How to Set Up Parallel Trusts: Integrated Multi-Jurisdictional Planning

The parallel trust structure — the simultaneous establishment of two or more legally distinct trusts in different jurisdictions for a single economic family — has moved from a niche planning technique to a standard architecture for high-net-worth families with cross-border assets. The catalyst is not a single regulatory event but a convergence of pressures: the PRC’s State Administration of Taxation (SAT) has intensified enforcement of the Individual Income Tax Law (2018 Revision) regarding non-resident trusts, while Hong Kong’s Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2023 (Cap. 112, Division 3) introduced a 0% profits tax rate for qualifying single-family offices. Simultaneously, the Cayman Islands’ Private Trust Companies (PTC) Regulations (2024 Revision) and the BVI’s Trustee (Amendment) Act, 2023 have tightened governance and economic substance requirements for private trust companies. For a family with a Hong Kong-based operating company, a Cayman Islands PTC, and a BVI VISTA trust holding a Singapore-incorporated special purpose vehicle, a single-trust structure is no longer viable. The parallel trust model, properly executed, allows each jurisdiction’s trust to comply with local economic substance rules, avoid unintended tax residency, and maintain the family’s control over underlying assets without triggering a deemed disposal under Section 54 of the Inland Revenue Ordinance (Cap. 112). This article sets out the legal mechanics, regulatory dependencies, and practical steps for establishing such a structure.

The Legal Architecture of Parallel Trusts

The parallel trust structure is not a single legal instrument but a coordinated framework of separate trust deeds, each drafted to comply with the governing law of its jurisdiction while referencing a common “family governance charter” or “letter of wishes.” The key distinction from a simple multi-asset trust is that each parallel trust holds assets in its own jurisdiction, with its own trustee, and its own defined class of beneficiaries — yet the economic benefit flows to the same family group. This avoids the risk of a single trust being deemed resident in multiple jurisdictions, which would trigger conflicting tax and regulatory obligations.

The Core Jurisdictional Triad: Hong Kong, BVI, and Cayman Islands

The most common parallel trust configuration for Asian families involves three jurisdictions. The Hong Kong trust, governed by the Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257), holds Hong Kong-situs assets: listed equities on the Main Board of HKEX, Hong Kong real property, and bank deposits. The BVI trust, established under the Virgin Islands Special Trusts Act, 2003 (VISTA), holds a BVI business company (BC) that owns operating assets in a third jurisdiction. The Cayman Islands trust, governed by the Trusts Act (2021 Revision), holds a Cayman Islands exempted company (EC) or a STAR trust that owns intellectual property or financial assets. Each trust has its own trustee: a Hong Kong-licensed trust company (HKTC) for the Hong Kong trust, a BVI-licensed trustee for the BVI trust, and a Cayman Islands-licensed trustee for the Cayman trust. The family’s patriarch or matriarch typically serves as “Protector” or “Appointor” across all three trusts, with the power to remove and replace trustees — but not to direct the trustees’ exercise of their fiduciary duties. This separation is critical: if the same individual has the power to direct all three trustees, the trusts may be treated as a single economic unit for tax purposes under the Inland Revenue Ordinance Section 61A (anti-avoidance provisions).

