Where a reserved-powers trust for a founder-controlled business stands now

A founder who built a business across the Mainland and an offshore holding structure faces a specific problem at the succession layer: how to retain meaningful control over the operating group while placing the holding vehicle inside a trust that will actually work when it matters. The question is not abstract. It sharpens every time a family's residence map shifts, a forced-heirship jurisdiction enters the picture, or an enforcement event tests the structure's legal credibility under a system the drafter never fully considered.

A reserved-powers trust allows a settlor to retain defined powers – over investment, over distributions, over the appointment and removal of trustees – without the trust being set aside as a sham or as an illusory arrangement. Under the Trustee Ordinance (Cap. 29, as amended with effect from 1 December 2013), Hong Kong law provides statutory protection for that reservation: a trust governed by Hong Kong law is not invalidated solely because the settlor has reserved certain powers. That protection sits alongside a complete abolition of the rule against perpetuities and a strengthened firewall against foreign forced-heirship claims. Together, those three features make Hong Kong a serious governing-law choice for founders whose families span multiple legal systems.

This analysis sets out the commercial stakes, the governing instrument, the cross-border interface with Mainland Chinese succession law and offshore holding structures, and our current read on where the structural risk actually sits for a founder-controlled group.

What is commercially at stake for the founder?

The reserved-powers trust is not primarily a tax instrument for a Hong Kong founder. It is a control instrument with a succession payload. The founder's core concern is this: if the trust holds the apex of the group – a BVI or Cayman holding company above a Hong Kong intermediate and a Mainland operating entity – then the trust must allow the founder to keep running the business without creating a legal argument that the trust is not a trust at all.

That tension between retained control and legal validity has been the defining structural problem in cross-border private wealth work for at least two decades. Founders in manufacturing, property and technology businesses across Greater China have routinely placed group holding companies into offshore discretionary trusts and then continued to direct the underlying business as if nothing had changed. The commercial rationale is entirely understandable. The legal risk, however, is substantial: a trust that is in substance a nominee arrangement, with the settlor directing every material decision, is vulnerable to challenge on sham or illusory-trust grounds, and those challenges do not expire when the settlor does. They surface when the assets are most exposed – on death, on divorce, or on an enforcement application by a creditor.

The reserved-powers structure is designed to address that problem directly. Instead of the founder pretending not to control the business, the trust instrument explicitly grants defined powers to the settlor as a matter of legal right. The founder controls the operating group through a documented, enforceable mechanism. The trust is still a trust. The distinction matters enormously when a challenge comes.

What is at stake commercially, therefore, is not merely succession planning. It is the difference between a structure that can withstand forensic scrutiny and one that collapses under it – taking the family's succession plan with it.

What does the Trustee Ordinance actually protect – and what does it leave open?

The Trustee Ordinance (Cap. 29) was substantially reformed with effect from 1 December 2013, and those reforms changed the position in Hong Kong in three ways that matter for a founder-controlled structure.

First, the Ordinance provides that a Hong Kong-law trust is not invalidated solely because the settlor has reserved certain powers to himself or herself. That is a statutory answer to the sham-trust argument in its most direct form. The reservation of power is a feature of the trust, not evidence against it. The key word is "solely" – a court will still look at the totality of the arrangement, and a structure where the trustee has no real function at all will still be at risk. But the statutory protection removes the argument that reservation of powers is, in itself, proof of a sham.

Second, the rule against perpetuities and the rule against excessive accumulations were abolished for Hong Kong trusts. A founder can therefore settle a trust that operates for the benefit of descendants across multiple generations without the structural limitation of a fixed perpetuity period. For a family with a business that they intend to hold across generations, this is a material planning advantage.

Third, the 2013 reforms strengthened the firewall against foreign forced-heirship claims. Hong Kong law has no forced-heirship regime of its own. The firewall provision goes further: it protects a Hong Kong-law trust against the application of foreign law that would otherwise compel the trustee to distribute the trust fund to a forced heir under a foreign succession regime. That protection is not absolute – its scope depends on the governing law of the trust instrument, the assets held, and the jurisdictions in which any judgment against the trust would need to be enforced – but it substantially improves Hong Kong's position as a governing-law choice for founders with family members in civil-law or Islamic-law jurisdictions.

