Where holding a family business interest in trust stands now

A family business is rarely just an asset. It is the employment of the next generation, the collateral for the bank, the thread that holds the family map together across multiple jurisdictions. When a principal asks whether the operating interest should sit in trust, the question is never purely structural. It is about who controls the business when the founder is no longer there, which legal system governs that transition, and whether a foreign court can unwind what was carefully assembled.

Holding a family business interest in trust – governed in Hong Kong by the Trustee Ordinance (Cap. 29), substantially reformed with effect from 1 December 2013 – is one of the most legally intensive decisions a cross-border family can make. Done well, it separates beneficial ownership from management, protects operating assets from a single heir's creditors, and creates a succession mechanism that does not depend on a will. Done poorly, it triggers forced-heirship challenges in the family's home jurisdiction, governance deadlocks, and tax surprises in the jurisdictions where the business actually operates.

This analysis maps the current position: the commercial stakes, the governing instruments, the cross-border pressure points, and where our desk sees the risk concentrated in 2027.

What is actually at stake when a family puts its operating interest in trust?

The founding question is control. A trust separates legal title from beneficial enjoyment. The trustee holds the shares; the family holds the benefit. That gap is exactly where the structural value lies – and where governance disputes ignite.

For a family business with operations in the Mainland, a holding entity in the BVI or Cayman Islands, and principals resident in Hong Kong or the United Kingdom, the decision to place the operating interest in trust triggers at least three concurrent legal analyses. First, who governs the trustee's relationship with the operating board? Second, which legal system applies to the trust instrument itself? Third, if the founder's home jurisdiction has forced heirship (a civil-law rule requiring that a defined fraction of an estate pass to certain family members regardless of the founder's intentions), does that system's rule penetrate the trust and override it?

The commercial stakes are high. A mid-market group with operations across Greater China may have its most valuable asset – the controlling stake in the operating company – sitting in a trust whose governing law was chosen for convenience rather than protection. Our cross-border practice regularly sees structures where the choice of governing law was an afterthought, and the family is now exposed to a forced-heirship claim from a jurisdiction nobody planned for.

The window to restructure is not always open. When a principal's tax residence changes, or when a jurisdiction of asset location tightens its rules on foreign trusts, the moment to act is before the event, not after.

The governing instruments and what they actually provide

Hong Kong's trust law, as reformed, is among the most sophisticated in Asia for holding complex cross-border family interests. The Trustee Ordinance (Cap. 29) provides the statutory foundation. The 2013 reform was structural: it abolished the rule against perpetuities and the rule against excessive accumulations for Hong Kong trusts, which means a family business interest can be held in trust indefinitely without triggering a forced distribution.

That reform also addressed settlor control directly. A trust is not invalidated under Hong Kong law by the settlor reserving certain powers – including the power to direct investments, to add or remove beneficiaries, or to change the governing law. That statutory protection matters enormously for a business-owning family: the founder can settle the operating interest in trust without surrendering every thread of influence over how the business is run.

Critically, Hong Kong's 2013 reform strengthened the position of Hong Kong-law trusts against forced-heirship claims from foreign legal systems. The firewall provision means that a court in Hong Kong will generally not recognise or give effect to a foreign forced-heirship rule that would otherwise invalidate the trust or vary its terms. This does not mean such claims vanish. It means the Hong Kong forum applies its own law, not the claimant's.

For a BVI or Cayman holding structure above the Hong Kong operating company, the analysis extends beyond Hong Kong law. Both the BVI and the Cayman Islands have their own trust legislation, their own perpetuity positions (also reformed), and their own economic-substance regimes. The choice of which jurisdiction governs the trust instrument is therefore a real decision, not a formality.

The Companies Ordinance (Cap. 622) sits alongside the Trustee Ordinance where the trust holds shares in a Hong Kong-incorporated entity. Governance requirements at the company level – including the Significant Controllers Register (the register of persons with significant control over Hong Kong companies, in force since 1 March 2018) – interact with the trust structure. The trustee may appear as the registered shareholder; the beneficial owner sits in the SCR. That transparency obligation applies regardless of whether the trust is disclosed commercially.

How does the cross-border interface actually bite?

