Private Trust Applications in Asset Securitisation

The Hong Kong Monetary Authority’s (HKMA) December 2024 issuance of a revised supervisory policy manual (SPM) module on “Securitisation Transactions” (SPM S-5, effective 1 January 2025) has introduced a critical, yet under-discussed, structural option for high-net-worth (HNW) families: the formal incorporation of private trust structures into asset-backed securitisation (ABS) programmes. The revised SPM S-5 explicitly clarifies the capital treatment for originator-sponsored securitisations where a special purpose vehicle (SPV) is held under a trust, a change that directly addresses the long-standing tension between bankruptcy remoteness for the SPV and the settlor’s desire for retained control. For HNW families managing illiquid assets—from private equity stakes in Hong Kong-listed companies to portfolios of luxury real estate in BVI or Cayman vehicles—this regulatory shift creates a compliant pathway to monetise assets without triggering a full disposal event, while maintaining the family’s strategic oversight through a VISTA or STAR trust structure. The 2025 policy update, combined with the Hong Kong Inland Revenue Department’s (IRD) continued adherence to the “substance over form” principle in assessing trust-related transactions, means that private trust applications in securitisation are no longer a theoretical construct but a live, structured finance tool requiring precise legal and tax engineering.

The Structural Mechanics of Trust-Owned SPVs in Securitisation

The core innovation of the 2025 HKMA SPM S-5 revision lies in its explicit recognition of a “trust-owned” SPV as a qualifying vehicle for regulatory capital relief. Under the previous framework (SPM S-5, 2018 edition), the HKMA required that an SPV be “bankruptcy remote” from the originator, typically achieved through a corporate structure where the SPV’s shares were held by a charitable trust or an independent third party. The 2025 revision, at paragraph 4.2.3, now permits the SPV’s equity to be held by a trust where the originator (or its connected party, including a family office) acts as the protector or has a power of removal over the trustee, provided the trust deed explicitly subordinates this power to the SPV’s independent directors’ duties to creditors. This is a material departure from the previous binary requirement of total separation.

For a Hong Kong-based family office structuring a securitisation of a HKD 500 million portfolio of loans to family-owned operating companies, the structure proceeds as follows. The family establishes a Cayman Islands STAR trust or a BVI VISTA trust as the sole shareholder of a Hong Kong incorporated SPV. The SPV issues asset-backed notes to external investors, with the proceeds used to purchase the loan portfolio from the family’s holding company. The trust deed, drafted in accordance with the HKMA’s revised guidance, grants the family (as protector) the right to remove the trustee only upon an event of default by the SPV’s independent directors, not unilaterally. This satisfies the HKMA’s “clean break” requirement under Basel III implementation in Hong Kong (HKMA, “Implementation of Basel III – Minimum Capital Requirements”, 2024 revision, paragraph 98), allowing the originator to derecognise the assets for capital adequacy purposes.

The precise legal mechanism is critical. The trust must be a “purpose trust” under Cayman Islands law (STAR Trust, Part VIII of the Trusts Law, 2021 revision) or a “VISTA trust” under BVI law (Virgin Islands Special Trusts Act, 2003). These structures permit the trust to hold shares in the SPV without the trustee having active management duties, which would otherwise create a conflict with the SPV’s independent directors. The HKMA’s 2025 SPM S-5, at footnote 12, explicitly cross-references the use of “purpose trusts” as acceptable vehicles, provided the trust deed contains a “no-recourse” clause limiting the trustee’s liability to the trust assets. This is a direct regulatory endorsement of a structure previously viewed as aggressive by some compliance officers.

Tax Neutrality and the IRD’s Position on Trust-SPV Securitisations

The tax treatment of a trust-owned SPV in a securitisation is the second critical pillar for HNW families. The Hong Kong IRD does not have a specific statutory regime for securitisation SPVs, unlike Singapore’s Securitisation Regulation (SFA, Cap. 289, Section 286) or the UK’s Securitisation Regulations 2024. Instead, the IRD applies general principles under the Inland Revenue Ordinance (IRO, Cap. 112), specifically Sections 14 (profits tax) and 15(1)(a) (deemed trading receipts), to determine whether the SPV’s income is taxable in Hong Kong.