What the Ordinance does not resolve is the conflict-of-laws question. A Hong Kong-law trust holding a BVI company above a Mainland operating entity sits at the intersection of at least three legal systems. The firewall operates under Hong Kong law. Whether a Mainland court, an offshore court, or a court in the settlor's country of domicile will give effect to that firewall is a separate question – and it is the question where the structural risk most often concentrates.

How does the cross-border interface with Mainland Chinese succession law actually bite?

Mainland Chinese succession law operates on a forced-heirship principle. Spouses, children and parents of the deceased have statutory rights to a portion of the deceased's estate. Those rights are not easily excluded by private arrangement, including a foreign trust.

The interface bites in the following way. A Mainland court asked to assess what belongs to the estate of a deceased founder will look at the substance of the arrangement. If the founder retained sufficient control over the trust assets during his or her lifetime – directing the trustee, controlling distributions, substituting beneficiaries – a Mainland court may take the view that the trust assets remained beneficially in the founder's estate. That analysis does not require the Mainland court to apply Hong Kong trust law. It requires the court to characterise the founder's interest under Mainland conflict-of-laws rules, which may apply Mainland law to the issue.

Consider a practical scenario. A founder domiciled in the Mainland at the time of death has settled a Hong Kong-law discretionary trust holding a BVI company above a Guangdong manufacturing operation. The trust instrument grants the founder extensive reserved powers: to direct investments, to remove and appoint the trustee, to add and exclude beneficiaries. On the founder's death, the surviving spouse and a child from a first marriage both assert entitlements. The child from the first marriage challenges the trust in a Mainland court, arguing that the assets were effectively the deceased's property. The Mainland court looks at the substance of the control the founder exercised and reaches a conclusion unfavourable to the trust's separateness.

The Hong Kong trustee may have a strong answer under Hong Kong law. The trust instrument is valid under the Trustee Ordinance. The firewall protects against the foreign forced-heirship claim. But those arguments must be enforced. Under the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), which came into force on 29 January 2024, Mainland judgments that fall within the regime's scope can now be registered and enforced in Hong Kong without relitigating the merits. The exclusion list under Cap. 645 covers succession matters, which provides some structural protection. But a Mainland judgment that characterises the trust assets as part of the estate – framed as a civil or commercial determination rather than a pure succession matter – may not fall clearly within that exclusion. The boundary is not always clean.

This is where a well-drafted reserved-powers trust, with genuinely active trustee governance and a properly documented exercise of reserved powers, matters most. The factual record of how the trust operated is the primary defence against a substance-over-form attack. If the trustee has exercised independent judgment, documented its decisions, and the founder's reserved powers have been exercised within the scope the instrument contemplates – not beyond it – the structure is substantially more defensible than one where the trustee's file contains nothing but countersigned instructions from the settlor.

What does the offshore holding layer add – and what does it complicate?

Most founder-controlled businesses in Greater China with a trust structure at the apex use a BVI or Cayman intermediate holding company between the trust and the operating group. That structure is familiar, cost-efficient, and well-understood by the financial community. It also adds layers of legal complexity that affect the reserved-powers analysis.

The BVI and Cayman Islands are common-law jurisdictions with their own trust statutes, corporate laws, and substance regimes. A trust holding a BVI company is not exclusively a Hong Kong trust matter. Questions about the shares of the BVI company – their validity as trust property, the enforceability of a share charge, the effect of a corporate resolution – are governed by BVI law. Economic-substance regimes in both jurisdictions require genuine business activity or management to be located in the relevant jurisdiction for certain categories of company. For a pure holding company passively holding shares in a Hong Kong intermediate, the substance analysis is generally manageable. Where the holding company is active – receiving royalties, managing intercompany lending, acting as a treasury centre – the substance position requires specific analysis.