The tension between Hong Kong trust law and the laws of the family's origin jurisdiction is the single most underestimated risk our desk encounters. It is not theoretical.

Consider a founding principal who is a national of a civil-law jurisdiction in continental Europe. That system's succession rules impose réserve héréditaire (the French and several other civil-law systems' mandatory share, guaranteed by law to the principal's children regardless of any will or trust). The principal has settled the family business interest in a Hong Kong-law discretionary trust, with a Hong Kong trustee and a BVI holding entity above the operating group. The principal dies. The children who were excluded – or given less than the réserve – bring a claim in the home jurisdiction.

What happens next depends on where the assets are located, which court hears the claim first, and which system's conflict-of-laws rules apply. The Hong Kong firewall is effective in Hong Kong. It is not binding on a court in France, Germany, or another civil-law system that applies its own rules to determine whether the trust is valid for succession purposes. If the operating business has assets, bank accounts, or contracts in that jurisdiction, the claimants have enforcement options that bypass Hong Kong entirely.

The cross-border interface also bites at the level of enforcement. Since the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) came into force on 29 January 2024, judgments in civil and commercial matters made by Mainland courts on or after that date can be registered and enforced in Hong Kong with considerably greater speed than was previously possible. The old exclusive-jurisdiction test was removed. For a family with operating assets in the Mainland held through a trust, a Mainland court order affecting those assets – in a succession dispute, a marital claim, or a creditor action – now has a cleaner route into the Hong Kong enforcement system.

That change is material. It means the trust structure must be assessed not only for Hong Kong enforceability but for its resilience against Mainland court orders that could, in certain circumstances, reach Hong Kong through registration under Cap. 645. The trust is not automatically immune.

For advice on structuring the holding vehicle and managing the interface between the trust, the holding entity, and the operating company, see our Private Wealth practice page.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost.

For a structured assessment of your family's cross-border trust position and the enforceability risks across the relevant jurisdictions, write to us at info@lockhartyip.com.

The comparative read: Hong Kong and the BVI versus a European origin system

The practical question for a cross-border family is not "which is the best trust law?" but "which combination of laws, in which sequence, protects the operating interest against the specific threats this family faces?" That requires a comparative read.

Hong Kong offers a common-law system, an independent judiciary with English as an official working language of the courts, abolished perpetuities, a strong firewall against forced heirship, and statutory settlor-reserved-powers protection. BVI and Cayman structures offer similar positions at the holding-company level and are tested by decades of cross-border use. A European civil-law jurisdiction of origin may apply its own succession rules to the founder's estate – potentially clawing back lifetime gifts or trust settlements made within a defined period before death.

The comparison reveals a structural risk. Hong Kong is excellent as a trust forum. It is not insulated from claims that originate in, and are enforced through, the founder's origin system. A family that has used Hong Kong trust law without mapping the origin system's rules is not protected – it is simply unaware of the gap.

A micro-scenario illustrates the point. A Southeast Asian manufacturing group with principals resident across three jurisdictions settled the controlling interest in a Hong Kong discretionary trust in late 2022. The trust was well-drafted under Hong Kong law. Two of the principals held nationality in a civil-law jurisdiction that applies a forced-heirship regime to its nationals' worldwide estates. In reviewing the structure in early 2025, our desk identified that the settlors had not obtained a formal analysis of whether the civil-law system's actio pauliana (the clawback action available to creditors and forced heirs against gratuitous transfers that reduce the transferable estate) applied to the settlement. The answer turned out to be jurisdiction-specific and required mapping the look-back period under the origin system's rules. The remediation was structural rather than documentary.

A second scenario. A family office relocating from a European hub to Hong Kong in mid-2024 – a pattern our desk has seen with regularity since the family-office tax concession came into focus – asked us to review whether the existing offshore trust, established in the Cayman Islands under Cayman law, should be migrated to Hong Kong law on the change of residence. The answer was not straightforward. The Cayman trust had its own reserved-powers architecture, its own investment committee, and a protector with veto rights over distributions. The migration question was as much a governance question as a law question. The analysis covered three systems: Cayman trust law, Hong Kong trust law under the Trustee Ordinance (Cap. 29), and the tax-residence position of the trustee under the new jurisdiction. We recommended a partial amendment rather than a redomicile, preserving the Cayman governance structure while adding a Hong Kong-law governing-law clause for the shares held in the Hong Kong operating entity.

