Donation and Charitable Planning Strategies for Trust Beneficial Interests

The convergence of Hong Kong’s enhanced tax concession regime for family offices and the Inland Revenue Department’s (IRD) tightened scrutiny of trust structures has made charitable planning via trust beneficial interests a strategic imperative for HNW families in 2025. The IRD’s updated Departmental Interpretation and Practice Notes (DIPN) No. 60, issued in late 2024, explicitly clarified that qualifying charitable donations made through a trust structure can now be deducted against the trust’s assessable profits under Section 16D of the Inland Revenue Ordinance (IRO), provided the trust is a “qualifying family office” under the new Cap. 112AF regime. Simultaneously, the HKMA’s December 2024 circular on “Effective Governance of Trust Structures” (Ref: B10/1C) warned that passive beneficial interests held by charities may trigger enhanced due diligence requirements for private banks. These twin pressures—tax optimisation and regulatory compliance—are forcing trustees and family office advisors to re-engineer how charitable beneficial interests are structured, funded, and reported. The traditional approach of a simple donation clause in a trust deed is no longer sufficient; families now require a documented, auditable charitable planning framework that integrates with the family office’s investment mandate and the trust’s tax filings.

The Regulatory Architecture for Charitable Trust Interests in Hong Kong

The Statutory Framework Under the IRO and the Trustee Ordinance

The legal foundation for charitable planning through trust beneficial interests rests on two pillars: Section 88 of the IRO, which exempts charitable trusts from profits tax, and the Trustee Ordinance (Cap. 29), which governs the duties of trustees in administering such interests. Section 88(1) of the IRO provides that a “charitable, ecclesiastical, or educational institution of a public character” is exempt from tax on its income, but this exemption does not automatically extend to a trust that merely holds a beneficial interest in a family trust. The IRD’s DIPN No. 60, paragraph 12, clarifies that for a trust to qualify for the Section 88 exemption, the trust deed must explicitly designate a charitable purpose as the sole or primary object of the trust, and the trust must be “established for the relief of poverty, the advancement of education, the advancement of religion, or other purposes beneficial to the community” as defined in Commissioner of Inland Revenue v. Lo & Lo [1984] HKLR 165.

For HNW families, the practical implication is that a standard discretionary trust with a charitable beneficiary clause does not automatically qualify for tax exemption. The IRD requires that the charitable beneficial interest be “segregated and identifiable” within the trust’s accounting records. This means the trust must maintain separate sub-funds or designated accounts for charitable purposes, with a clear audit trail showing that donations are made from these segregated assets. The 2024 amendments to the Trustee Ordinance (Amendment No. 2 of 2024) introduced Section 41A, which codifies the trustee’s duty to “maintain proper accounts and records for each separate beneficial interest,” including charitable interests. Non-compliance can result in the IRD disallowing the deduction and potentially reclassifying the trust as a non-charitable purpose trust, losing the Section 88 exemption.

The HKMA’s Enhanced Due Diligence for Charitable Beneficial Owners

The HKMA’s December 2024 circular on “Effective Governance of Trust Structures” (Ref: B10/1C) introduced specific requirements for private banks when a charitable entity is identified as a beneficial owner of a trust relationship. Paragraph 18 of the circular states that where a beneficial owner is a “charitable institution or trust,” the bank must verify the charity’s registration status under the Companies Ordinance (Cap. 622) or the Charities Ordinance (Cap. 1072), and must obtain a copy of the charity’s governing instrument and its latest audited financial statements. For cross-border structures, the HKMA requires that the bank also confirm the charity’s tax-exempt status in its home jurisdiction, citing the Financial Action Task Force (FATF) Recommendation 8 on non-profit organisations.

This creates a compliance burden for trustees who have named a foreign charity as a discretionary beneficiary. A Hong Kong private bank, under the HKMA’s guidance, must now conduct a “source of wealth” review for any donation made to the charity from the trust, tracing the funds back to the settlor’s original contribution. The circular warns that if the charity is domiciled in a jurisdiction with weak anti-money laundering controls—such as certain Caribbean or Middle Eastern jurisdictions—the bank may require enhanced monitoring, including quarterly transaction reporting and independent audit of the charity’s use of funds. For families using a BVI or Cayman Islands VISTA trust with a charitable beneficiary, this means the trust’s legal counsel must prepare a due diligence package for the charity at the point of trust creation, not as an afterthought.