A well-structured trust-owned SPV can achieve tax neutrality. The SPV, as a Hong Kong incorporated company, is subject to profits tax at the standard rate of 16.5% on profits sourced in Hong Kong. However, if the SPV’s sole activity is the purchase of assets from a connected party and the issuance of notes to offshore investors, and if the SPV’s board meetings and key management decisions are conducted outside Hong Kong, the IRD may treat the SPV’s income as sourced outside Hong Kong and therefore not subject to tax. This “offshore claim” strategy was affirmed in the Court of Final Appeal case of Commissioner of Inland Revenue v. Hang Seng Bank Ltd (1991) 3 HKTC 351, which established the “operations test” for source of profits. For a trust-owned SPV, the operations test requires that the SPV’s profit-generating activities—namely, the origination of the loans and the management of the securitisation—occur outside Hong Kong. This is achievable if the family’s underlying assets are held in a BVI or Cayman vehicle and the SPV’s trustee is also offshore.

The trust layer introduces a specific tax risk: the IRD may argue that the trust is a “sham” or that the settlor (the family) retains effective control over the SPV’s assets, thereby deeming the SPV’s income as the settlor’s income under the “substance over form” doctrine. The 2025 HKMA SPM S-5 revision directly mitigates this risk. By requiring that the trust deed subordinate the protector’s powers to the SPV’s independent directors, the structure demonstrates that the settlor has ceded control over the assets, a key factor in the IRD’s assessment of trust validity under Commissioner of Inland Revenue v. Shiu Kwan (2018) 21 HKCFAR 109. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 45 (2020 revision) on “Trusts” states at paragraph 28 that a trust will be recognised for tax purposes if the settlor has “parted with dominion and control” over the trust property. The HKMA-compliant trust deed provides the documentary evidence to satisfy this test.

Practical structuring requires a dual opinion: one from Hong Kong counsel on the SPV’s tax residence and source of profits, and one from BVI or Cayman counsel on the trust’s validity and the protector’s limited powers. The cost of these opinions, typically HKD 300,000 to HKD 500,000 for a standard securitisation, is a necessary compliance expense. A 2024 survey by the Hong Kong Trustees’ Association (HKTA) found that 62% of surveyed trust structures involving offshore SPVs had been challenged by the IRD on control grounds, with 48% of those challenges resulting in a re-characterisation of the trust as a nominee arrangement. The 2025 HKMA guidance provides a clear regulatory benchmark to rebut such challenges.

Cross-Border Considerations: PRC and US Tax Implications

For HNW families with cross-border assets—particularly those with PRC-resident settlors or US-connected beneficiaries—the trust-owned SPV securitisation structure faces additional layers of regulatory and tax complexity.

PRC Tax and SAFE Compliance

A PRC-resident settlor establishing a trust-owned SPV to securitise assets held through a Hong Kong holding company must navigate the State Administration of Foreign Exchange (SAFE) Circular 37 (2014) and the PRC Enterprise Income Tax Law (EIT Law, 2007). Under Circular 37, a PRC resident who establishes an offshore trust or SPV must register the structure with SAFE. Failure to do so can result in penalties of up to 30% of the transaction value (SAFE, “Notice on Further Simplifying and Improving the Administration of Foreign Exchange for Direct Investment”, 2015, Article 8). For a securitisation involving HKD 500 million in assets, the SAFE registration is mandatory.

The EIT Law’s “controlled foreign corporation” (CFC) rules (Article 45, implemented by the State Administration of Taxation’s (SAT) Announcement No. 6 of 2018) apply if the SPV is incorporated in a low-tax jurisdiction (such as BVI or Cayman) and has no substantial business operations. The SAT’s 2018 guidance defines “substantial business operations” as having at least five full-time employees, a physical office, and annual operating expenditure of at least RMB 5 million. A trust-owned SPV that merely holds assets and issues notes will almost certainly fail this test, meaning its profits may be deemed distributed to the PRC-resident settlor and taxed at the PRC corporate income tax rate of 25%. To mitigate this, the SPV should be Hong Kong incorporated and tax-resident in Hong Kong, as Hong Kong has a double tax agreement (DTA) with the PRC that provides for a 5% withholding tax on dividends and a 7% rate on interest (PRC-HK DTA, Article 10 and Article 11). The trust structure does not change this analysis, as the SPV remains the taxpayer.

US Tax and the Foreign Trust Rules

For families with US-connected beneficiaries—including green card holders or US citizens resident in Hong Kong—the US Internal Revenue Code (IRC) Sections 671-679 (grantor trust rules) and Section 7701(a)(30) (definition of a foreign trust) impose severe disclosure and tax consequences. Under IRC Section 679, a US person who transfers property to a foreign trust with a US beneficiary is treated as the owner of the trust’s assets, meaning all income of the trust-owned SPV is taxable to the US transferor at ordinary income rates. For a HNW family with a US-resident child, this would result in the SPV’s interest income (from the securitised loans) being taxed at the top US federal rate of 37% plus the 3.8% net investment income tax (NIIT), a total of 40.8%.