For principals moving a family office structure to Hong Kong, our guide to transferring a family office from a European hub to Hong Kong covers the practical sequence in detail.

Tax interaction: the position that foreign counsel often miss

Hong Kong's territorial tax system is one of the structure's genuine advantages. There is no capital gains tax, no withholding tax on dividends paid by Hong Kong entities, and no inheritance or estate duty. The profits tax rate for a corporate trustee – or for a company held by the trust – is 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above that threshold, under the two-tier regime.

Those advantages are real. They are also not the whole picture.

The foreign-sourced income exemption (FSIE regime, in force from 1 January 2023, as amended) conditions Hong Kong's exemption from profits tax on passive income – dividends, interest, gains on disposal of equity interests – on the entity meeting economic-substance requirements or satisfying a participation exemption test. For a trust holding a passive interest in an offshore company that itself holds operating assets, the FSIE analysis is not optional. It is the difference between the structure working as intended and generating an unexpected Hong Kong tax liability on income that was assumed to be outside the territorial scope.

The Pillar Two minimum top-up tax, effective for fiscal years beginning on or after 1 January 2025, applies to in-scope multinational enterprise groups with consolidated revenue at or above EUR 750 million. For the family groups our desk advises, Pillar Two is rarely the primary concern – most family businesses fall below the threshold. But the interaction between Pillar Two and the FSIE regime, for those groups that do qualify, requires a separate analysis and is not addressed by the trust instrument itself.

What foreign counsel most often miss is the interaction between the trust's distribution policy and the tax residence of the beneficiaries. A beneficiary resident in a jurisdiction that taxes trust distributions – including certain European systems, the United Kingdom, and some Middle Eastern jurisdictions – may have a tax liability triggered by a distribution from a discretionary Hong Kong trust, even if that distribution is tax-free in Hong Kong. The trust deed may be silent on this point. The trustee may not be aware. The family certainly does not expect it.

Where the risk sits now: our read on the current environment

In 2027, the risk concentration for cross-border family business trusts sits in three areas. Our desk's view, formed from the matters we currently handle, is that none of these risks is new – but each has intensified in the past two years.

The first is enforcement exposure from the Mainland. The Cap. 645 regime has been in force for over three years now. The initial period of uncertainty about its scope and operation has given way to a clearer picture: the registration mechanism works, and Mainland judgments in civil and commercial matters are moving through the Hong Kong courts on the new connection-based test. For a family trust holding operating assets with a Mainland footprint, any litigation in the Mainland that touches the beneficial interest in those assets is now closer to the Hong Kong enforcement arena than it was before 29 January 2024. The structure needs to be mapped for that exposure.

The second is the residency shift. The movement of high-net-worth principals from European and CIS jurisdictions to Hong Kong and other Asian hubs has accelerated. With that movement comes a new tax-residence analysis for both the settlor and the trustee, and a reassessment of which jurisdiction's succession law now applies to the principal's estate. The trust that was structured correctly for a principal resident in Cyprus or the United Kingdom may need amendment for a principal now resident in Hong Kong – not because Hong Kong law is hostile, but because the conflict-of-laws analysis has changed.

The third is the governance fault line inside the trust itself. A family business interest held in trust requires the trustee to engage with the operating board on decisions that affect the trust asset. In our experience, most trust instruments drafted for family businesses give inadequate guidance on how the trustee exercises shareholder rights – voting, dividends, capital calls, third-party acquisitions. When the family disagrees internally, the trustee is often caught between competing family instructions, the trust deed, and its own fiduciary duties. That governance fault line is a litigation risk as much as a succession risk.

For a fuller treatment of the succession and residence interaction across the family's map, see our analysis of succession planning across Hong Kong and the United Kingdom.

If an earlier filing, structure or enforcement attempt produced an adverse or stalled result, a second read can identify the strategic error and the routes still open.

To discuss how the trust structure and the cross-border enforcement environment interact with your family's specific position, contact info@lockhartyip.com.