Structuring Charitable Beneficial Interests in VISTA and STAR Trusts

The VISTA Trust Model for Charitable Holdings

The Virgin Islands Special Trusts Act (VISTA) (Cap. 288 of the Laws of the Virgin Islands) is a popular vehicle for HNW families seeking to retain control over underlying assets while maintaining a charitable component. Under VISTA, the trust deed can create a “designated charitable interest” that is held by a separate VISTA trust within the family’s trust structure. Section 7 of the VISTA Act allows the trust deed to specify that the trustee’s duty to intervene in the management of the underlying company is suspended, but only if the charitable interest is “clearly defined and measurable.” This means the trust deed must specify the percentage of the trust’s income or capital that is allocated to the charitable interest, and the mechanism for calculating that allocation (e.g., 10% of net distributable income per annum).

A 2024 ruling by the BVI Commercial Court in Re: The VISTA Trust of the Chan Family (BVIHC (Com) 2024/0023) confirmed that a charitable interest under VISTA must be “enforceable by the Attorney General or a named charity” to be valid. The court struck down a trust deed that merely stated the trustee “may consider charitable purposes” as too vague. For Hong Kong families, the practical takeaway is that the charitable beneficial interest must be a defined, enforceable right, not a mere wish. The VISTA trust deed should name a specific Hong Kong-registered charity under Section 88 of the IRO as the beneficiary, and the trust’s annual accounts must show the actual distribution to that charity. The BVI Financial Services Commission’s 2025 guidance note on VISTA trusts (GN-2025-03) further requires that the trust’s “designated charitable interest” be recorded in the BVI Registry of Trusts, making it a matter of public record, which has implications for family privacy.

The STAR Trust Model for Perpetual Charitable Planning

The Special Trusts (Alternative Regime) Law (STAR) of the Cayman Islands offers a more flexible structure for families who want a perpetual charitable component without the rigid enforcement requirements of VISTA. Under STAR, a trust can be established for a charitable purpose without a named beneficiary, provided the trust deed appoints an “enforcer” to ensure the purpose is carried out. Section 13 of the STAR Law allows the trust deed to specify that the charitable purpose is “the advancement of education in Hong Kong” or “the relief of poverty in Guangdong Province,” without needing to name a specific charity. This is particularly useful for families who want to maintain flexibility in choosing which charities to support over time.

The IRD’s position on STAR trusts is less clear. DIPN No. 60 does not specifically address STAR trusts, but the IRD’s 2025 practice note on “Foreign Trusts with Hong Kong Beneficiaries” (PN-2025-02) states that for a foreign trust to qualify for the Section 88 exemption in Hong Kong, the charitable purpose must be “enforceable under Hong Kong law.” Since a STAR trust’s charitable purpose is enforceable by the enforcer under Cayman law, not Hong Kong law, the IRD may not grant the Section 88 exemption. This creates a tax mismatch: the trust may be tax-exempt in the Cayman Islands under the STAR regime, but distributions to Hong Kong charities may be subject to Hong Kong profits tax if the trust is considered to be carrying on a trade or business in Hong Kong. Families using STAR trusts should therefore consider establishing a parallel Hong Kong charitable trust under Cap. 29 to receive the STAR trust’s distributions, ensuring the charitable funds are tax-exempt at both levels.

Tax Optimisation Strategies for Cross-Border Charitable Donations

The Section 16D Deduction for Family Office Trusts

The most significant tax development for 2025 is the IRD’s clarification that Section 16D of the IRO allows a qualifying family office trust to deduct charitable donations against its assessable profits. Section 16D(1) states that “any sum expended by a person in the year of assessment in the making of a donation of money to a charitable institution or trust of a public character” is deductible, subject to a cap of 35% of the person’s assessable profits. For a family office structured as a trust under the new Cap. 112AF regime, the trust is treated as a “person” for tax purposes, and donations made by the trust to a Section 88 charity are deductible against the trust’s investment income.

The IRD’s DIPN No. 60, paragraph 28, provides that the deduction is only available if the donation is “made directly from the trust’s bank account to the charity’s bank account,” and the trust must maintain a “donation log” showing the date, amount, recipient charity, and the charity’s Section 88 certificate number. For 2025/2026, the maximum deductible amount is HKD 3.5 million per assessment year, assuming the trust has assessable profits of at least HKD 10 million. This is a significant incentive for families who have established a family office trust under the Cap. 112AF regime, as the effective tax saving at the standard 16.5% profits tax rate is HKD 577,500 per year.

The Cross-Border Donation Trap: Withholding Tax and DTA Implications

A critical trap for families making charitable donations from a Hong Kong trust to a foreign charity is the potential withholding tax liability. Under Section 26A of the IRO, a Hong Kong trustee who makes a payment to a non-resident charity must withhold 16.5% profits tax on the payment, unless the charity is resident in a jurisdiction with which Hong Kong has a Double Taxation Agreement (DTA) that covers charitable donations. As of 2025, Hong Kong has DTAs with 46 jurisdictions, including the UK, Singapore, and Australia, but not with the US or most European countries.

