Hong Kong is an attractive jurisdiction for establishing foundations due to its strategic location, well-developed legal framework, and favorable tax environment.
Hong Kong does not recognise foundation in law in technical terms, so setting up a foundation in Hong Kong requires understanding the various legal structures available, their respective registration processes, associated costs, and tax implications.
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This comprehensive guide explores the essentials of how to set up a foundation in Hong Kong, providing potential founders with the necessary knowledge to make informed decisions about their philanthropic ventures.
There are three types of legal structures for a non-profit organization in Hong Kong, namely trusts or charitable trusts, companies limited by guarantee (CLGs), and societies under the Societies Ordinance.
Trusts (or Charitable Trusts)
A charitable trust is created when a settlor transfers assets to a trustee to be used for public benefit purposes (relief of poverty, education, religion, etc.).
The trust deed must clearly define the charitable purposes and appoint at least one trustee.
To enjoy tax exemption, trusts must apply to the Inland Revenue Department for recognition under section 88 of the Inland Revenue Ordinance using Form C.D.22 and annexures.
Once approved, income applied solely to charitable purposes is exempt from profits tax.
Key considerations:
- No formal registration of trusts is required, but you must apply for tax exemption if you intend to raise public donations.
- Trustees are personally liable unless the trust deed limits liability.
- Drafting the trust deed can cost around HK$200,000 for complex arrangements.
- Trustee fees typically range from 1%–2% of assets under management per annum.
Cost of Setting Up a Trust in Hong Kong
Setting up a trust in Hong Kong involves various costs that vary depending on the complexity of the trust structure and the professionals involved.
The main expenses include:
- Professional Fees: Engaging lawyers to draft the trust deed typically costs between HKD 50,000 and HKD 200,000, depending on the complexity of the arrangement and the reputation of the law firm.
- Trustee Fees: Professional trustees charge initial setup fees ranging from HKD 15,000 to HKD 30,000, plus annual administration fees typically calculated as a percentage of the trust assets (usually 1% to 2% per annum).
- Registration Fees: Registration may only be needed for specific assets held by the trust.
- Tax Exemption Application: If applying for tax exemption as a charitable institution under section 88 of the Inland Revenue Ordinance, additional professional fees may apply for preparing the application.
- Annual Compliance Costs: Ongoing expenses include accounting, audit, and legal compliance services, which can range from HKD 10,000 to HKD 30,000 annually.
It’s advisable to budget at least HKD 50,000 to HKD 100,000 for the initial setup of a charitable trust in Hong Kong.
Additional annual maintenance costs of approximately HKD 20,000 to HKD 50,000, excluding asset-based trustee fees might also be needed.
Hong Kong Trust Tax
In Hong Kong, the taxation of trusts follows specific principles outlined in the Inland Revenue Ordinance. Section 2 of the Ordinance defines a taxable person as including a trustee.
This means that trustees may be subject to profits tax on income derived from carrying on a business in Hong Kong.
There are two main scenarios in which trustees may be taxable:
- Professional Trustee Business:
If a trustee carries on the trade or business of being a professional trustee in Hong Kong and derives profits through remuneration for acting as trustee.
These profits may be subject to profits tax.
- Business Activities on Behalf of the Trust:
Imagine a trustee carrying on a trade, business, or profession on behalf of a trust (e.g., administering a family business or actively trading in shares).
If that’s the case, then the trustee may be carrying on both the business of being a professional trustee and the business administered on behalf of the trust.
For charitable trusts that qualify for tax exemption under section 88 of the Inland Revenue Ordinance, income and profits are exempt from tax provided they are applied solely for charitable purposes.
However, this exemption is not automatic and must be applied for and approved by the Inland Revenue Department.
To determine if profits are Hong Kong’s source (and therefore taxable), the authorities look at:
- What the taxpayer has done to earn the profits
- Where these activities were carried out, discounting purely antecedent or incidental transactions.
Companies Limited by Guarantee
A company limited by guarantee (CLG) in Hong Kong is a specialized legal structure primarily designed for non-profit organizations.
This type of company is characterized by the absence of share capital and shareholders, making it distinct from traditional for-profit companies.
Instead of shareholders, a CLG has members who act as guarantors. Each member agrees to contribute a predetermined nominal amount, typically HKD 1.
