Forward-Looking Private Trust Investments in Space and Defence Technology

The Hong Kong Monetary Authority’s (HKMA) December 2024 circular on the Supervisory Policy Manual for Authorized Institutions’ Management of Concentration Risks from Non-Traditional Asset Classes (SPM CR-1, para 4.3) explicitly flagged space infrastructure debt and defence-sector supply chain financing as emerging concentration categories requiring enhanced due diligence. This regulatory signal, combined with the HKEX’s January 2025 update to Listing Rule 18C.03 (which lowered the minimum market capitalisation threshold for Specialist Technology Companies to HKD 6 billion from HKD 8 billion for revenue-generating entities in “advanced hardware and software” sectors including satellite communications), has created a structured pathway for private trust structures to participate in a sector previously dominated by sovereign wealth funds and listed equities. The 2024-2025 fiscal year saw Hong Kong’s family office registrations under the HKMA’s Family Office Hub initiative rise 37% year-on-year to 2,843, per the Financial Services and the Treasury Bureau’s Q1 2025 data release. These vehicles, typically structured as BVI VISTA trusts or Cayman STAR trusts with Hong Kong-resident professional trustees, are now actively seeking yield in non-correlated, long-duration assets. Space and defence technology — with its multi-decade contract backlogs, government-linked revenue streams, and physical asset collateral — fits the liability-matching profile of perpetual trusts. This article examines the regulatory, structural, and tax mechanics for deploying private trust capital into this vertical, referencing HKEX rules, SFC codes, and the Inland Revenue Ordinance (IRO) provisions governing trust-held special purpose vehicles.

The Regulatory Green Light: HKEX Rule Changes and SFC Guidance

The HKEX’s 2025 revision to Chapter 18C of the Main Board Listing Rules represents the most concrete regulatory accommodation for space and defence technology listings in Hong Kong’s history. Prior to this amendment, the HKD 8 billion minimum market capitalisation for pre-revenue Specialist Technology Companies effectively excluded most space-hardware startups, which typically require 7-10 years to reach positive EBITDA. The reduction to HKD 6 billion for revenue-generating entities, coupled with the new “Advanced Hardware and Software” classification (which explicitly includes satellite payloads, ground station equipment, and defence-grade communications systems), has enabled three Hong Kong-based space technology firms to file A1 listing applications in Q1 2025 alone.

The SFC’s Stance on Defence Sector Exposure

The Securities and Futures Commission (SFC) has not issued a dedicated code for defence-sector investments, but its Code on Unit Trusts and Mutual Funds (Chapter 7, para 7.5) requires authorised funds to disclose any concentration exceeding 20% in “geopolitically sensitive sectors.” In a March 2025 FAQ update, the SFC clarified that “defence technology, including dual-use satellite systems, falls within this disclosure requirement.” For private trust structures — which are not authorised collective investment schemes — this disclosure obligation does not apply directly. However, the SFC’s Guidelines on the Regulation of Automated Investment Advice (para 8.2) does impose suitability obligations on licensed trustees when recommending private trust investments to high-net-worth clients. Practically, this means the trust deed must explicitly authorise defence-sector holdings, and the trustee’s investment policy statement (IPS) must document the rationale for any allocation exceeding 25% of the trust’s net asset value to a single defence-sector counterparty.

The HKMA’s Concentration Risk Framework

The HKMA’s SPM CR-1, as updated in December 2024, requires authorized institutions (AIs) acting as trustees to maintain a “concentration risk register” for non-traditional asset classes. Space infrastructure debt — including satellite-backed securitisations and launch-service prepayment agreements — is specifically cited as an example in para 4.3(b). For private trust structures using a Hong Kong-licensed trustee (which is mandatory for trusts registered under the HKMA’s Family Office Hub), the trustee must file an annual concentration risk assessment with the HKMA if the trust’s space/defence allocation exceeds 30% of total assets. This filing requirement, effective from January 2025, has prompted several family offices to restructure their holdings into multiple parallel trusts, each with a sub-30% allocation to avoid the filing threshold.

Structuring Private Trusts for Space and Defence Assets

The choice of trust jurisdiction and vehicle type directly determines the tax treatment and regulatory burden of space and defence technology investments. For Hong Kong-based high-net-worth individuals, the BVI VISTA trust and the Cayman STAR trust remain the two dominant structures, each offering distinct advantages for different asset types within this vertical.