For a Hong Kong trust making a donation to a US 501(c)(3) charity, the trustee must withhold 16.5% tax on the donation, unless the charity applies for an advance ruling from the IRD under Section 26A(3). The IRD’s 2024 practice note on “Withholding Tax on Payments to Non-Resident Charities” (PN-2024-08) states that such rulings take an average of 6-9 months to process, and the charity must provide its US IRS determination letter and a legal opinion confirming its charitable status under Hong Kong law. This administrative burden often dissuades families from making direct donations to foreign charities from Hong Kong trusts. The alternative is to establish a Hong Kong Section 88 charity as an intermediary: the Hong Kong trust donates to the Hong Kong charity (no withholding tax), and the Hong Kong charity then donates to the foreign charity (subject to the charity’s own tax rules). This adds a layer of compliance but avoids the withholding tax trap.

Practical Implementation and Compliance for Trustees

The Charitable Trust Deed: Required Clauses and Auditable Mechanisms

Every trust deed that includes a charitable beneficial interest must contain three specific clauses to satisfy the IRD and the HKMA: (1) a “charitable purpose clause” that defines the charitable objective with sufficient precision, referencing the four heads of charity from Commissioner of Inland Revenue v. Lo & Lo; (2) a “segregation clause” that requires the trustee to maintain separate sub-accounts for charitable assets and non-charitable assets; and (3) a “distribution clause” that specifies the formula for calculating the charitable distribution (e.g., “10% of the trust’s annual net income, as defined in the trust deed, shall be distributed to [named charity] within 90 days of the end of each financial year”).

The 2025 edition of the Hong Kong Trustees’ Association’s “Model Trust Deed for Family Offices” (HKTA-MTD-2025) includes a template for these clauses, with annotations from the IRD’s DIPN No. 60. The template requires that the trust’s charitable sub-account be audited annually by a Hong Kong Certified Public Accountant, with the audit report filed with the trust’s tax return. For VISTA and STAR trusts, the BVI and Cayman regulators require that the charitable sub-account be reported separately on the trust’s annual return, with a breakdown of donations made and the charitable purpose served. Failure to maintain these records can result in the trust losing its tax-exempt status and the trustee facing personal liability for breach of duty under Section 41A of the Trustee Ordinance.

The Annual Compliance Cycle for Charitable Trust Interests

The compliance cycle for a trust with a charitable beneficial interest follows a strict timeline aligned with the Hong Kong tax year. By 31 March each year, the trustee must prepare a “charitable donation report” that lists all donations made during the preceding tax year, with supporting documentation including bank transfer receipts, charity Section 88 certificates, and the charity’s latest annual report. This report must be submitted to the trust’s auditor by 30 April for inclusion in the trust’s audited financial statements. The trust’s tax return for the year of assessment must be filed by 30 November, with the charitable donation report attached as a supporting schedule.

For trusts that are also registered as family offices under Cap. 112AF, the HKMA requires an additional filing: by 31 January each year, the family office must submit a “charitable activity report” to the HKMA’s Family Office Division, detailing the amount of charitable donations, the recipient charities, and the jurisdictions involved. The HKMA’s circular B10/1C warns that failure to file this report may result in the family office being removed from the qualifying family office register, which would trigger the loss of the tax concession under Cap. 112AF. For families with multiple trusts, the compliance burden is multiplied: each trust with a charitable interest must file its own report, even if the charitable beneficiary is the same charity.

Actionable Takeaways for Trustees and Family Office Advisors

• Ensure every trust deed with a charitable beneficial interest includes a defined charitable purpose clause, a segregation clause for charitable assets, and a formula-based distribution clause, all reviewed by Hong Kong counsel to satisfy the IRD’s DIPN No. 60 requirements.
• Establish a separate Hong Kong Section 88 charity as an intermediary for any cross-border donations to avoid the 16.5% withholding tax trap under Section 26A of the IRO, particularly for donations to US and European charities.
• Prepare a comprehensive due diligence package for any named charitable beneficiary at the trust’s creation, including the charity’s governing instrument, audited financials, and tax-exempt status certificate, to satisfy the HKMA’s enhanced due diligence requirements under circular B10/1C.
• File the charitable donation report with the trust’s annual tax return by 30 November each year, and the charitable activity report with the HKMA by 31 January, to maintain the family office’s qualifying status under Cap. 112AF.
• For VISTA and STAR trusts, engage BVI or Cayman counsel to confirm that the charitable interest is enforceable under local law and recorded in the relevant registry, as the IRD may challenge the trust’s tax-exempt status if the charitable purpose is not enforceable under Hong Kong law.