The objection handler: what the structure does not protect against

The most persistent myth our desk encounters is this: once a family business interest is in trust, the structure is protected. It is not. It is conditionally protected, subject to the law of the governing jurisdiction, the law of the asset locations, and the law that applies to the settlor's succession.

Three specific gaps are worth naming.

First, a trust does not make forced-heirship claims disappear. The Hong Kong firewall operates in Hong Kong. It is not a global shield. A civil-law court in the founder's origin jurisdiction applies its own conflict-of-laws rules to decide whether the settlement is effective for succession purposes. If it concludes that the founder was a national subject to the heirship regime at the time of settlement, the trust may be ineffective as against the forced heirs – at least in that jurisdiction's courts and as against assets within that jurisdiction's reach.

Second, a trust does not insulate the operating business from its own commercial risks. If the operating company has creditors, those creditors pursue the company. If the trust guarantee structure is defective, the trustee may face liability. The trust is a holding vehicle, not a firewall around the business itself.

Third, the sham trust doctrine – the legal principle by which a court may disregard a trust where the settlor retains such complete practical control that no genuine trust relationship exists – remains active in common-law courts including Hong Kong. Settlor-reserved powers are legitimate and protected by statute. But there is a line between reserved powers and complete control. A family that runs the trust as if the trustee does not exist is building a structure that a court may one day decline to recognise.

Decision matrix: which instrument, which route, which risk

The analysis above maps to a practical decision structure. Consider the following positions.

Situation A: a principal who is a national of a civil-law jurisdiction, resident in Hong Kong, holds a controlling interest in a Mainland-operating group through a BVI holding company. The instrument of choice is a Hong Kong discretionary trust governed by the Trustee Ordinance (Cap. 29), holding the BVI shares. The route requires a conflict-of-laws analysis of the origin system's forced-heirship reach, an FSIE assessment for dividends flowing up from the BVI entity, and a SCR filing at the BVI and Hong Kong levels. The primary risk is the origin system's actio pauliana on the settlement if the principal dies within the look-back window. Timing: the structure should be assembled before any succession event, and the look-back period should be identified before settlement, not after.

Situation B: a family already holding the business in an offshore trust under Cayman law considers whether to migrate to Hong Kong law following the principal's relocation to Hong Kong. The instrument in play is the existing Cayman deed and the Trustee Ordinance (Cap. 29) as a potential governing law. The route involves a governing-law-change analysis, a review of reserved powers under Cayman versus Hong Kong law, and a tax-residence assessment of the trustee. The risk is governance disruption during the migration and unintended CGT or income-tax triggers in the jurisdiction the principal has left. Timing: the analysis should precede the change of residence, not follow it.

Situation C: a family trust holding a Hong Kong operating company receives notice of a judgment registered under Cap. 645 arising from Mainland litigation that names the operating company as a defendant. The trust structure does not automatically shield the company's assets from that judgment. The route requires urgent review of the registration, an assessment of whether any exclusions under Cap. 645 apply, and an interim-measures analysis. The risk is enforcement against the operating assets before the strategic response is complete. Timing: the window after registration is short, and parties should verify the current procedural requirements before acting.

What the next step looks like

The analysis is only useful if it moves. A cross-border family business trust that has not been reviewed against the current enforcement environment, the current residence position of the settlor and beneficiaries, and the current governing-law analysis across the asset locations is a structure that may be providing less protection than the family believes.

In our cross-border wealth practice, the first engagement step is a structured assessment of the existing documents, the jurisdictions engaged, and the specific risk points. We do not begin with a recommendation. We begin with the map.

The family business interest is the asset that matters most. The question is whether the structure around it reflects that.

Related practices

• Private Wealth – succession, trust structures, and asset-protection across Hong Kong and offshore centres
• Holding Structures – cross-border holding vehicle design, BVI, Cayman and Hong Kong

Speak with Lockhart & Yip

For a scoped view of your matter, contact info@lockhartyip.com. Discuss your matter →

Related

• Private Wealth
• Transferring Family Office From European Hub Hong Kong 3
• Succession Planning Across Hong Kong United Kingdom Uk 6

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.