How to Use Trusts for Venture Capital and Angel Investments

The Hong Kong Monetary Authority’s (HKMA) December 2024 circular on the supervision of private wealth management activities, combined with the Inland Revenue Department’s (IRD) updated 2025 interpretation of the unified profits tax exemption for family-owned investment holding vehicles (FIHVs), has created a distinct window for high-net-worth (HNW) individuals to deploy trust structures into venture capital (VC) and angel investments. The HKMA’s Supervisory Policy Manual module SA-2, revised effective 1 January 2025, now explicitly requires private banks to assess the “economic substance and governance framework” of trust structures used for direct investment portfolios. Simultaneously, the IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 60, issued in Q1 2025, clarifies that a properly constituted VISTA trust in the British Virgin Islands (BVI) or a STAR trust in the Cayman Islands can qualify for the 0% profits tax rate on capital gains from unlisted equity, provided the trust’s investment committee maintains decision-making power in Hong Kong. This regulatory convergence makes the 2025-2026 period the most advantageous in a decade for HNW families to use private trust companies (PTCs) as the legal wrapper for early-stage portfolio construction, offering both asset protection and tax transparency.

The Structural Case for Trust-Based Venture Capital

Why a Trust, Not a Direct Holding, for Angel Portfolios

The primary advantage of using a trust for VC and angel investments lies in asset partitioning and succession continuity. A direct shareholding in a portfolio of 10 to 15 unlisted startups exposes the individual to joint liability in the event of a company’s insolvency, particularly under Hong Kong’s Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), where a shareholder who is also a director may face personal liability for wrongful trading under Section 275. A trust, by contrast, separates legal ownership from beneficial enjoyment. The trustee holds the shares; the settlor and beneficiaries have no direct legal title to the underlying portfolio companies. This structure insulates the family’s core wealth from the operational risks of any single startup.

For a BVI VISTA trust, the Virgin Islands Special Trusts Act, 1961 (as amended) allows the settlor to retain control over the appointment and removal of directors of the underlying investment holding company, without the trustee being required to intervene in management. This is critical for angel investors who wish to serve as board observers or directors in their portfolio companies. The trustee’s duty under VISTA is limited to holding the shares; the business judgment rests with the directors appointed by the settlor. Data from the BVI Financial Services Commission’s 2024 annual report indicates that VISTA trusts now account for 62% of all new trust registrations in the territory, with a notable increase in structures designated for “venture capital holding.”

The Private Trust Company (PTC) as the General Partner

For families managing a multi-million-dollar VC allocation, the PTC structure offers the most efficient governance model. A PTC is a licensed or exempt company that acts as trustee for a single trust or a group of related trusts. Under Hong Kong’s Trustee Ordinance (Cap. 29), a PTC incorporated in Hong Kong must apply for a trust company licence from the Registrar of Companies unless it qualifies for the exemption under Section 78A for “private trust companies” that act only for connected trusts. The exemption threshold, last updated in 2023, requires that the PTC’s beneficiaries be limited to the settlor, the settlor’s spouse, children, and grandchildren, and that the PTC does not hold itself out to the public as a trustee.

The PTC’s board typically includes the settlor, a trusted family advisor, and an independent professional (often a lawyer or accountant). This board functions as the general partner (GP) of the family’s VC fund. The PTC signs the limited partnership agreement (LPA) with external limited partners (LPs) if the family co-invests with other families or institutional investors. The HKMA’s 2024 circular on private wealth management specifically notes that PTCs should maintain a “clear investment mandate and documented investment committee minutes” to satisfy the regulator’s expectations on governance. Failure to do so could result in the trust being reclassified as a collective investment scheme under the Securities and Futures Ordinance (Cap. 571), triggering licensing requirements under the Securities and Futures (Licensing and Registration) (Information) Rules.

