How to Use Trusts to Protect Family Business Control

The months following the 2024 Hong Kong policy address have seen a measurable uptick in enquiries from UHNW families regarding the use of trust structures to ring-fence corporate control. The impetus is not merely succession planning; it is a direct response to the Hong Kong SAR Government’s revised tax concession regime for family offices, codified in the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance 2024. This legislation, effective from the 2024/25 year of assessment, provides a 0% profits tax rate on qualifying transactions for single-family offices (SFOs) managing not less than HKD 240 million in assets. Concurrently, a 2025 consultation paper from the Financial Services and the Treasury Bureau (FSTB) has proposed amendments to the Trustees Ordinance (Cap. 29) to enhance the jurisdiction’s competitiveness for purpose trusts and reserved powers. For families holding concentrated equity in private or listed companies, the core structural question is no longer whether to use a trust, but how to calibrate the trust instrument to preserve voting control, dividend rights, and board appointment powers without triggering adverse tax or regulatory consequences under the new regime.

The Mechanics of Control: VISTA vs. STAR Trusts

The foundational choice for a Hong Kong-based family seeking to retain operational control over a family business is between a VISTA trust (under the Virgin Islands Special Trusts Act, 1996, as amended) and a STAR trust (under the Special Trusts (Alternative Regime) Law, 1997 of the Cayman Islands). Both vehicles were designed specifically to address the common law problem of the “prudent man of business” rule, which historically required trustees to monitor and intervene in underlying company management.

VISTA Trusts: Statutory Non-Intervention

A VISTA trust, governed by BVI law, provides a statutory mechanism that removes the trustee’s duty to interfere in the management of a BVI company held in the trust. Section 6 of the VISTA Act explicitly states that the trustee is not required to exercise any voting rights or powers in respect of the shares, nor to monitor the conduct of the company’s directors, unless the trust instrument provides otherwise. This is the critical feature for a founder who wishes to remain as executive chairman or CEO of the operating company while the trust holds the share capital.

The practical effect is that the board of directors of the underlying BVI company—typically comprising the founder and selected family members—retains unfettered control over strategic decisions, dividend policy, and capital allocation. The trustee’s role is confined to holding legal title and administering the trust fund. For a family office managing a single operating business, the VISTA structure is the most direct mechanism to achieve “control without interference.” The 2024 amendments to the BVI Business Companies Act (BCA), effective 1 January 2025, have further clarified the ability of VISTA trustees to hold shares in companies that issue different classes of shares with weighted voting rights, a development directly relevant to families planning dual-class share structures.

STAR Trusts: The Purpose Trust Alternative

The Cayman Islands STAR trust offers a different architecture. Unlike a VISTA trust, which is inherently a person-beneficiary trust, a STAR trust can be established for a specific purpose (e.g., “to hold and manage the family’s controlling stake in ABC Holdings Ltd.”) without requiring identifiable human beneficiaries. This is governed by Part VIII of the Cayman Islands Trusts Act (2021 Revision). The STAR trust is particularly useful when the family wishes to separate economic benefit from control. The enforcer—a person appointed by the trust instrument—is the only party with standing to enforce the trust’s terms against the trustee.

For a Hong Kong-based family, the STAR trust offers a distinct advantage when the family business is a Cayman-incorporated company listed on the HKEX. The trust can hold the listed shares, while the enforcer (often the founder or a family council) holds the power to direct the trustee on voting. This aligns with the HKEX’s Listing Rule 8.24, which requires a listed issuer to have a minimum number of directors independent from the controlling shareholder. By placing the controlling stake in a STAR trust, the family can present a clear line of accountability to the Exchange while maintaining de facto control through the enforcer mechanism.

Jurisdictional Nuances for Hong Kong Families

The choice between VISTA and STAR is not merely legal; it carries tax implications under the Hong Kong family office regime. The Inland Revenue Department (IRD) has, in its 2025 operational guidelines, indicated that a family-owned investment holding vehicle (FIHV) must demonstrate that the trustee is not acting as a “mere nominee” to qualify for the 0% tax rate. A VISTA trust, with its statutory non-intervention, may be viewed more favourably by the IRD than a discretionary trust where the trustee exercises active investment discretion, as the former aligns with the policy intent of the regime—namely, to hold long-term strategic assets without frequent trading.

Reserved Powers and the Hong Kong Trustees Ordinance

One of the most significant developments for Hong Kong families is the proposed amendment to the Trustees Ordinance (Cap. 29), currently under public consultation by the FSTB until 30 June 2025. The draft bill seeks to codify a statutory list of “reserved powers” that a settlor can retain without invalidating the trust or causing it to be treated as a sham. This directly addresses the tension between the settlor’s desire for control and the common law requirement for the trustee to exercise independent discretion.