For the reserved-powers trust, the offshore layer raises an additional question: who actually controls the BVI or Cayman holding company? If the founder, as settlor, holds reserved powers that include the power to direct how the trustee votes its shares in the holding company, the founder is effectively directing the corporate governance of the group from outside the trust layer. That is the intended design. But it requires the corporate governance of the holding company to be documented consistently with that model. The board minutes, the shareholder resolutions, and the trustee's records should all reflect a coherent structure in which the founder's powers are exercised within the trust instrument's terms – not informally and not beyond them.

Where a founder's control also extends to the operating entity in the Mainland – through, for example, a variable interest entity structure (a contractual arrangement used to allow foreign investment in restricted sectors) – the documentation challenge multiplies. The VIE contracts need to be consistent with the trust structure at the apex, and any reorganisation of the group for trust planning purposes needs to consider the VIE's regulatory treatment under Mainland rules. These are not insurmountable problems. They are problems that require coordinated legal input across the jurisdictions involved, and they are problems that frequently receive inadequate attention in structures assembled piecemeal.

Where does the residency and residence-change risk sit?

A founder's tax residence position has become more consequential in the current environment. Hong Kong's profits tax is territorial. Hong Kong imposes no capital gains tax, no withholding tax on dividends, and no general withholding tax on interest. For a trust holding an investment portfolio or a passive group, that position is materially advantageous. For an operating group with Mainland-source income, the tax position requires separate analysis at each level of the structure.

The foreign-sourced income exemption (FSIE) regime, in force from 1 January 2023 and as subsequently amended, imposes economic-substance conditions on certain categories of passive income received by Hong Kong entities from foreign sources. A trust holding company in Hong Kong that receives dividends, interest or royalties from offshore subsidiaries must satisfy the applicable substance test. Trustees of a Hong Kong-law trust should take active steps to ensure the entity through which the trust holds its assets satisfies the conditions, not simply assume that Hong Kong's general tax position makes the structure efficient.

The Pillar Two global minimum tax regime – Hong Kong's minimum top-up tax and income inclusion rule – applies to in-scope multinational enterprise groups with consolidated revenue at or above EUR 750 million for fiscal years beginning on or after 1 January 2025. Most founder-controlled businesses in the mid-market fall below that threshold, but groups that sit close to it or that anticipate growth need to model the Pillar Two position as part of the trust structuring exercise, not as an afterthought.

Beyond Hong Kong, a founder who changes residence – moving from the Mainland to Hong Kong, or from Hong Kong to the UAE or Singapore – creates a succession-law complication. The applicable succession law for moveable assets generally follows the domicile of the deceased. A founder whose domicile at death is in a jurisdiction with forced-heirship rules may expose the trust to an attack it could have avoided with earlier planning. The window for that planning is not unlimited. Once a founder's residence has shifted and a new domicile is arguably established, the options for restructuring the trust's governing law or the family's succession position narrow.

In our cross-border practice, we regularly see structures established for founders who were Mainland-resident at the time of settlement and who have since acquired Hong Kong permanent residence or another passport. The trust instrument may have been optimised for the original residence position. It may not have been reviewed in light of the new one. That gap is a structural risk that accumulates quietly and becomes urgent only when an adverse event triggers a review.

How does the structure actually perform under challenge? A cross-border read

There is a practical test for any reserved-powers trust: how does it perform when challenged by a disappointed beneficiary, a creditor, or a foreign court applying its own succession or insolvency law? The answer depends on four elements in combination, not on any single one of them.

First, the governing law of the trust and the seat of the trustee. A Hong Kong-law trust administered by a trustee incorporated and operating in Hong Kong benefits from the Trustee Ordinance protections and falls within the Hong Kong courts' supervisory jurisdiction. That is a strong starting position. If the trustee is based in a different jurisdiction – a common configuration in some legacy structures where the trust was originally established in a British Crown dependency – the applicable trust statute and the supervisory forum are different. The firewall protection in particular needs to be assessed under whichever statute governs, not assumed to be the Hong Kong position.