Tax Efficiency and the IRD’s 2025 Stance

The Unified Profits Tax Exemption for FIHVs

The IRD’s DIPN No. 60, effective for years of assessment commencing on or after 1 April 2025, provides the most detailed guidance yet on the tax treatment of FIHVs. A FIHV is defined as a Hong Kong resident entity or trust that holds investments in unlisted companies, provided that the entity’s income is derived from the holding and disposal of those investments, and that the entity does not carry on a trade or business in Hong Kong. For a trust to qualify, the IRD requires that the trust’s investment committee—whether composed of family members or professional advisors—makes all investment decisions in Hong Kong. The physical location of the committee meetings is the determinative factor.

The practical implication is significant. A family trust that holds shares in 20 early-stage technology companies, with an average holding period of five years, will pay 0% Hong Kong profits tax on gains from the sale of those shares, provided the trust’s investment committee meets in a Hong Kong office (not a Zoom call from Singapore or London). The IRD’s guidance explicitly states that “substantive decision-making” must occur in Hong Kong. The trust’s administrative functions—bookkeeping, compliance, custody—can be outsourced to a licensed trust company in Hong Kong, but the investment committee’s minutes must reflect a Hong Kong location. The HKMA’s SA-2 module reinforces this by requiring that the trust company maintain records of the committee’s meeting location and attendance.

Avoiding the “Trading” Classification

The greatest risk for a VC trust is being reclassified as a trading entity by the IRD, which would subject gains to the standard 16.5% profits tax rate. The IRD’s 2025 DIPN provides a safe harbour: a trust that holds investments for an average of at least 24 months, with no more than 20% of the portfolio turned over in any single year of assessment, is presumed to be a holding entity rather than a trading entity. For angel investors, this is not onerous. A typical angel portfolio holds for three to seven years before a liquidity event. The IRD also accepts that follow-on investments in the same company do not reset the holding period for the original shares.

If the trust engages in active deal sourcing, negotiating terms, and board representation, the IRD may argue that the trust is carrying on a business of investing, which is taxable. To mitigate this, the trust’s investment committee should document that its role is passive oversight—reviewing but not originating deals. The actual deal sourcing and negotiation should be conducted by a separate family office or an external fund manager, which is compensated via a management fee that is subject to Hong Kong profits tax at 16.5%. This fee is deductible against the trust’s income if the trust has any taxable income, but for a pure holding trust with no trading activity, the fee is simply a cost borne by the family.

Jurisdictional Selection and Asset Protection

BVI VISTA vs. Cayman STAR for VC Holdings

The choice between a BVI VISTA trust and a Cayman Islands STAR trust depends on the degree of control the settlor wishes to retain. The BVI VISTA trust is the preferred vehicle for angel investors who want to serve as directors of their portfolio companies. Under VISTA, the trustee cannot interfere with the directors’ decisions unless there is evidence of fraud or dishonesty. The settlor can also retain the power to remove and appoint directors, effectively controlling the company’s board without being the legal owner of the shares. The BVI Business Companies Act, 2004 (as amended) requires that the company’s registered agent in the BVI maintain a register of directors, which is not publicly searchable. This provides privacy for the family’s portfolio.

The Cayman STAR trust, governed by the Special Trusts (Alternative Regime) Law, 1997 (as amended), offers greater flexibility for multi-beneficiary structures. A STAR trust can have an “enforcer” appointed to ensure the trustee performs its duties, which is useful when the trust holds shares in a Cayman exempted company that itself holds a portfolio of VC investments. The enforcer can be a family member or a professional advisor. The Cayman Islands Monetary Authority’s 2024 statistics show that STAR trusts represent 18% of all new trust registrations in the territory, with a growing proportion used for “investment holding platforms” rather than traditional estate planning.

The Hong Kong Trust as a Domestic Alternative

For families who prefer to keep all assets and governance within Hong Kong’s legal system, a Hong Kong trust under the Trustee Ordinance (Cap. 29) is a viable option. The Hong Kong trust does not offer the same degree of asset protection against future creditors as a BVI or Cayman trust, because Hong Kong courts have the power to set aside a trust under the Conveyancing and Property Ordinance (Cap. 219) if it is found to have been created to defraud creditors. However, for families with no existing or foreseeable creditor claims, the Hong Kong trust offers simplicity: no requirement for a separate enforcer, no annual filing with a foreign regulator, and direct access to Hong Kong’s common law courts for any disputes.

