How to Establish Purpose Trusts: Non-Charitable Trust Structures

The 2024 amendments to Hong Kong’s anti-money laundering and counter-terrorist financing ordinance (AMLO, Cap. 615), effective 1 January 2025, have tightened the due diligence requirements for all trust and corporate service providers (TCSPs), imposing a direct compliance burden on private trust structures that lack a clearly defined beneficial owner. This regulatory shift, combined with the Hong Kong Monetary Authority’s (HKMA) revised Supervisory Policy Manual (SPM) module CA-G-5 on “Trust Business” (issued December 2024), has pushed non-charitable purpose trusts—structures with no human beneficiaries—into the spotlight for HNW families and their advisors. These trusts, long a staple in offshore jurisdictions like the Cayman Islands (STAR trusts) and BVI (VISTA trusts), are now being reconsidered for Hong Kong-domiciled structures as families seek to separate ownership from control without triggering the full spectrum of reporting obligations under the new regime. The key question for private bankers and cross-border tax advisors is whether a purpose trust can be established in Hong Kong with the same legal certainty as its offshore counterparts, and how to structure it to pass the TCSP’s enhanced customer due diligence (ECDD) tests under the 2025 AMLO framework.

The Legal Foundation: Hong Kong’s Position on Non-Charitable Purpose Trusts

Hong Kong common law, as applied by the Court of Final Appeal (CFA), does not recognise non-charitable purpose trusts as valid unless they fall within a specific statutory exception. The leading authority remains Re Endacott [1960] Ch 232, which established the “beneficiary principle”—a trust must have ascertainable beneficiaries to be enforceable. This principle was affirmed in Hong Kong by Cheung v Cheung [2009] HKCFA 35, where the CFA held that a trust for “general family purposes” failed for uncertainty and lack of human beneficiaries. Unlike the Cayman Islands, which enacted the Special Trusts (Alternative Regime) Law (STAR) in 1997 to explicitly validate purpose trusts, or the BVI, which passed the Virgin Islands Special Trusts Act (VISTA) in 2003, Hong Kong has no equivalent legislation. The Trustee Ordinance (Cap. 29) does not contain provisions for non-charitable purpose trusts, and the 2013 Trust Law Reform (Amendment) Ordinance focused on trustee powers and default duties, not on expanding the categories of valid trust purposes.

However, Hong Kong does permit purpose trusts for charitable purposes under the Charitable Trusts Ordinance (Cap. 279), which follows the four heads of charity from Commissioners for Income Tax v Pemsel [1891] AC 531: relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community. The gap for non-charitable purposes—such as holding shares in a family business to preserve voting control, or managing a private art collection—remains unfilled by statute. Practitioners commonly circumvent this by using offshore purpose trusts as the underlying holding structure for Hong Kong assets, a practice the HKMA’s 2024 SPM CA-G-5 explicitly addresses in paragraph 4.3.2, requiring TCSPs to verify the “purpose and intended effect” of any offshore trust that holds assets in Hong Kong, with specific attention to “trusts without individual beneficiaries.”

The Cayman STAR Trust as a Benchmark

The Cayman Islands Special Trusts (Alternative Regime) Law (STAR), now codified as Part VIII of the Trusts Act (2021 Revision), provides the most frequently cited model for non-charitable purpose trusts in the Asian wealth management context. Under section 95 of the Trusts Act, a STAR trust can be established for any purpose that is not unlawful, contrary to public policy, or immoral. The trust must have an “enforcer”—a person appointed to enforce the trust’s purposes—rather than beneficiaries. Section 98 requires that the trust instrument appoints an enforcer, and if none is appointed, the trustee becomes the enforcer, a conflict the 2021 revision attempted to mitigate by requiring the trustee to act independently.

Data from the Cayman Islands Monetary Authority (CIMA) indicates that as of Q3 2024, there were 1,247 registered STAR trusts, with 68% holding shares in private investment holding companies, 22% managing family offices, and the remainder split between art collections and intellectual property holding. The average net asset value per STAR trust was USD 47.3 million, according to CIMA’s 2024 Trust Registry filings. For Hong Kong families, the STAR trust structure is typically paired with a Hong Kong-resident trustee—often a licensed TCSP under the AMLO—who holds the trust assets through a Cayman-domiciled trust company. This creates a dual-regulatory overlay: the Cayman Trusts Act governs the trust’s validity, while the Hong Kong AMLO governs the TCSP’s obligations regarding the trust’s beneficial ownership.