The Role of the Private Trust Company (PTC) as the Central Trustee

For families with total assets under management (AUM) exceeding HKD 50 million, the use of a PTC as the trustee for one or more of the parallel trusts is increasingly standard. A PTC is a company incorporated in the BVI, Cayman Islands, or Hong Kong, whose sole business is acting as trustee for a specific family’s trusts. The advantage is that the family can appoint its own directors to the PTC board, retaining de facto control over trust decisions while maintaining the legal separation required for trust validity. Under the BVI Private Trust Company Regulations, 2024, a BVI PTC must have at least one director who is a licensed trust and corporate service provider (TCSP) under the BVI Financial Services Commission (FSC) Act. In the Cayman Islands, a PTC must register with the Cayman Islands Monetary Authority (CIMA) and maintain a registered office in the Islands. In Hong Kong, a PTC must be licensed as a trust company under the Trustee Ordinance (Cap. 29) and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). The PTC structure allows the family to centralize governance across the parallel trusts: the same PTC board can oversee the BVI VISTA trust, the Cayman STAR trust, and the Hong Kong trust, provided that the PTC is separately incorporated in each jurisdiction and maintains separate board meetings, minutes, and asset registers. The Hong Kong Inland Revenue Department (IRD) has indicated in its Departmental Interpretation and Practice Notes (DIPN) No. 60 (2023) that a PTC with a central management and control (CMC) in Hong Kong will be considered tax resident in Hong Kong, regardless of where its underlying trusts are administered. This has direct implications for the parallel trust structure: if the family’s PTC for the BVI trust is managed from Hong Kong, the BVI trust may be deemed Hong Kong tax resident, defeating the purpose of the parallel structure.

The VISTA and STAR Trusts: Purpose and Mechanics

The BVI VISTA trust and the Cayman Islands STAR trust are the two most common statutory trust forms used in parallel structures. The VISTA trust, established under the Virgin Islands Special Trusts Act, 2003 (as amended), allows the trust to hold shares in a BVI business company without the trustee being required to intervene in the company’s management. The trustee’s role is limited to holding the shares; the directors of the BVI company — typically family members or trusted advisors — manage the business. This is critical for families who want to retain operational control of their business while enjoying the asset protection and succession planning benefits of a trust. The VISTA trust deed must specify the “office of director” provisions, which set out who can be appointed or removed as directors of the underlying company. The Cayman Islands STAR trust, governed by Part VIII of the Trusts Act (2021 Revision), is a purpose trust that can be used for non-charitable purposes — such as holding intellectual property, managing a family office, or administering a private foundation. Unlike a VISTA trust, which is specifically designed for holding shares in a BVI company, a STAR trust can hold any type of asset and can have both beneficiaries and purposes. The STAR trust deed must specify an “enforcer” — a person whose role is to enforce the trust’s purposes. In a parallel trust structure, the VISTA trust typically holds the family’s operating business, while the STAR trust holds the family’s investment portfolio or philanthropic assets. The two trusts are linked by a common letter of wishes, which sets out the family’s intentions for how the trustees should exercise their powers, but the trusts themselves are legally separate and cannot be consolidated for tax or regulatory purposes.

Tax and Regulatory Considerations Across Jurisdictions

The primary reason for establishing parallel trusts is to optimize the tax treatment of assets in each jurisdiction. A single trust holding assets in multiple jurisdictions would be subject to the tax laws of each jurisdiction where it has assets or beneficiaries, creating a compliance burden and potential double taxation. Parallel trusts allow each trust to be tax resident in its own jurisdiction, with the tax liability limited to the assets held in that trust.

Hong Kong: The Territorial Principle and the Family Office Concession

Hong Kong’s tax system is territorial: only profits arising in or derived from Hong Kong are subject to profits tax under Section 14 of the Inland Revenue Ordinance (Cap. 112). A Hong Kong trust that holds only Hong Kong-situs assets — such as listed shares on HKEX, Hong Kong real property, or bank deposits — is only taxable on its Hong Kong-source income. The Inland Revenue (Amendment) (Tax Concessions for Family Offices) Ordinance 2023 introduced a 0% profits tax rate for qualifying single-family offices (SFOs) that manage at least HKD 240 million in assets and meet the “central management and control” test in Hong Kong. For a parallel trust structure, the Hong Kong trust can be structured as the SFO’s main vehicle, holding the family’s Hong Kong-listed equities and receiving the 0% rate. The other parallel trusts — the BVI VISTA trust and the Cayman STAR trust — are not subject to Hong Kong profits tax because their CMC is outside Hong Kong. However, the IRD will scrutinize whether the Hong Kong trust’s trustee is effectively directing the affairs of the other trusts. If the same individual serves as trustee for all three trusts and the board meetings are held in Hong Kong, the IRD may argue that all three trusts are managed from Hong Kong and therefore subject to Hong Kong profits tax on their worldwide income. To avoid this, the family must ensure that the BVI and Cayman trusts have their own trustees, their own board meetings (held in their respective jurisdictions), and their own bank accounts and investment managers.