The Hong Kong trust also benefits from the IRD’s DIPN No. 60 treatment, as the trust’s investment committee will naturally meet in Hong Kong. The trust’s assets—shares in Hong Kong-incorporated startups or in BVI companies that hold operating businesses in the Greater Bay Area—are subject to Hong Kong’s stamp duty on share transfers at 0.13% of the consideration for the buyer and 0.13% for the seller (0.26% total), under the Stamp Duty Ordinance (Cap. 117). This is lower than the 0.2% stamp duty on Hong Kong stock exchange transactions and comparable to BVI’s stamp duty of 0.1% on share transfers.

Operational Mechanics and Compliance

Setting Up the Trust and the Investment Holding Company

The typical structure for a VC trust involves three layers. The first layer is the trust itself, established by a trust deed that names the trustee (either a PTC or a licensed trust company) and the beneficiaries. The second layer is a holding company, usually incorporated in the BVI or Cayman, which is the legal owner of the trust’s assets. The third layer is the portfolio of startup shares, held directly by the holding company. The trust deed should include a “reserved powers” clause that grants the settlor the right to veto certain investment decisions, such as investments in a specific sector or above a certain value. The HKMA’s 2024 circular notes that reserved powers are acceptable provided they do not make the settlor a de facto trustee, which would trigger licensing requirements.

The BVI holding company must maintain a registered office and a registered agent in the territory. The annual cost, including government fees and agent services, is approximately USD 1,200 to USD 1,800 per company. For a portfolio of 15 startups, a single BVI holding company can hold all the shares, avoiding the need for a separate company per investment. The BVI Business Companies Act allows a company to have multiple classes of shares, so the trust can issue different share classes to different beneficiaries or to external co-investors.

Anti-Money Laundering (AML) and Know-Your-Client (KYC) Requirements

Since 2023, the BVI Financial Services Commission has required all trust companies and PTCs to conduct AML checks on the settlor, beneficiaries, and any person with control over the trust. The BVI’s Anti-Money Laundering Regulations, 2022 (as amended) mandate that the trust company obtain a certified copy of the settlor’s passport, proof of address, and a source of wealth declaration. For a PTC, the directors must also undergo AML checks. The cost of compliance is typically absorbed by the trust company’s annual fee, but families should budget an additional USD 500 to USD 1,000 per year for enhanced due diligence on high-risk jurisdictions.

In Hong Kong, the trustee must comply with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), which requires ongoing monitoring of the trust’s transactions. The HKMA’s SA-2 module expects the trustee to have a written AML policy that covers the trust’s investment activities. For a VC trust that makes 10 to 20 investments per year, the trustee should conduct a simplified due diligence on each portfolio company, verifying the identity of the company’s directors and ultimate beneficial owners. The cost of this due diligence can be passed to the trust as an administrative expense.

Actionable Takeaways for HNW Families

1. Establish a BVI VISTA trust with a Hong Kong-based investment committee by Q3 2025 to lock in the IRD’s DIPN No. 60 guidance on the 0% profits tax rate for unlisted equity gains, before any potential policy reversal in the 2026-2027 Budget.

2. Use a private trust company (PTC) as the trustee to retain control over director appointments in portfolio companies, ensuring that the settlor can serve as a board observer without triggering the trustee’s duty to intervene under VISTA.

3. Document all investment committee meetings in Hong Kong with signed minutes and attendance records, as the IRD and HKMA both require evidence of substantive decision-making within the jurisdiction to maintain the tax exemption and regulatory compliance.

4. Hold all portfolio shares in a single BVI holding company to minimise annual maintenance costs and simplify AML/KYC compliance, with a target of no more than 20% portfolio turnover per year to avoid reclassification as a trading entity by the IRD.

5. Engage a separate family office or external fund manager for deal sourcing to ensure the trust’s role remains passive holding, with the management fee for the external party being the only taxable income in the structure.