Second, the quality of the trustee's records and the exercise of the reserved powers. A trust challenged on sham grounds will be defended, or lost, on facts. The trustee's decision-making record – its minutes, its deliberations on distributions, its assessment of the beneficiaries' needs, its engagement with independent advisers where appropriate – is the primary evidence of the trust's legal substance. A reserved-powers trust where the trustee has genuinely operated within the scope of the instrument, and where the founder's reserved powers have been exercised in a way that is consistent with the instrument, is substantially more defensible than one where the records show a trustee that simply countersigned the founder's decisions without independent analysis.

Third, the assets and where they are situated. A trust that holds Hong Kong-listed shares can generally be enforced in Hong Kong with relative efficiency. A trust that holds a Mainland-operating business through a VIE structure faces a materially different enforcement environment. The assets need to be identified, and the trust's legal claim over those assets needs to be documented at each level of the structure.

Fourth, the beneficiary map. A trust whose beneficiaries include individuals in jurisdictions with forced-heirship regimes – Mainland China, France, Germany, certain Gulf states – faces potential claims from those jurisdictions when a beneficiary dies or a beneficiary's creditor seeks to reach the trust interest. The Hong Kong firewall provides protection under Hong Kong law. Whether that protection can be practically enforced against a judgment from one of those jurisdictions depends on the current bilateral recognition position.

Under Cap. 645, Mainland civil and commercial judgments made on or after 29 January 2024 are registrable in Hong Kong through the Court of First Instance. The exclusion of succession matters provides partial protection. But a creative plaintiff with a well-resourced legal team and time will look for a characterisation of the claim that falls within the registrable category. The structural response is to maintain robust trustee records, a clear governing-law clause, a well-documented exercise of reserved powers, and – where the family's geographic spread makes it advisable – a protector mechanism with clearly defined powers separate from those of the settlor.

A structural scenario: the founder's map and where the risk concentrates

The following scenario is drawn from the pattern of instructions we receive, fully anonymised. It illustrates the structural interaction rather than any specific matter.

A founder of a Mainland manufacturing group, having operated through a BVI holding company for many years, established a Hong Kong-law discretionary trust in the period following the 2013 reforms. The trust instrument granted the founder reserved powers to direct investments and to remove and appoint the trustee. A protector – a trusted family member – was given a power to add and exclude beneficiaries. The founder's immediate family included a spouse in Hong Kong, two children in the United Kingdom, and a parent still resident in the Mainland.

By the mid-2020s, the founder had acquired Hong Kong permanent residence. The operating group had grown to a scale where the Pillar Two threshold, while not yet reached, was within the group's three-year planning horizon. The trust instrument had not been reviewed since settlement. The trustee's records contained substantial gaps – years of unminuted decisions and distributions approved informally by email from the founder.

The structural risks at that point were: (a) the trustee's records were insufficient to defend a sham-trust challenge; (b) the parent in the Mainland, as a statutory heir under Mainland succession law, could raise a forced-heirship argument on the founder's death; (c) the Pillar Two position had not been modelled at the trust level; and (d) the children's UK residence created a potential UK-law succession exposure for their respective beneficial interests, a point that had not been addressed since the United Kingdom introduced its own changes to the taxation of non-domiciled individuals.

The response was not to unwind the trust but to remediate it: a formal review of the trustee's file, updated minutes documenting the trustee's exercise of discretion across the preceding period, a deed of amendment to the trust instrument addressing the protector's powers and the distribution provisions, and a coordinated analysis of the Pillar Two position at the BVI and Hong Kong intermediate levels. None of that work required structural dismantling. All of it was easier – and cheaper – than defending a challenge after the event.

Our current read: where the risk sits and what the window means

The structural environment for reserved-powers trusts holding founder-controlled businesses has not deteriorated – but it has become more demanding. Three developments define the current position.

The first is the enforcement environment. Cap. 645, in force since 29 January 2024, materially improved the reciprocal recognition of Mainland civil and commercial judgments in Hong Kong. For a trust that has always been managed with rigour, this is not a threat. For a trust whose administration has been informal, a Mainland judgment characterising the founder's retained powers as tantamount to ownership is a risk that the new enforcement regime makes more immediate. The practical window for remediation – while the founder is alive and legally capable of cooperating with a restructuring – is finite.

