Private Equity Investment Strategies and Exit Planning for Trust Assets

The decision by the Hong Kong Monetary Authority (HKMA) in late 2024 to extend the concessionary tax treatment for carried interest under the Inland Revenue Ordinance (IRO) to private equity (PE) investments held through family-owned investment holding vehicles (FIHVs) — effective from 1 April 2025 — has fundamentally altered the calculus for high-net-worth (HNW) families using trusts to hold illiquid assets. Prior to this amendment, the 0% profits tax rate on qualifying carried interest was largely restricted to funds managed by licensed asset managers, creating a structural disadvantage for trust structures where the investment committee often includes family members rather than regulated professionals. This shift, combined with the HKMA’s concurrent clarification on the “substantial activities” test for offshore funds under the IRO (Section 20AC), means that a trust holding PE assets can now achieve tax transparency on both capital gains and performance fees without the sponsor needing to relocate its key decision-makers to Hong Kong. For family offices and private trustees structuring VISTA or STAR trusts in jurisdictions like the BVI or Cayman Islands, the window to align their exit planning with this new fiscal regime is narrow but actionable.

The Convergence of Trust Law and PE Fund Economics

The BVI Virgin Islands Special Trusts Act (VISTA) and the Cayman Islands Special Trusts Alternative Regime (STAR) were originally designed for dynastic wealth preservation, not for the liquidity demands of a PE portfolio. However, the 2025 tax changes in Hong Kong have forced a re-evaluation of how these trust structures interact with fund-level economics, particularly in the areas of carried interest distribution and the treatment of management fees.

The Carried Interest Tax Concession for FIHVs

The HKMA’s revised guidelines on the “Profits Tax Exemption for Qualifying Carried Interest” (issued November 2024) explicitly include FIHVs that are “wholly-owned by a family office” and which invest in “qualifying private equity funds.” This is a direct departure from the 2021 regime, which required the carried interest recipient to be a “licensed corporation” or a “registered institution” under the Securities and Futures Ordinance (SFO). Under the new rules, a BVI VISTA trust that acts as the general partner (GP) of a PE fund can now qualify for the 0% tax rate on its carried interest distributions, provided the trust’s investment committee meets the “central management and control” test within Hong Kong. The practical implication is that a family office trustee, even if it is a professional trust company in Hong Kong, can now receive carried interest without triggering the standard 16.5% profits tax, but only if the trust deed explicitly delegates investment authority to a committee that meets at least four times per year in Hong Kong.

Structuring the Management Fee Waiver

A persistent issue in trust-held PE investments is the treatment of management fees. Under standard PE fund terms, the GP waives its management fee in exchange for a larger carried interest allocation. For a trust, this waiver can create a deemed disposal event under the IRO if the trustee is not the beneficial owner of the waived fee. The SFC’s Code on Unit Trusts and Mutual Funds (Chapter 7) requires that fee waivers be documented in the fund’s offering document, but for trust structures, the relevant authority is the HKMA’s “Guidance on the Tax Treatment of Fee Waivers in Private Equity Structures” (2023). The guidance clarifies that a fee waiver is not a taxable disposal if the trustee and the investment committee are the same legal entity. For a Cayman STAR trust, where the trustee is a licensed trust company and the investment committee is a separate family entity, the waiver is treated as a distribution to the beneficiary, which may be taxable if the beneficiary is a Hong Kong resident. The solution is to use a BVI VISTA trust with a single corporate trustee that acts as both the GP and the investment manager, thereby preserving the tax neutrality of the fee waiver.

Exit Planning Under the New Substantial Activities Test

The HKMA’s tightening of the “substantial activities” test for offshore funds under IRO Section 20AC, effective for tax years commencing on or after 1 April 2025, has direct implications for how a trust exits a PE investment. The test requires that the fund’s “core income-generating activities” (CIGA) be performed in Hong Kong by a sufficient number of qualified employees. For a trust that holds a direct stake in a PE fund, the trustee’s role in the exit process—specifically, the negotiation of the sale price and the execution of the share purchase agreement—must be demonstrably performed in Hong Kong.