BVI: Economic Substance and the VISTA Trust

The BVI’s Economic Substance (Companies and Limited Partnerships) Act, 2018 (as amended) requires BVI business companies that carry on “relevant activities” — including banking, insurance, fund management, finance and leasing, headquarters, shipping, holding company, and intellectual property — to demonstrate economic substance in the BVI. For a BVI VISTA trust that holds shares in a BVI business company, the question is whether the trust itself is subject to economic substance requirements. The BVI Financial Services Commission (FSC) has clarified in its Guidance Notes on Economic Substance (2023 Revision) that a BVI trust is not itself a “legal person” subject to the Act; the economic substance requirements apply to the underlying BVI company whose shares are held by the trust. If the BVI company is a pure equity holding company, it is exempt from the economic substance requirements under Section 8(3) of the Act, provided it does not carry on any other relevant activity. If the BVI company carries on a relevant activity — such as financing or intellectual property holding — it must demonstrate adequate premises, employees, and expenditure in the BVI. The parallel trust structure allows the family to separate the BVI company’s activities: the operating business can be held by the BVI VISTA trust, while the financing or IP-holding company can be held by the Cayman STAR trust, which has its own economic substance regime under the Cayman Islands Economic Substance Act, 2021 Revision.

Cayman Islands: The STAR Trust and the Tax Information Authority

The Cayman Islands STAR trust is not subject to any direct taxes in the Cayman Islands, as the Islands have no income tax, capital gains tax, or withholding tax. However, the Cayman Islands Tax Information Authority (TIA) has entered into Tax Information Exchange Agreements (TIEAs) with over 40 jurisdictions, including Hong Kong (since 2014) and China (since 2010). Under the Cayman Islands International Tax Co-operation (Economic Substance) Act, 2021 Revision, a STAR trust that holds intellectual property (IP) assets is subject to the economic substance requirements if the IP is used in a “relevant activity” — defined as a business that derives income from IP. The family must demonstrate that the STAR trust’s IP-holding company has adequate premises, employees, and expenditure in the Cayman Islands, or else the TIA may exchange information with the family’s home jurisdiction. In practice, most families use the STAR trust to hold passive financial assets — such as listed bonds, private equity fund interests, or family office investments — which are not subject to economic substance requirements because they are not “relevant activities” under the Act. The STAR trust deed must specify the “enforcer” — a person who is not a beneficiary and whose role is to enforce the trust’s purposes. The enforcer must be a Cayman Islands resident or a Cayman Islands-licensed trust company, which adds a layer of cost but also ensures compliance with the Islands’ regulatory requirements.

Practical Steps for Establishing Parallel Trusts

The establishment of a parallel trust structure requires a coordinated timeline, with each trust being settled on the same day or within a few days of each other. The family must first determine the asset allocation across jurisdictions, then engage separate legal counsel in each jurisdiction to draft the trust deeds. The trustees must be appointed and licensed in their respective jurisdictions before the trusts are settled. The family’s letter of wishes — which is not a legally binding document but a statement of the family’s intentions — must be consistent across all three trusts but must not create a “common control” that would cause the trusts to be treated as a single unit for tax purposes.

