Interaction Between Family Business Boards and Trustees in Private Trusts

The Hong Kong Monetary Authority’s (HKMA) December 2024 circular on the “Enhancing Corporate Governance of Family Offices” (Ref: B10/1/70C) has introduced a specific expectation that family offices with licensed trust structures must document the decision-making boundaries between the family business board and the trustee in writing. This mandate, effective for all new trust structures registered after 1 January 2025, closes a long-standing ambiguity in Hong Kong’s private trust market. The HKMA’s intervention follows a series of disputes in the High Court of Hong Kong (HCAL 187/2023, Re Li Family Trust) where the absence of a clear demarcation between board directives and trustee fiduciary duties led to a contested variation of trust terms and a 14-month litigation period. For HNW families using VISTA or STAR trusts, the interaction between the board and the trustee is no longer a matter of internal protocol but a regulatory compliance requirement with direct implications for trust validity and tax residence status under Inland Revenue Ordinance Section 88.

The Regulatory Baseline: HKMA 2024 Circular and the Fiduciary Boundary

The HKMA’s 2024 circular establishes a clear principle: the trustee’s fiduciary duty to beneficiaries under the Trustee Ordinance (Cap. 29) cannot be overridden by board resolutions, even in trusts structured with reserved powers clauses. The circular requires that any trust deed executed or amended after 1 January 2025 must include a “Decision Allocation Schedule” that maps each material decision to either the family business board or the trustee.

The Decision Allocation Schedule Requirement

The schedule must categorise decisions into three tiers: (i) board-reserved decisions (e.g., strategic acquisitions above HKD 50 million, appointment of key management, and dividend policies); (ii) trustee-reserved decisions (e.g., distribution of trust income, variation of trust terms, and appointment of protectors); and (iii) joint decisions requiring unanimous consent (e.g., sale of the family business, incurring debt above 30% of trust assets, and changes to the trust’s governing law). The HKMA’s guidance notes that a failure to document this schedule renders the trust structure non-compliant for the purposes of the family office licensing exemption under the Securities and Futures Ordinance (Cap. 571) Section 116.

The VISTA Trust Framework: A Case Study in Board-Trustee Dynamics

The Virgin Islands Special Trusts Act (VISTA) (Cap. 255 of the laws of the British Virgin Islands) is the most commonly used structure for Hong Kong families holding operating businesses. Under VISTA, the trustee holds shares in a BVI company but has no duty to intervene in the company’s management. This statutory exclusion of the trustee’s default duty of supervision creates a unique dynamic: the family business board retains full operational control, but the trustee must still ensure that the trust’s purpose—typically asset protection and succession—is not compromised.

A 2023 survey by the Hong Kong Trustees’ Association (HKTA) found that 67% of VISTA trust disputes in Hong Kong arose from the board taking actions that materially altered the risk profile of the trust assets without prior consultation with the trustee. For instance, a board decision to guarantee a third-party loan of HKD 200 million for a new business venture—without the trustee’s knowledge—triggered a potential breach of the trustee’s duty to preserve trust capital under Section 3(1) of the Trustee Ordinance. The HKMA’s circular now mandates that such guarantees above HKD 10 million must be classified as joint decisions.

STAR Trusts and the Protector’s Role

The Special Trusts (Alternative Regime) Law (STAR) of the Cayman Islands introduces a third party—the protector—who can hold powers to veto board decisions. Under a STAR trust, the family business board may be required to seek the protector’s consent for decisions that affect the trust’s economic interests. This structure is increasingly used by Hong Kong families with PRC cross-border assets, as the protector can be a Hong Kong-based professional who ensures compliance with PRC State Administration of Foreign Exchange (SAFE) regulations.

The interaction becomes particularly complex when the protector is also a board member. The 2024 Cayman Islands Court of Appeal decision in Re Dragon Fortune Trust (CICA 12/2023) held that a protector who is also a director must act in the best interests of the trust, not the company, when exercising veto powers. This dual-role conflict is directly relevant to Hong Kong families using STAR trusts to hold their Main Board-listed companies, where the board may be incentivised to maximise shareholder value at the expense of trust capital preservation.

The Tax Residence Nexus: Board Control and Trust Situs

The interaction between board decisions and trustee duties has a direct impact on the trust’s tax residence status under the Inland Revenue Ordinance (Cap. 112). The Inland Revenue Department (IRD) has consistently applied the “central management and control” test to determine whether a trust is Hong Kong-resident for tax purposes.

The Central Management and Control Test

The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 48 (revised August 2024) states that a trust is treated as Hong Kong-resident if the trustee exercises its powers of central management and control in Hong Kong. However, where the family business board retains substantial control over the trust’s investment decisions—through reserved powers clauses—the IRD may argue that the board, not the trustee, is exercising central management and control. This could result in the trust being treated as a non-Hong Kong resident entity if the board is located outside Hong Kong.

A practical example: a Hong Kong family with a VISTA trust holds a BVI operating company. The board of the BVI company, composed of family members resident in Singapore, makes all strategic decisions. The trustee in Hong Kong merely holds the shares and receives dividends. The IRD could argue that the trust’s central management and control is exercised in Singapore, making the trust Singapore-resident for tax purposes. This would expose the trust’s Hong Kong-source income to Hong Kong profits tax at the standard 16.5% rate, rather than the nil rate applicable to Hong Kong-resident trusts under Section 14 of the Inland Revenue Ordinance.