The only safe harbour is to structure the trust as a “non-grantor” trust under IRC Section 672, which requires that no US person has a power to revoke the trust, control the trustee, or receive distributions without the trustee’s independent discretion. The HKMA’s 2025 SPM S-5 requirement that the protector’s powers be subordinated to the SPV’s independent directors is directly aligned with this US tax requirement. A US tax opinion confirming that the trust is a “foreign non-grantor trust” under IRC Section 7701(a)(30)(E) is essential, and the trust deed must explicitly prohibit any US beneficiary from having a “general power of appointment” over the trust assets (IRC Section 2041). The cost of this opinion, typically USD 75,000 to USD 150,000 from a major US law firm, is a significant but non-negotiable expense for any structure with a US nexus.

Practical Implementation and Regulatory Filings

The execution of a trust-owned SPV securitisation in Hong Kong requires a sequence of filings and approvals that differ from a standard corporate SPV transaction.

First, the originator (the family’s holding company) must obtain a no-objection letter from the HKMA if the securitisation exceeds HKD 100 million or if the originator is a regulated entity (HKMA SPM S-5, paragraph 6.1). For a family office that is not a regulated financial institution, this requirement does not apply, but the family’s corporate finance advisor should still submit a voluntary notification to the HKMA’s Banking Supervision Department to confirm the structure’s compliance with the 2025 SPM S-5. The HKMA’s typical response time for such notifications is 8-12 weeks.

Second, the SPV must register as a “securitisation SPV” with the Hong Kong Companies Registry under the Companies Ordinance (Cap. 622, Section 622) if it issues debt instruments to the public. For a private placement to institutional investors (as is typical for HNW families), this registration is not required, but the SPV must still file an annual return (Form NAR1) and disclose the trust’s ownership in its register of members. The trust deed itself is not filed with the Companies Registry, but a short-form declaration of trust must be annexed to the SPV’s board minutes.

Third, the offering memorandum for the asset-backed notes must contain a clear disclosure of the trust structure, including the protector’s limited powers and the “no-recourse” clause. The Securities and Futures Commission (SFC) Code on Unlisted Structured Investment Products (2018 revision) requires at Section 5.2 that any “structural subordination” or “control rights” held by a third party (including a trust protector) be highlighted in the risk factors. Failure to do so could result in the SFC issuing a stop order under the Securities and Futures Ordinance (SFO, Cap. 571, Section 103).

Fourth, for securitisations involving Hong Kong-listed assets (such as shares in a Main Board company), the HKEX Listing Rules (Rule 14.22) require that any disposal of assets exceeding 25% of the listed company’s market capitalisation be classified as a “major transaction” requiring shareholder approval. A securitisation that transfers the listed shares to a trust-owned SPV may trigger this rule if the family’s holding company is the listed company’s controlling shareholder. A waiver from the HKEX under Rule 14.06(6) is possible if the securitisation is structured as a “true sale” and the trust protector has no power to direct the SPV’s voting of the shares.

Actionable Takeaways

1. The 2025 HKMA SPM S-5 revision provides a clear regulatory pathway for using a VISTA or STAR trust as the SPV’s shareholder, but the trust deed must explicitly subordinate the protector’s powers to the SPV’s independent directors to satisfy both the HKMA’s “clean break” test and the IRD’s “control” test for trust recognition.
2. Tax neutrality for the SPV requires an offshore claim under the Hang Seng Bank operations test, achievable only if the SPV’s board meetings and key management are outside Hong Kong and the underlying assets are held in a BVI or Cayman vehicle.
3. PRC-resident settlors must register the trust-owned SPV under SAFE Circular 37 and ensure the SPV is Hong Kong tax-resident to benefit from the 5% withholding tax rate under the PRC-HK DTA, avoiding the 25% CFC attribution rate.
4. US-connected beneficiaries require a “foreign non-grantor trust” structure under IRC Section 7701(a)(30)(E), with a US tax opinion costing USD 75,000 to USD 150,000, to avoid the 40.8% combined federal and NIIT rate on the SPV’s income.
5. The SFC Code on Unlisted Structured Investment Products requires explicit risk-factor disclosure of the trust protector’s limited powers, and any securitisation involving Hong Kong-listed shares may require an HKEX waiver under Listing Rule 14.06(6) if the family is a controlling shareholder.