This nominal amount represents the maximum liability that each member may face in case of bankruptcy or dissolution of the company. This limited liability protects members’ personal assets from the company’s debts.
Even without share capital, a CLG is a legal entity separate from its members and has its own legal existence. This allows the company to own property, enter into contracts, and engage in legal proceedings independently of its members.
The directors of a CLG hold the same legal duties and responsibilities as directors of traditional limited liability companies.
However, due to its non-profit objective, a CLG cannot distribute profits to its members. This means that all profits must be reinvested in the activities of the company.
To establish a CLG in Hong Kong, founders must:
- Choose a unique name that reflects the organization’s purpose
- Draft a Memorandum and Articles of Association outlining the company’s objectives, governance structure, and operational rules
- Appoint at least two directors who must be at least 18 years old and a company secretary
- Submit Form NNC1G to the Companies Registry and pay the incorporation fee—HK$155 e-incorporation; HK$170 hard copy.
- Obtain a Business Registration Certificate from the Inland Revenue Department IRD—HK$2,200 for a 1-year certificate.
- Open a bank account in Hong Kong for the organization
- Apply for tax exemption if qualifying as a charitable organization
CLGs are widely used for charitable and philanthropic foundations in Hong Kong.
This is due to their separate legal personality, limited liability for members, and governance structure that provides transparency and accountability.
Profits must be reinvested into the organization, and surplus cannot be distributed to members
Societies under Societies Ordinance (Cap. 151)
Societies or associations represent a simpler structure suitable for smaller, community-based organizations.
They are less formal than companies and have fewer regulatory requirements. In Hong Kong, societies are governed by the Societies Ordinance (Cap. 151).
The Societies Ordinance defines a society as “any club, company, partnership or association of persons, whatever the nature or objects, to which the ordinance applies.”
Under the Societies Ordinance, all societies must either be registered or exempted from registration.
The registration process involves applying for the Societies Officer, who is also the Commissioner of Police.
This application should provide details about the society’s purpose, activities, membership, and leadership structure. The registration process includes the following steps:
- Application Submission:
Complete and submit Form Soc-1 (Application for Registration or Exemption from Registration as a Society) to the Societies Office.
- Constitutional Document:
Provide a copy of the society’s constitution or rules, which should outline the society’s name, objectives, membership criteria, management structure, meeting procedures, financial management, and dissolution provisions.
- Review Process:
The Societies Officer will review the application to ensure compliance with the Ordinance and that the society’s objectives and activities are lawful.
- Registration Decision:
The Societies Officer may register the society, exempt it from registration, or refuse registration if the society is deemed unlawful or likely to be used for unlawful purposes.
HK Societies Limitations
Societies in Hong Kong face several limitations compared to CLGs:
- Lack of Legal Personality:
Societies do not have separate legal personality, meaning they cannot own property, enter into contracts, or sue/be sued in their own name.
These actions must be undertaken by individual members on behalf of the society.
- Limited Liability Protection:
Members of societies may face personal liability for the society’s activities and debts.
- Governance Challenges:
Societies often face challenges in terms of formal governance structures, particularly as they grow in size and complexity.
- Funding Limitations:
Some funders and donors may be reluctant to provide substantial funding to organizations without separate legal personality.
Despite these limitations, societies remain popular for community-based organizations, interest groups, and smaller non-profit initiatives. This is especially due to their relatively simple establishment process and fewer ongoing compliance requirements compared to CLGs.
Conclusión
Setting up a foundation in Hong Kong offers various options to suit different organizational needs, scales, and purposes.
Each legal structure—trusts, companies limited by guarantee, and societies—presents distinct advantages and considerations.
For large-scale philanthropic initiatives with substantial assets, charitable trusts or companies limited by guarantee generally provide more robust frameworks.
Companies limited by guarantee offer the additional benefit of limited liability and separate legal personality.
This makes them particularly suitable for organizations engaging in ongoing activities, employing staff, and managing significant operational responsibilities.
For smaller community-based initiatives or special interest groups, societies provide a simpler and more cost-effective option.
However, these come with less liability protection and greater limitations on activities.
When establishing a foundation in Hong Kong, careful consideration should be given to the organization’s purpose, scale, activities, and long-term plans.
Consulting with legal and tax professionals experienced in Hong Kong’s non-profit sector is highly recommended to ensure compliance with all relevant laws and regulations while maximizing the foundation’s impact and sustainability.
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