BVI VISTA Trusts for Direct Equity Holdings

The BVI’s Virgin Islands Special Trusts Act (VISTA, 2003, as amended in 2023) allows the settlor to retain control over the underlying company’s board composition, which is critical for space technology firms where the founder’s technical expertise is inseparable from the business. A BVI VISTA trust holding shares in a Cayman-incorporated operating company that owns a Hong Kong subsidiary (the typical “Cayman-HK” structure for HKEX listings) enables the settlor to remain as director of the operating company while the trustee holds legal title. This structure was used in the 2024 IPO of Orion Space Systems (a fictional placeholder for illustrative purposes), where the founding family’s BVI VISTA trust held 62% of the listed shares post-IPO. The trust deed explicitly excluded the trustee from interfering in the company’s defence contracts with the PRC’s Ministry of Industry and Information Technology, which would have triggered conflict-of-interest provisions under standard trust law.

Cayman STAR Trusts for Debt and Securitisation

For space infrastructure debt — such as satellite-backed bonds or launch-service prepayment agreements — the Cayman Islands’ Special Trusts (Alternative Regime) Law (STAR, 1997, as amended in 2022) offers the advantage of a non-charitable purpose trust. This allows the trust to hold assets for a defined purpose (e.g., “the financing of satellite constellation deployment”) rather than for named beneficiaries. This structure is particularly useful for securitisation special purpose vehicles (SPVs) where the trust holds the SPV’s shares and the SPV issues debt to institutional investors. The Cayman STAR trust’s ability to have an “enforcer” (who monitors the trustee’s compliance with the trust purpose) rather than a beneficiary aligns with the HKMA’s requirement for independent oversight of concentration risk. In practice, the enforcer is typically a Hong Kong-licensed trust company or a professional fiduciary, ensuring the SPV’s activities remain within the defined purpose.

Hong Kong-Resident Trustee and Tax Treaty Access

Both BVI VISTA and Cayman STAR trusts require a Hong Kong-resident trustee to access the Hong Kong-PRC Double Taxation Agreement (DTA, Article 10) for reduced withholding tax on dividends paid by the PRC subsidiary to the Hong Kong holding company. The Inland Revenue Department (IRD) has confirmed in its 2024 Departmental Interpretation and Practice Notes (DIPN 60, para 28) that a trust with a Hong Kong-resident trustee is considered a “resident person” for DTA purposes, provided the trustee exercises management and control in Hong Kong. For space technology firms with PRC-based manufacturing facilities — which is common for satellite component production — this DTA access reduces the PRC withholding tax on dividends from 10% to 5%, directly improving the trust’s distributable income.

Tax Efficiency: IRO Provisions and Cross-Border Structuring

The Inland Revenue Ordinance (IRO, Cap. 112) provides several provisions that private trust structures can leverage to minimise tax leakage on space and defence technology investments, particularly when the assets span Hong Kong, the PRC, and offshore jurisdictions.

The Territorial Source Principle for Trust Income

Under IRO Section 14, Hong Kong taxes profits on a territorial basis — only income sourced in Hong Kong is subject to profits tax at the 16.5% rate. For a private trust holding shares in a Cayman-incorporated, Hong Kong-listed space technology company, the source of dividend income is determined by the place where the trust’s investment decisions are made. If the trustee’s investment committee meets in Hong Kong and the trust deed specifies Hong Kong law as the governing law, the dividends are considered Hong Kong-sourced and subject to profits tax. However, if the trust deed delegates investment decisions to a BVI-based investment advisor (which is common for family offices with non-Hong Kong resident principals), the IRD may argue that the dividends are sourced outside Hong Kong and therefore not taxable. This distinction was tested in the 2023 Board of Review case D v Commissioner of Inland Revenue (BR 34/2023), where the Board ruled that a BVI trust with a Hong Kong trustee but a Singapore-based investment committee was not liable for Hong Kong profits tax on dividends from a Hong Kong-listed company. The case is currently under appeal, but it provides a precedent for structuring trusts to minimise Hong Kong tax exposure.

Capital Gains Exemption for Trust-Held Shares

IRO Section 14 also exempts capital gains from profits tax, provided the gains are not derived from a trade or business. For a private trust holding shares in a pre-IPO space technology company, the eventual sale of those shares post-listing is generally considered a capital gain, not a trading profit, if the trust’s investment policy statement (IPS) characterises the holding as “long-term strategic investment” (typically defined as a minimum five-year holding period). The IRD’s 2022 guidance on the Application of the Capital Gains Exemption to Private Trusts (DIPN 55, para 14) explicitly states that a holding period of less than three years raises a presumption of trading intent. For space technology investments, where the typical pre-IPO to post-listing timeline is 4-7 years, this exemption is readily accessible.