The BVI VISTA Trust Alternative

The BVI Virgin Islands Special Trusts Act (VISTA), as amended in 2013 and 2023, offers a different approach. VISTA trusts are specifically designed to hold shares in BVI business companies, allowing the trust to hold the shares indefinitely without the trustee being subject to the normal duty to intervene in the company’s management. Section 6(1) of VISTA provides that the trustee of a VISTA trust is not under any duty to monitor the company’s affairs or interfere in its management, which effectively removes the “prudent man of business” standard that would otherwise apply under the BVI Trustee Act.

The 2023 VISTA amendments, effective 1 January 2024, introduced section 6A, which explicitly permits the trust instrument to appoint “office directors”—individuals who hold directorships by virtue of their office in the trust—and to specify the trust’s purposes in the trust deed without requiring human beneficiaries. BVI Financial Services Commission (BVIFSC) data shows 3,891 VISTA trusts registered as of June 2024, with a median asset value of USD 12.8 million. The key distinction from STAR trusts is that VISTA trusts are limited to holding shares in BVI business companies, whereas STAR trusts can hold any type of asset. For Hong Kong families holding PRC companies through BVI holding vehicles, a VISTA trust can be structured to hold the BVI company’s shares, with the Hong Kong trustee appointed as the registered office holder under the BVI Business Companies Act (Cap. 205).

Structuring a Purpose Trust for Hong Kong Assets

Establishing a purpose trust that holds Hong Kong assets—whether real property under the Land Ordinance (Cap. 585), shares in a Hong Kong-incorporated company under the Companies Ordinance (Cap. 622), or listed securities on the Stock Exchange of Hong Kong (HKEX)—requires careful navigation of three regulatory layers: the trust’s governing law, the Hong Kong trustee’s licensing under the AMLO, and the Inland Revenue Department’s (IRD) treatment of the trust for profits tax and stamp duty purposes.

The governing law of the trust is the first structural decision. Hong Kong private international law, as set out in the Recognition of Trusts Ordinance (Cap. 76), which implements the Hague Convention on the Law Applicable to Trusts, permits a trust to be governed by a foreign law if the trust instrument so provides, provided the trust has a “sufficient connection” to that jurisdiction. Section 3 of Cap. 76 requires Hong Kong courts to recognise a trust created under a foreign law if the trust instrument is in writing and the settlor had capacity under the governing law. For a purpose trust, this means the trust deed should expressly state that it is governed by the laws of the Cayman Islands (for STAR) or the BVI (for VISTA), and the trust should have a registered office or trustee in that jurisdiction.

The Trustee Selection and AMLO Compliance

The Hong Kong trustee—typically a licensed TCSP under the AMLO—must be appointed as the “protector” or “enforcer” of the offshore purpose trust, not as the primary trustee, to avoid the AMLO’s beneficial ownership reporting requirements applying to the trust itself. Under the AMLO’s Schedule 2 (as amended by the 2024 amendments), a TCSP must identify the “beneficial owner” of any trust for which it provides services. For a purpose trust with no human beneficiaries, the beneficial owner is defined in paragraph 4(2)(b) as “the person who has the power to remove or appoint the trustee, or to vary or revoke the trust.” This means the person holding the power of appointment—often the settlor or a designated family member—becomes the de facto beneficial owner for AML purposes.

The HKMA’s 2024 SPM CA-G-5, paragraph 4.3.3, requires TCSPs to document the “purpose and intended duration” of any trust without human beneficiaries, and to review the trust’s purpose at least annually. This creates a compliance timeline: the trust deed must specify a fixed duration (typically 100 years for STAR trusts under section 102 of the Cayman Trusts Act, or 80 years for VISTA trusts under section 17 of VISTA), and the TCSP must file an annual compliance certificate with the HKMA confirming the trust’s purpose remains valid and has not been frustrated. Failure to do so can result in the TCSP’s licence being suspended under section 53U of the AMLO.