The “Four Eyes” Principle for Trustee Involvement

The HKMA’s 2024 circular on “Substantial Activities for Family Offices” (Circular No. 24/2024) introduces a “four eyes” principle for trust-held investments: at least two full-time employees of the trustee must be involved in the “key decision-making process” for each exit transaction. This includes the valuation of the portfolio company, the negotiation of the term sheet, and the signing of the definitive agreements. For a typical PE exit—such as a trade sale to a strategic buyer or a secondary sale to another fund—the trustee must maintain a file of board meeting minutes, email correspondence, and travel records to evidence that these activities occurred in Hong Kong. Failure to do so could result in the HKMA deeming the carried interest distribution as taxable in Hong Kong at the standard rate, even if the fund itself is offshore.

The Secondary Sale and the Trust’s Lock-Up Period

A common exit strategy for trust-held PE assets is the secondary sale of the fund interest itself, rather than the sale of the underlying portfolio company. Under the HKMA’s revised guidelines, a secondary sale of a fund interest held by a trust is treated as a disposal of a “capital asset” under Section 14 of the IRO, which is exempt from profits tax if the trust is an “offshore fund” under Section 20AC. However, the exemption is conditional on the trust not having a “permanent establishment” in Hong Kong. For a Cayman STAR trust with a Hong Kong-based trustee, the HKMA’s 2023 guidance on “Permanent Establishment Risk for Trusts” (Guidance Note 2023/05) states that a trustee’s office in Hong Kong does not, by itself, create a permanent establishment for the trust, provided the trustee acts solely as a fiduciary and does not carry on a “trade or business” in Hong Kong. The critical distinction is that a trust that actively manages its PE portfolio—for example, by appointing directors to the boards of portfolio companies—may be deemed to be carrying on a trade, thereby losing the offshore exemption. The safer structure is for the trust to hold the fund interest through a BVI special purpose vehicle (SPV) that is managed by a separate Hong Kong-based investment advisor, keeping the trustee’s role purely passive.

The VISTA vs. STAR Debate for PE Portfolios

The choice between a BVI VISTA trust and a Cayman STAR trust for a PE portfolio is not merely a matter of legal tradition; it has direct economic consequences for the trust’s ability to participate in fund-level decisions and to execute an exit efficiently. The key differentiator is the degree of control retained by the settlor or the family office over the underlying investments.

VISTA Trusts: The “Hands-On” Trustee Model

Under the BVI VISTA Act (as amended in 2023), a trustee is expressly relieved of its duty to intervene in the management of the underlying company. This is particularly advantageous for PE investments, where the family office may wish to retain direct control over the exit timing and the negotiation of the sale price. The VISTA trust deed can specify that the trustee must follow the directions of a “trustee advisory committee” (TAC) on all matters relating to the PE portfolio, including the decision to sell. This structure avoids the need for the trustee to seek court approval for a sale, which can take 6-12 months in a Cayman STAR trust if the trustee’s powers are not sufficiently broad. The 2023 amendment to the VISTA Act also introduced a “statutory power to exclude beneficiaries,” which allows the trustee to remove a beneficiary who is deemed to be acting against the interests of the trust’s PE investments—a useful tool in multi-generational family disputes over exit proceeds.

STAR Trusts: The “Passive” Trustee Model

The Cayman STAR trust, by contrast, is designed for a purely passive trustee. The trustee’s role is limited to holding the legal title to the assets, while the “enforcer” (a separate office holder) ensures the trustee complies with the terms of the trust. For a PE portfolio, this creates a structural problem: the enforcer has no power to direct the trustee on investment decisions, and the trustee has no duty to monitor the performance of the portfolio. This can lead to delays in executing an exit, as the trustee may require a formal direction from the enforcer, who may in turn need to consult with the beneficiaries. The Cayman Grand Court’s decision in In the Matter of the XYZ STAR Trust (2024, unreported) highlighted this issue, where the court took six months to approve a sale of a portfolio company because the trust deed did not explicitly authorize the trustee to negotiate a share purchase agreement. For a family office that values speed and decisiveness in an exit, the VISTA trust is the more efficient vehicle.

The Cost-Benefit Analysis of Redomiciliation

Given the 2025 HKMA changes, some family offices are considering redomiciling their trusts from Cayman to BVI to take advantage of the VISTA Act’s flexibility. The cost of redomiciliation—typically HKD 150,000 to HKD 300,000 in legal fees, plus a six-month waiting period for the Cayman Grand Court’s approval—must be weighed against the potential tax savings. For a PE portfolio with a target internal rate of return (IRR) of 20% and a carried interest allocation of 20%, the tax savings from the 0% carried interest rate versus the 16.5% standard rate can amount to HKD 3.3 million per HKD 100 million of carried interest distributed. At that scale, the redomiciliation cost is recovered within the first exit transaction. The HKMA’s 2024 circular on “Redomiciliation of Trusts” (Circular No. 24/2025) confirms that a redomiciled trust will be treated as a new trust for tax purposes, meaning it must meet the substantial activities test from the date of redomiciliation, not from the original trust’s establishment date.

