolidated annual revenue of all entities held within the trust structure for the fiscal years 2022-2025 to determine if the EUR 750 million threshold is met, using the OECD’s GloBE Model Rules (2021) as the basis for consolidation.

2. Map the trust’s tax residence profile: Determine whether the trust is treated as a flow-through entity or a separate taxpayer under the IRD’s DIPN No. 55 (2023) and the relevant legislation of the trust’s jurisdiction (VISTA Act, STAR Law, or Hong Kong IRO Cap. 112), as this determines the UPE for GloBE purposes.

3. Calculate the ETR of each constituent entity: For each entity in the trust structure, compute the ETR using the GloBE Model Rules’ formula—covering covered taxes divided by GloBE income—and identify any entities with an ETR below 15% that will trigger top-up tax under Hong Kong’s DMTT or a foreign IIR.

4. Assess the applicability of safe harbours: Evaluate whether the group qualifies for the Simplified Calculations Safe Harbour (SCSH) or the Transitional Country-by-Country Reporting (CbCR) Safe Harbour, as detailed in the OECD’s February 2023 Administrative Guidance, to reduce compliance costs.

5. Prepare for the first GIR filing by 30 June 2027: Ensure the trustee has a data collection protocol in place to aggregate financial information from all underlying entities, with a clear allocation of responsibility between the trustee, the settlor, and the family office, to meet the Hong Kong IRD’s electronic filing requirements.