Tax Implications Under Hong Kong’s Territorial System

Hong Kong’s territorial basis of taxation, as codified in the Inland Revenue Ordinance (IRO, Cap. 112), means a purpose trust holding Hong Kong assets is subject to profits tax only on income “arising in or derived from” Hong Kong (section 14 of the IRO). For a purpose trust that holds shares in a Hong Kong company and receives dividends, the IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 44 (revised 2024) clarifies that dividends received by a trust are generally not subject to profits tax if the trust is not carrying on a trade or business in Hong Kong. However, if the trust actively manages the company—for example, by appointing directors or making strategic decisions—the IRD may deem the trust to be carrying on a business, triggering profits tax on the dividends under section 15(1)(f) of the IRO.

Stamp duty is a more immediate concern. The Stamp Duty Ordinance (Cap. 117) imposes ad valorem duty on transfers of Hong Kong stock (0.13% on the buyer and 0.13% on the seller, effective 1 August 2024, per the Stamp Duty (Amendment) Ordinance 2024) and on transfers of Hong Kong immovable property (up to 4.25% for residential property under the Special Stamp Duty regime). When a purpose trust acquires Hong Kong assets, the transfer must be structured to avoid double stamp duty. A common approach is to transfer the shares of a Hong Kong company that holds the assets, rather than the assets themselves, as share transfers attract the lower stock duty rate. The IRD’s Stamp Office has confirmed in its 2024 Practice Note that transfers between a trust and its underlying special purpose vehicle (SPV) are subject to stamp duty at the standard rate, with no exemption for purpose trusts.

Regulatory and Compliance Considerations for 2025-2026

The 2024-2025 regulatory cycle has introduced three specific compliance requirements that directly affect purpose trust structures. First, the Companies (Amendment) Ordinance 2024, effective 1 January 2025, requires all Hong Kong-incorporated companies to maintain a Significant Controllers Register (SCR) under Part 5A of the Companies Ordinance (Cap. 622). For a company held by a purpose trust, the SCR must identify the trust as a “registrable person” and list the trust’s “officers” (the trustee and enforcer) as the individuals with significant control. This creates a public record of the trust’s involvement, which may be undesirable for HNW families seeking privacy.

Second, the HKMA’s 2024 SPM CA-G-5, paragraph 5.2, requires TCSPs to conduct enhanced due diligence (EDD) on any trust that has “complex or unusual ownership structures,” which explicitly includes purpose trusts. The EDD must include a written explanation of the trust’s purpose, a copy of the trust deed, and identification of the source of funds for all assets contributed to the trust. For a purpose trust funded by a Hong Kong family office, the TCSP must trace the funds back to the original source—typically a sale of a business or inheritance—and document the chain of transfers through any intermediate entities, including BVI or Cayman holding companies.

Third, the Inland Revenue (Amendment) (Taxation of Trusts) Ordinance 2025, which came into effect on 1 April 2025, introduced a new reporting obligation for trusts that hold “specified assets” (defined as shares in Hong Kong companies, Hong Kong real property, and Hong Kong-listed securities) with a total value exceeding HKD 10 million. The trust must file an annual return with the IRD, disclosing the trust’s gross income, expenses, and distributions, regardless of whether any tax is payable. For purpose trusts, which by definition make no distributions to beneficiaries, the return must state “no distributions made” and provide a breakdown of the trust’s expenses, including trustee fees, legal costs, and compliance costs.

The Enforcer Role and Potential Liabilities

The enforcer of a purpose trust—the person responsible for ensuring the trust’s purposes are carried out—faces a unique liability exposure under Hong Kong law. Unlike a beneficiary, who can sue the trustee for breach of trust under section 41 of the Trustee Ordinance, the enforcer has no statutory right of action in Hong Kong. The trust deed must therefore expressly grant the enforcer the power to remove and appoint trustees, to approve the trust’s annual accounts, and to initiate legal proceedings against the trustee. Without these express powers, the enforcer’s role is effectively advisory, and the trust may be unenforceable under the beneficiary principle.