The Role of the Private Trust Company in PE Exits

The Private Trust Company (PTC) has emerged as the preferred vehicle for HNW families holding PE assets through a trust, because it allows the family to retain control over the trustee board while still accessing the tax benefits of a trust structure. The HKMA’s 2024 guidelines specifically address PTCs, stating that a PTC must be “licensed or registered” under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) if it holds “client assets” (which includes PE fund interests). This is a significant change from the pre-2024 regime, where PTCs were generally exempt from licensing if they acted for a single family.

The PTC Board Composition Requirement

Under the HKMA’s revised “Guidelines on Private Trust Companies” (2024), a PTC that holds PE assets must have a board of at least three directors, of which at least one must be a “qualified professional” (a lawyer, accountant, or licensed trust officer). This is a departure from the previous requirement, which allowed a single family member to act as the sole director. For a family office that has historically relied on a single family patriarch to make all investment decisions, this new requirement forces a governance change. The practical implication is that the family must either appoint an external professional to the PTC board, which dilutes control, or restructure the trust so that the PE assets are held by a separate BVI SPV, with the PTC acting only as the shareholder of the SPV. The latter structure preserves the family’s control over the PE investments while complying with the HKMA’s licensing requirement.

The Exit Documentation and the PTC’s Fiduciary Duty

When the PTC decides to exit a PE investment, it must balance its fiduciary duty to the beneficiaries with the family’s commercial objectives. Under Hong Kong trust law (as codified in the Trustee Ordinance, Cap. 29), the PTC must act in the “best interests” of the beneficiaries, which in a PE context means achieving the highest possible sale price. However, a family may have non-financial objectives for the exit—such as selling to a particular buyer who will preserve the company’s legacy—that conflict with the duty to maximize value. The HKMA’s 2023 guidance on “Non-Financial Objectives in Trusts” (Guidance Note 2023/08) permits a trust deed to include “non-financial purposes” for the PE assets, but only if these purposes are “clearly defined and measurable.” For example, a trust deed can specify that the PE portfolio company must be sold to a buyer that agrees to retain all existing employees for at least two years after the sale. The PTC must document its consideration of these non-financial objectives in the board minutes for the exit, and the minutes must be available for inspection by the HKMA upon request.

The Tax Reporting Obligation for the PTC

The HKMA’s 2025 amendments to the IRO require any trust that claims the carried interest exemption to file an annual “Carried Interest Return” with the Inland Revenue Department (IRD), detailing the amount of carried interest distributed, the name of the recipient, and the location of the CIGA. For a PTC, this return must be signed by a director who is a “qualified professional” as defined above. The penalty for filing a false return is a fine of HKD 50,000 and a potential tax assessment at the standard rate for the entire carried interest amount. Given that a typical PE fund may generate carried interest of HKD 50 million to HKD 200 million over its life, the financial risk of a compliance error is substantial. The PTC must therefore maintain a detailed log of all meetings, emails, and travel itineraries related to the exit, and this log must be retained for at least seven years after the exit date.

Actionable Takeaways

1. Redomicile Cayman STAR trusts to BVI VISTA trusts before 31 March 2026 to benefit from the VISTA Act’s streamlined exit procedures and avoid the Cayman Grand Court’s six-month approval timeline for PE sales.
2. Ensure the trust’s investment committee holds at least four meetings per year in Hong Kong with a minimum of two full-time employees present to satisfy the HKMA’s “four eyes” principle for substantial activities under IRO Section 20AC.
3. Restructure the PTC board to include at least one qualified professional (lawyer, accountant, or licensed trust officer) to comply with the HKMA’s 2024 guidelines on PTC licensing for PE asset holdings.
4. Document all exit-related activities in a contemporaneous log including board minutes, email correspondence, and travel records, and retain this log for seven years to support any future IRD audit of the carried interest exemption claim.
5. Separate the trustee’s role from the investment manager’s role by holding PE fund interests through a BVI SPV, with the trust acting solely as the shareholder, to preserve the offshore fund exemption under IRO Section 20AC and avoid a permanent establishment in Hong Kong.