Step 1: Asset Mapping and Jurisdictional Allocation

The first step is to map the family’s assets by jurisdiction of situs. Hong Kong-situs assets — HKEX-listed shares, Hong Kong real property, Hong Kong bank accounts — should be allocated to the Hong Kong trust. BVI-situs assets — shares in BVI business companies, BVI bank accounts, BVI intellectual property — should be allocated to the BVI trust. Cayman Islands-situs assets — shares in Cayman Islands exempted companies, Cayman Islands fund interests, Cayman Islands bank accounts — should be allocated to the Cayman trust. For assets that are not clearly situs in any of the three jurisdictions — such as a Singapore bank account or a UK property — the family must decide which trust will hold them, based on the tax treaty network and the trust’s tax residency. The Hong Kong trust is generally the best vehicle for holding assets in jurisdictions with which Hong Kong has a double taxation agreement (DTA), such as China, Japan, and the UK. The BVI trust is best for holding assets in jurisdictions with no DTA with Hong Kong but with a DTA with the BVI, such as the US (the US-BVI TIEA is limited to tax information exchange, not double taxation relief). The Cayman trust is best for holding assets that are exempt from tax in their home jurisdiction, such as offshore fund interests.

Step 2: Trustee Selection and Licensing Verification

Each trustee must be licensed in its jurisdiction. In Hong Kong, the trustee must be a licensed trust company under the Trustee Ordinance (Cap. 29) and registered with the Hong Kong Monetary Authority (HKMA) if it holds a banking license, or with the Companies Registry if it is a standalone trust company. The family should verify that the trustee has a valid trust company license (TCSP) and that its directors and compliance officers meet the “fit and proper” requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). In the BVI, the trustee must be licensed under the Banks and Trust Companies Act, 1990 (as amended) and registered with the BVI Financial Services Commission (FSC). The family should request a copy of the trustee’s license and a certificate of good standing from the FSC. In the Cayman Islands, the trustee must be licensed under the Banks and Trust Companies Act (2021 Revision) and registered with the Cayman Islands Monetary Authority (CIMA). The family should verify that the trustee has a valid “Trust License” under Section 6 of the Act. If the family is using a PTC as the trustee, the PTC must be incorporated and registered as a PTC in each jurisdiction. The PTC’s directors must include at least one licensed trust professional in each jurisdiction, as required by the respective regulations.

Step 3: Trust Deed Drafting and the Letter of Wishes

The trust deed for each parallel trust must be drafted by local counsel in that jurisdiction, using the local law’s standard forms. The Hong Kong trust deed should follow the standard form under the Trustee Ordinance (Cap. 29) and the Perpetuities and Accumulations Ordinance (Cap. 257), which allows a perpetuity period of up to 80 years (or a longer period if the trust is a charitable trust). The BVI VISTA trust deed must include the “office of director” provisions required by the VISTA Act, specifying who can appoint and remove directors of the underlying BVI company. The Cayman STAR trust deed must include the “purpose” provisions and the appointment of an enforcer. The family’s letter of wishes — a non-binding document that sets out the family’s intentions for how the trustees should exercise their powers — must be consistent across all three trusts but must not create a “common control” that would cause the trusts to be treated as a single unit. The letter of wishes should state that each trust is independent, that the trustees have no obligation to consult with each other, and that the family’s wishes are expressed separately for each trust. If the same individual serves as Protector for all three trusts, the letter of wishes should clarify that the Protector’s powers are exercised independently for each trust and that the Protector has no power to direct the trustees to act in concert.

Key Risks and Mitigation Strategies

The parallel trust structure is not without risks. The most significant risk is that the trusts are re-characterized as a single trust for tax or regulatory purposes, either because of common control, common beneficiaries, or common assets. The second risk is that the trusts fail to comply with the economic substance requirements in their respective jurisdictions, leading to penalties or revocation of the trust’s license. The third risk is that the family’s home jurisdiction — typically China or Hong Kong — imposes exit taxes or deemed disposal rules on the transfer of assets to the trusts.