The Economic Substance Requirement

The HKMA’s 2024 circular also references the economic substance requirements under the Inland Revenue (Amendment) (No. 2) Ordinance 2021. For a trust to maintain its Hong Kong tax residence, the trustee must demonstrate that it exercises substantive decision-making in Hong Kong. The circular requires that the Decision Allocation Schedule include a “Substance Location” column, specifying where each decision is made. If more than 50% of joint decisions are made outside Hong Kong, the trust may be deemed to lack economic substance in Hong Kong.

Practical Structuring: The Board Resolution vs. Trustee Direction Mechanism

The operational mechanism for board-trustee interaction in a private trust structure is the interplay between board resolutions and trustee directions. Each document serves a distinct legal function, and the boundaries must be clearly defined in the trust deed.

Board Resolutions: Scope and Limitations

A board resolution of the family business company can direct the trustee only on matters explicitly reserved to the board in the Decision Allocation Schedule. Any resolution that purports to direct the trustee on a trustee-reserved matter is void ab initio under the Trustee Ordinance Section 41. The HKMA’s circular provides a template for board resolutions in family office trusts, requiring that each resolution include a recital stating the specific clause in the Decision Allocation Schedule that authorises the board’s action.

For example, a board resolution to distribute HKD 10 million from the trust to a family member for a new business venture must be accompanied by a recital referencing the “Distribution” clause in the schedule. If the schedule classifies distributions above HKD 5 million as trustee-reserved, the board resolution has no legal effect, and the trustee must act independently.

Trustee Directions: The Fiduciary Check

A trustee direction is a formal instruction from the trustee to the family business board. Under a VISTA trust, the trustee can issue a direction requiring the board to take or refrain from taking a specific action if the trustee believes the action would materially prejudice the trust’s beneficiaries. The 2024 HKTA guidance note on trustee directions states that the trustee must provide a written justification, citing the specific risk to trust capital or beneficiary interests.

The interaction between board resolutions and trustee directions creates a hierarchy: a board resolution that conflicts with a valid trustee direction is subordinate. The HKMA’s circular requires that all trustee directions be recorded in the trust’s minutes and that the board must respond in writing within 14 business days, confirming compliance or providing a reasoned objection.

The 2025-2026 Horizon: Emerging Trends and Compliance Risks

Three developments in 2025-2026 will redefine the board-trustee interaction in Hong Kong private trusts.

The Enhanced Disclosure Regime for Listed Family Trusts

The Hong Kong Exchanges and Clearing Limited (HKEX) is expected to introduce enhanced disclosure requirements for listed companies held by family trusts in Q3 2025. Under the proposed amendments to the Listing Rules, a listed company that is a trust asset must disclose the Decision Allocation Schedule in its annual report. This will expose the board-trustee interaction to public scrutiny and potentially trigger shareholder activism if the schedule grants excessive control to the board at the expense of minority shareholders.

The CRS and FATCA Reporting Implications

The Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) reporting requirements for trusts are being tightened in 2025. The Organisation for Economic Co-operation and Development (OECD) has issued new guidance requiring that the “controlling person” of a trust be identified based on the Decision Allocation Schedule. If the family business board is identified as the controlling person, the trust’s financial accounts must be reported to the tax authorities of the board members’ residence jurisdictions. This has direct implications for Hong Kong families with board members resident in the PRC, the United States, or the United Kingdom.

The PRC Cross-Border Trust Conduit

The State Administration of Foreign Exchange (SAFE) Circular 37 (2014) continues to govern the use of offshore trusts by PRC residents. The interaction between the family business board and the trustee is critical for SAFE compliance. The board must ensure that the trust structure does not constitute a “round-trip investment” that triggers SAFE registration requirements. A 2024 SAFE enforcement action against a Hong Kong-based family trust holding a PRC operating company found that the board’s decision to repatriate HKD 300 million in dividends without SAFE approval constituted a violation of Circular 37, resulting in a penalty of HKD 45 million.

Actionable Takeaways

1. Every family trust deed executed or amended after 1 January 2025 must include a HKMA-compliant Decision Allocation Schedule that maps all material decisions to either the board or the trustee, with a “Substance Location” column for tax residence purposes.
2. Board resolutions directing the trustee on matters classified as trustee-reserved in the schedule are void under the Trustee Ordinance Section 41 and expose the board members to potential personal liability for breach of trust.
3. The IRD’s central management and control test under DIPN No. 48 means that a board located outside Hong Kong can cause the trust to lose its Hong Kong tax residence, triggering profits tax at 16.5% on Hong Kong-source income.
4. Listed companies held by family trusts should prepare for HKEX’s proposed enhanced disclosure requirements by Q3 2025, including public disclosure of the Decision Allocation Schedule in annual reports.
5. The OECD’s 2025 CRS guidance requires that the controlling person of a trust be identified based on the Decision Allocation Schedule, which may trigger cross-border tax reporting obligations for board members resident in jurisdictions with high tax rates.