The second is the tax environment. The FSIE regime and Pillar Two together mean that a trust holding an operating group above a Hong Kong intermediate can no longer rely on Hong Kong's general tax position as a passive benefit. Substance, filing positions and entity-level analysis are now required. Trustees who have not reviewed the tax position of the structures they administer since the FSIE changes of 2023 are exposed to a compliance gap that compounds the longer it is left.

The third is the residence dynamic. The decade since the 2013 trust reforms has seen substantial movement of founders and their families across jurisdictions – Mainland to Hong Kong, Hong Kong to Singapore or the UAE, and some returning. Each move creates a potential mismatch between the trust instrument as drafted and the succession law that would apply on the founder's death. We regularly advise on structures where that mismatch has never been formally identified, let alone addressed. Identifying it is not complicated. Addressing it while the founder has full capacity and the structure is still intact is considerably easier than doing so after an adverse event.

The argument for acting now is not that the law has changed in a way that invalidates existing structures. The argument is that the combination of a more demanding enforcement environment, a changed tax regime, and an accumulated residence history has created a gap between the structure as built and the structure as it needs to perform. That gap is manageable. It does not remain manageable indefinitely.

For founders and their advisers evaluating where a reserved-powers trust stands today, the priority is a structured cross-border review: of the governing instrument, the trustee's administration record, the applicable succession law in each relevant jurisdiction, and the tax position at each level of the structure. That review should be led by counsel familiar with both the trust-law and the cross-border enforcement dimensions – not by any single adviser applying a single jurisdiction's rules.

The sequence above describes the standard position. Your matter turns on the specific powers reserved, the jurisdictions actually engaged by the family's current residence map, and the quality of the trustee's records – which is precisely where the structure is won or lost under challenge.

For a structured cross-border review of your reserved-powers trust – covering the governing instrument, the trustee's administration record, and the applicable succession and enforcement position – write to us at info@lockhartyip.com.

What foreign advisers most commonly get wrong

Counsel in civil-law jurisdictions – and a surprising number of offshore advisers – approach the reserved-powers trust as if the primary risk were the reserved powers themselves. It is not. The primary risk is the gap between the powers documented in the instrument and the powers actually exercised in practice.

A trust instrument that carefully calibrates the founder's reserved powers to the line recognised by common-law courts and the Trustee Ordinance will be legally unremarkable if the founder has in practice exercised powers that go beyond those the instrument contemplates. The trustee's records are the evidence. If those records show the trustee routinely accepting unilateral direction from the founder on matters outside the reserved-powers schedule, the instrument's care is substantially undone.

A second common error is treating the governing-law clause as conclusive for all purposes. A Hong Kong-law trust is governed by Hong Kong law for trust purposes. But the property held by the trust – shares in a BVI company, real estate in a third jurisdiction, an interest in a Mainland partnership – may be governed by a different law for the purpose of determining the nature and transferability of that property right. A trust that holds assets in multiple jurisdictions needs to have considered whether the trust's claim over those assets is legally effective in each jurisdiction, not merely under Hong Kong law.

A third error is failing to review the structure when the family's residence map changes. Most reserved-powers trusts are reviewed at establishment and then left unchanged for years. That approach is manageable in a stable environment. The current environment – in which founders and their families are moving across multiple jurisdictions, succession laws in several key jurisdictions have been reformed, and the enforcement environment between the Mainland and Hong Kong has materially changed – is not stable. Annual or biennial review is appropriate, not a luxury.

If an earlier filing, structure, or enforcement attempt has produced an adverse or stalled result, a second read by counsel with cross-border trust and enforcement experience can identify the strategic error and the routes still open. Write to us at info@lockhartyip.com.

Related practices

• Private Wealth – succession, trust structures, family-office planning and asset protection across jurisdictions
• Disputes & Arbitration – cross-border enforcement, trust challenges and Mainland–Hong Kong judgment recognition
• Tax Positions – FSIE regime, Pillar Two analysis and cross-border structuring for holding groups

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