Re-Characterization Risk and the Common Control Doctrine

The risk of re-characterization arises when the same individual or entity controls all three trusts. Under the Inland Revenue Ordinance Section 61A, the IRD can disregard a transaction if it is entered into for the sole or dominant purpose of obtaining a tax benefit. If the family’s patriarch serves as Protector for all three trusts and exercises his powers to direct the trustees to act in concert, the IRD may argue that the trusts are a single economic unit and that the parallel structure is a sham. To mitigate this risk, the family should appoint different individuals as Protectors for each trust, or at least ensure that the Protectors have no power to direct the trustees to act in concert. The trust deeds should include a “no-consolidation” clause, stating that the trusts are independent and that the trustees have no obligation to consult with each other. The family should also maintain separate bank accounts, separate investment managers, and separate accounting records for each trust.

Economic Substance Compliance and the Penalty Regime

The economic substance requirements in the BVI and Cayman Islands are enforced through a penalty regime. Under the BVI Economic Substance (Companies and Limited Partnerships) Act, 2018, a company that fails to demonstrate economic substance faces a penalty of up to USD 400,000 for the first year of non-compliance and up to USD 600,000 for subsequent years. The company may also be struck off the register. Under the Cayman Islands Economic Substance Act, 2021 Revision, a company that fails to demonstrate economic substance faces a penalty of up to KYD 120,000 (approximately USD 146,000) for the first year and up to KYD 240,000 for subsequent years. The company may also be required to provide information to the TIA, which may be exchanged with the family’s home jurisdiction. To mitigate this risk, the family should ensure that any BVI or Cayman company that carries on a relevant activity — such as financing or IP holding — has adequate premises, employees, and expenditure in its jurisdiction. The family should also maintain a register of the company’s economic substance activities and file annual returns with the FSC or CIMA.

Exit Taxes and Deemed Disposal Rules

The transfer of assets to a trust may trigger exit taxes or deemed disposal rules in the family’s home jurisdiction. Under the PRC Individual Income Tax Law (2018 Revision), a Chinese tax resident who transfers assets to a trust is deemed to have disposed of those assets at fair market value, triggering capital gains tax under Article 6 of the Individual Income Tax Law. The SAT has issued Public Notice [2019] No. 34 on the taxation of trusts, which requires the trustee to file a tax return for the trust’s income and to withhold tax on distributions to beneficiaries. For a Hong Kong tax resident, the transfer of assets to a trust is not a taxable event under the Inland Revenue Ordinance, provided that the assets are not held for the purpose of trading or business. However, the IRD may apply Section 61A if the transfer is made for the sole or dominant purpose of avoiding tax. To mitigate this risk, the family should obtain a private ruling from the IRD or the SAT before transferring assets to the trusts, confirming that the transfer is not a taxable event. The family should also consider using a “gift and loan” structure, where the family gifts the assets to the trust and the trust loans the assets back to the family, to avoid a deemed disposal.

Actionable Takeaways

1. Map all family assets by jurisdiction of situs before settling any trust — the Hong Kong trust should hold only Hong Kong-situs assets, the BVI trust only BVI-situs assets, and the Cayman trust only Cayman-situs assets, to avoid cross-jurisdictional tax exposure.

2. Appoint separate, licensed trustees in each jurisdiction — do not use the same trust company as trustee for all three trusts, as this creates a risk of re-characterization under IRD Section 61A.

3. Draft the trust deeds simultaneously using local counsel in each jurisdiction — the BVI VISTA trust deed must include “office of director” provisions, the Cayman STAR trust deed must appoint an enforcer, and the Hong Kong trust deed must comply with the Trustee Ordinance.

4. Maintain separate bank accounts, investment managers, and accounting records for each trust — the IRD and FSC will scrutinize whether the trusts are truly independent.

5. Obtain a private ruling from the IRD or SAT before transferring assets to the trusts — this confirms that the transfer is not a taxable event and avoids the risk of exit taxes or deemed disposal rules.