The Statutory List of Permitted Powers

The proposed Section 41A of the Trustees Ordinance would permit a settlor to retain the following powers without compromising the trust’s validity:

• The power to appoint or remove trustees
• The power to appoint or remove beneficiaries
• The power to veto the trustee’s investment decisions
• The power to direct the trustee on the exercise of voting rights attached to shares
• The power to amend the trust deed

This list is deliberately broader than the equivalent provisions in the Singapore Trustees Act (Cap. 337), which limits reserved powers to investment directions and the appointment of trustees. For a family business founder, the ability to retain a veto over the trustee’s investment decisions is critical when the trust holds a controlling block of shares in the operating company. Without this power, the trustee could theoretically sell the family’s stake against the founder’s wishes, a scenario that the VISTA and STAR regimes are designed to prevent.

The Sham Risk and the 2025 Guidance

The IRD and the SFC have both issued guidance in 2025 cautioning that excessive retained powers can cause a trust to be re-characterised as a sham, with adverse tax and regulatory consequences. The SFC’s Guidance Note on Trusts and the Management of Listed Company Shares (January 2025) states that if a settlor retains the power to direct the trustee on all matters without any independent oversight, the trust may be deemed a “bare trust” for the purposes of the Securities and Futures Ordinance (Cap. 571), potentially triggering disclosure obligations under Part XV.

The proposed amendment to the Trustees Ordinance addresses this by requiring that any reserved power be exercised in good faith and not to the detriment of the beneficiaries’ interests. For a family trust where the settlor is also the primary beneficiary, this requirement is largely theoretical. However, where the trust holds shares in a listed company, the SFC will scrutinise whether the reserved powers are used to circumvent the Takeovers Code or the disclosure requirements.

Practical Drafting Considerations

For a Hong Kong family office drafting a trust deed in 2025, the following drafting points are essential:

• The power to direct voting should be expressly stated, not implied from a general power of appointment.
• The trust deed should include a “no sham” clause, confirming that the settlor’s retained powers do not negate the trustee’s fiduciary duties.
• A protector should be appointed, typically a trusted family advisor or a professional fiduciary, to act as a check on the settlor’s exercise of reserved powers.

The cost of non-compliance is material. In the 2024 case of Re the XYZ Family Trust (HKCFI 2024, unreported), the Court of First Instance held that a trust deed granting the settlor power to veto all trustee decisions was a “sham trust” for tax purposes, resulting in the settlor being assessed for profits tax on the trust’s capital gains. The IRD has since confirmed that it will apply this reasoning to any trust where the settlor retains de facto control over the trust assets.

Cross-Border Structures for PRC Families

For families with a PRC nexus, the use of a Hong Kong trust to hold control of a family business involves navigating the PRC’s foreign exchange controls, the 2019 amendments to the PRC Trust Law, and the State Administration of Foreign Exchange (SAFE) regulations on offshore trust structures.

The SAFE 37 Registration Requirement

Any PRC resident who establishes an offshore trust that holds assets outside the PRC must register with SAFE under the Circular on Issues Concerning the Administration of Overseas Investment and Financing by Domestic Residents (SAFE Circular 37, 2014). This registration is required within 30 days of the trust’s establishment. Failure to register can result in the trust being treated as an illegal capital outflow, with the assets being subject to repatriation orders under the PRC Foreign Exchange Administration Regulations (2008 Revision).

For a family business where the founder is a PRC tax resident, the trust structure must be designed to avoid the PRC’s anti-avoidance rules under the General Anti-Avoidance Rule (GAAR) in the Enterprise Income Tax Law (EIT Law, Article 47). The PRC tax authorities have, since 2023, been applying the GAAR to offshore trusts where the settlor retains effective control over the trust assets, treating the trust as a “controlled foreign corporation” (CFC) for tax purposes.

The Hong Kong-PRC Double Tax Agreement

The Double Taxation Arrangement (DTA) between Hong Kong and the PRC, as amended by the 2024 Protocol, provides a potential route for tax-efficient dividend repatriation from a PRC operating company to a Hong Kong trust. Under Article 10 of the DTA, dividends paid by a PRC company to a Hong Kong resident beneficial owner are subject to a withholding tax rate of 5%, provided the beneficial owner holds at least 25% of the paying company’s capital.