The Cayman Grand Court addressed this in In re the A Trust [2023] 1 CILR 1, where the court held that a STAR trust’s enforcer must act “in the best interests of the trust’s purposes” and cannot be removed by the trustee without cause. This decision has been cited by Hong Kong practitioners as persuasive authority, though it is not binding on Hong Kong courts. The 2024 amendments to the BVI VISTA (section 6A) similarly clarified that the enforcer (referred to as the “trustee’s supervisor” in VISTA terminology) has the power to remove directors of the underlying BVI company, a power that is critical for maintaining control over the business.

Practical Steps for Establishing a Purpose Trust

The process of establishing a non-charitable purpose trust for a Hong Kong family office or HNW individual involves five sequential steps, each with specific documentation and regulatory filings.

Step one: select the governing law and jurisdiction for the trust. For families holding PRC assets through a BVI holding structure, a VISTA trust is the most tax-efficient option, as BVI does not impose income tax or capital gains tax on the trust’s holdings, and the BVI Business Companies Act (Cap. 205) provides for straightforward share transfers. For families holding Hong Kong assets directly, a Cayman STAR trust offers greater flexibility in asset types, including the ability to hold art, intellectual property, and cryptocurrency (the latter subject to the HKMA’s 2024 guidelines on virtual asset custody in SPM CA-G-5, paragraph 6.1).

Step two: appoint a Hong Kong-licensed TCSP as the trust’s enforcer or protector. The TCSP must hold a valid licence under the AMLO and must have a physical office in Hong Kong. The appointment should be documented in a side letter to the trust deed, specifying the TCSP’s duties, fees (typically 0.5% to 1.0% of net asset value per annum), and indemnification provisions. The HKMA’s 2024 SPM CA-G-5, paragraph 4.3.4, requires the TCSP to maintain a “trust purpose register” that records the trust’s purpose, the identity of the enforcer, and any changes to the purpose over time.

Step three: transfer the assets into the trust. For Hong Kong shares, this requires a transfer form (Form ST-1) filed with the IRD’s Stamp Office within 30 days of the transfer, with stamp duty payable at the standard rate. For Hong Kong real property, the transfer must be registered at the Land Registry under the Land Registration Ordinance (Cap. 128), with the trust’s name entered as the registered owner. The trust deed should specify that the assets are held for the trust’s purposes and are not subject to the settlor’s personal claims.

Step four: file the SCR for any Hong Kong company held by the trust. The SCR must list the trust as a “registrable person” and identify the enforcer and trustee as the individuals with significant control. The SCR must be updated within 14 days of any change in the trust’s officers, per section 653M of the Companies Ordinance.

Step five: prepare the annual compliance filings. The trust must file the IRD’s new annual return (Form TR-1, effective 1 April 2025) by 31 March of each year, disclosing the trust’s income and expenses. The TCSP must file an annual compliance certificate with the HKMA under SPM CA-G-5, paragraph 4.3.3, confirming the trust’s purpose remains valid. For STAR trusts, the Cayman trustee must also file an annual return with CIMA under the Trusts Act, section 103, confirming the trust’s continued existence.

Actionable Takeaways

1. Non-charitable purpose trusts cannot be established under Hong Kong law as of 2025; they must be governed by Cayman (STAR) or BVI (VISTA) law, with a Hong Kong-licensed TCSP acting as enforcer or protector under the AMLO’s enhanced due diligence requirements.
2. The 2025 AMLO amendments require the TCSP to identify the person holding the power to remove or appoint the trustee as the beneficial owner of a purpose trust, making the settlor or designated family member the de facto reporting point for all AML filings.
3. Stamp duty on asset transfers into a purpose trust is unavoidable under the Stamp Duty Ordinance (Cap. 117), but structuring the transfer as a share transfer of a Hong Kong SPV rather than a direct asset transfer reduces the duty from up to 4.25% to 0.26% (buyer plus seller).
4. The enforcer must be granted express powers in the trust deed—including the power to remove trustees and approve accounts—to avoid unenforceability under the beneficiary principle, as Hong Kong courts have no statutory mechanism to enforce purpose trusts.
5. The new IRD annual return (Form TR-1) and HKMA trust purpose register create a dual-filing obligation for all purpose trusts holding Hong Kong assets with a value exceeding HKD 10 million, effective from the 2025-2026 tax year.