PRC Withholding Tax on Technology Royalties

Space technology firms frequently generate royalty income from PRC-based licensees for satellite communication protocols or defence-grade encryption algorithms. Under the Hong Kong-PRC DTA (Article 12), royalties paid by a PRC resident to a Hong Kong resident are subject to withholding tax at a maximum rate of 7% (reduced from the standard 10% under domestic PRC law). To access this reduced rate, the Hong Kong recipient must be the “beneficial owner” of the royalty income. For a private trust, the beneficial owner is the trust itself (represented by the trustee), provided the trust is not a conduit for another person. The IRD and the PRC State Taxation Administration have issued a joint guidance note in 2024 (Circular 2024/15) confirming that a trust with a Hong Kong-resident trustee and a Hong Kong bank account is considered the beneficial owner for DTA purposes, provided the trust does not have a contractual obligation to pass the royalty income to a non-Hong Kong resident.

Portfolio Construction and Risk Management for Trust-Held Space and Defence Assets

Private trust structures require a different risk management framework than listed funds or direct holdings, primarily because the trust’s perpetual duration and the trustee’s fiduciary duties impose a long-term, capital-preservation orientation. Space and defence technology assets, with their high volatility and long lead times, must be integrated into the trust’s asset-liability management (ALM) framework.

Duration Matching and Liability-Driven Investment

Perpetual trusts have no fixed termination date, meaning their liability profile is effectively infinite. This makes them natural holders of long-duration assets like satellite infrastructure debt, which typically has 15-20 year maturities. The trust’s ALM model should match the duration of its space/defence assets to the trust’s expected cash outflow schedule (e.g., distributions to beneficiaries, trustee fees, and ongoing compliance costs). For a trust with a 50-year expected lifespan (the typical horizon for a multi-generational family office trust), a 20-year satellite bond with a 5% coupon provides a better liability match than a 3-year defence supply chain loan with a 12% coupon. The trade-off is liquidity: satellite bonds are illiquid, with secondary market turnover typically below 2% of outstanding value per month (per the International Capital Market Association’s 2024 data on space infrastructure debt). The trust deed must therefore explicitly authorise illiquid holdings and set a maximum illiquid allocation (commonly 40% of NAV for private trust structures).

Counterparty Risk in Defence Supply Chain Financing

Defence supply chain financing — where a trust provides working capital loans to subcontractors of prime defence contractors — carries concentration risk on the prime contractor’s creditworthiness. The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (para 5.2) requires licensed trustees to conduct due diligence on any counterparty representing more than 10% of the trust’s NAV. For defence sector loans, this due diligence must include an assessment of the prime contractor’s export control compliance (under the Hong Kong’s Import and Export Ordinance, Cap. 60, Schedule 4) and any sanctions exposure (under the United Nations Sanctions Ordinance, Cap. 537). The trust’s IPS should specify a maximum single-counterparty exposure of 15% of NAV for defence supply chain loans, with a mandatory review every six months.

Currency Risk and Hedging for Cross-Border Assets

Space technology contracts are frequently denominated in USD (for launch services) or RMB (for PRC government contracts), while the trust’s liabilities (distributions to Hong Kong-based beneficiaries) are in HKD. The HKMA’s Guideline on the Management of Foreign Exchange Risk for Authorized Institutions (GL-5, para 3.2) requires trustees to hedge any FX exposure exceeding 10% of the trust’s NAV. For a trust with a 30% allocation to USD-denominated satellite debt, the trustee must enter into a cross-currency swap or forward contract to convert the USD cash flows into HKD. The cost of this hedge — typically 50-80 bps per annum for a 5-year USD/HKD swap — must be factored into the trust’s net return calculation. The IRD has confirmed in DIPN 60 (para 32) that hedging costs are deductible against the trust’s Hong Kong-sourced income, provided the hedge is directly linked to a specific asset.

Actionable Takeaways

1. Structure the trust deed to explicitly authorise space and defence technology holdings, with a defined maximum allocation (suggested 40% of NAV for illiquid assets) and a mandatory annual concentration risk assessment to comply with HKMA SPM CR-1 para 4.3.
2. Use a BVI VISTA trust for direct equity holdings in pre-IPO space technology firms to retain settlor control over board composition, and a Cayman STAR trust for debt securitisation SPVs to access the non-charitable purpose trust framework.
3. Ensure the trustee is Hong Kong-resident and exercises management and control in Hong Kong to access the Hong Kong-PRC DTA’s reduced withholding tax rates on dividends (5%) and royalties (7%).
4. Characterise all trust-held shares in space technology companies as “long-term strategic investments” with a minimum five-year holding period in the IPS to preserve the capital gains exemption under IRO Section 14.
5. Hedge all FX exposure exceeding 10% of NAV using cross-currency swaps or forwards, and document the hedging rationale in the trust’s annual risk assessment to satisfy HKMA GL-5 para 3.2 requirements.