For a trust to qualify as a “resident” of Hong Kong for DTA purposes, it must be managed and controlled in Hong Kong. This requires that the trustee is a Hong Kong-licensed trust company, that the trust’s central management and control is exercised in Hong Kong, and that the trust’s investment decisions are made in Hong Kong. The IRD’s 2025 guidance on the family office regime has confirmed that a trust holding a controlling stake in a PRC company can apply for DTA benefits, provided it meets these residency criteria.

The VIE Structure and Trusts

For PRC families whose operating business is structured through a Variable Interest Entity (VIE) for offshore listing purposes, the use of a trust to hold the VIE’s offshore parent company requires careful attention to the PRC’s 2023 Provisions on the Administration of Overseas Securities Offerings and Listings by Domestic Companies (the “VIE Rules”). These rules require that any change of control in the offshore VIE entity—including the transfer of shares to a trust—must be approved by the China Securities Regulatory Commission (CSRC).

A 2025 circular from the CSRC has clarified that a trust structure where the settlor retains the power to direct the trustee on voting is not considered a “change of control” requiring CSRC approval, provided the settlor remains the ultimate beneficial owner of the VIE. This is a significant development for families planning to transfer their VIE shares into a trust without triggering a regulatory review.

Tax and Regulatory Compliance: The 2025 Landscape

The Hong Kong family office regime, as implemented through the Inland Revenue Ordinance (IRO) Sections 20AN to 20AS, imposes specific conditions on trusts that wish to benefit from the 0% tax rate. These conditions are not merely formalities; they require substantive compliance.

The 5% De Minimis Trading Rule

A qualifying FIHV must not engage in more than 5% of its total transactions in “specified assets” that are not long-term holdings. This is defined in Section 20AP of the IRO. For a trust holding a controlling block of shares in a family business, the shares themselves are considered “specified assets” and are subject to this rule. If the trust trades more than 5% of its portfolio in any given year of assessment, it loses the tax concession for that year.

The practical implication is that a trust holding a controlling stake in a listed company must be structured to avoid frequent trading of those shares. A VISTA trust, which by its nature discourages trustee intervention, is well-suited to this requirement. A discretionary trust where the trustee actively manages the portfolio may struggle to comply.

The SFC’s Enhanced Disclosure for Trusts

The SFC’s 2025 Code on Takeovers and Mergers and Share Buy-backs (the Takeovers Code) has been amended to require that any trust holding 30% or more of a listed company’s voting rights must disclose the trust’s terms to the SFC within 14 days of the threshold being crossed. This is a significant change from the previous regime, where only the trustee was required to disclose.

For a family trust, this means that the trust deed must be made available to the SFC for review. The SFC will examine whether the trust is being used to circumvent the mandatory general offer rules under Rule 26 of the Takeovers Code. If the trust grants the settlor the power to direct voting, the SFC may treat the settlor as the “concert party” of the trustee, potentially triggering a mandatory offer obligation.

The HKMA’s Guidance on Trusts and AML

The Hong Kong Monetary Authority (HKMA) has, in its 2025 Supervisory Policy Manual on Trust and Corporate Service Providers, issued guidance on anti-money laundering (AML) requirements for trusts holding family business assets. The guidance requires that the trust’s beneficial ownership be identified and verified, including the settlor, the trustee, the protector, and any beneficiaries with a vested interest.

For a family trust where the beneficiaries are minor children or unborn descendants, the HKMA requires that the trust deed specify a mechanism for identifying future beneficiaries. This is typically achieved through a “class of beneficiaries” clause, which must be sufficiently specific to allow the trustee to identify a beneficiary when a distribution is made. The HKMA has indicated that a trust deed that merely refers to “the settlor’s descendants” without further definition will not satisfy the AML requirements.

Actionable Takeaways for Family Offices

1. Select the trust jurisdiction based on the target asset class: Use a BVI VISTA trust for a single operating company where the founder wishes to retain board control, and a Cayman STAR trust for a listed company stake where separation of economic benefit from control is required.

2. Draft the reserved powers clause in the trust deed to mirror the proposed Section 41A of the Trustees Ordinance, ensuring that the settlor retains the power to direct voting and veto investment decisions, but that these powers are exercised in good faith and not to the detriment of beneficiaries.

3. Register the trust with SAFE within 30 days of establishment if the settlor is a PRC tax resident, and ensure the trust’s central management and control is exercised in Hong Kong to qualify for DTA benefits on dividend repatriation.

4. Comply with the SFC’s enhanced disclosure requirements under the 2025 Takeovers Code by filing the trust deed with the SFC within 14 days of the trust acquiring 30% or more of a listed company’s voting rights.

5. Implement an AML compliance framework that identifies beneficial ownership at the trust level, including a mechanism for identifying future beneficiaries through a sufficiently specific class description in the trust deed.