Update: holding a family business interest in trust

For Asian principals whose family wealth sits inside an operating business, the trust question is never purely a succession matter. It touches the business's governance, the family's residence map, and the forced-heirship rules of every jurisdiction where a beneficiary or asset is located. Structural gaps that seemed manageable a year ago now carry measurable exposure – and Hong Kong's reformed trust regime, combined with its position as the natural cross-border hub for Greater China structures, makes the timing of any review consequential.

Holding a family business interest in trust through a Hong Kong-law structure is governed primarily by the Trustee Ordinance (Cap. 29), substantially reformed with effect from 1 December 2013. That reform abolished the rule against perpetuities for Hong Kong trusts, protected trusts against foreign forced-heirship claims, and confirmed that a settlor may reserve certain powers without invalidating the trust – three features that directly affect how a business interest can be held across the Mainland–Hong Kong corridor and beyond.

This briefing covers what the development means for families with operating businesses, who is affected, and the immediate action it calls for.

What changed – and why the business interest is the pressure point

The 2013 reform to Hong Kong trust law settled the structural question. What has shifted since is the environment around it.

Across the corridor, residence and domicile positions are under closer scrutiny. Family offices moving capital from European or CIS hubs to Asia are confronted with overlapping regimes. The Mainland's personal income-tax rules, Hong Kong's economic-substance conditions under the foreign-sourced income exemption (FSIE) regime – a set of conditions requiring qualifying activity in Hong Kong before offshore income is exempt from profits tax – and the offshore holding jurisdictions' own substance requirements now interact directly with how a business interest is held.

A trust that holds shares in an operating company, rather than passive financial assets, raises a distinct set of questions. Control provisions matter. Protector powers matter. The treatment of undistributed business profits matters. Where a family member is both a beneficiary and a director of the underlying company, the boundary between trust assets and personal assets can blur under a foreign court's analysis.

Forced heirship is a recurring trigger. Hong Kong law has no forced-heirship regime, and the Trustee Ordinance's anti-forced-heirship firewall strengthens protection of Hong Kong-law trusts against claims from foreign mandatory inheritance rules. But that protection operates within limits. A beneficiary resident in a civil-law jurisdiction – or an operating asset situated there – may expose part of the structure to a claim that the firewall cannot fully neutralise. We regularly see families discover this gap only when a succession event is imminent.

Who is affected across the corridor

The combination of factors now in motion affects three groups in particular.

First, families with a Mainland Chinese or Hong Kong operating business held through a BVI or Cayman holding entity, where the trust sits above that holding layer. The FSIE regime and the offshore jurisdictions' economic-substance rules require that qualifying activity take place at the right level. A trust administration layer that was adequate five years ago may no longer satisfy the substance conditions applied by the Inland Revenue Department.

Second, principals whose family includes members in civil-law jurisdictions – continental Europe, the Middle East, Latin America – where forced-heirship rules apply to movable or immovable property. The anti-forced-heirship firewall under the Trustee Ordinance operates as a matter of Hong Kong law. Whether a foreign court applies it is a separate conflict-of-laws question that turns on the law of the beneficiary's domicile and the situs of the assets.

Third, principals who have not revisited their trust deed since the 2013 reform. Older instruments may not incorporate the reserved-powers provisions or the perpetuity-period changes. A deed drafted before 1 December 2013 should be reviewed for consistency with the current statutory position and the family's changed circumstances.

The sequence of steps is where the route is won or lost. Identifying the governing law of the trust, mapping the residence and domicile of each beneficiary, and reconciling the business's governance documents with the trustee's powers are each a precondition to the next.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps. For a structured assessment of your family business trust structure across the relevant jurisdictions, write to us at info@lockhartyip.com.

The immediate action

The immediate action is a document and jurisdiction review. It does not require a full restructuring at the outset.

Three questions frame the exercise. Does the trust deed reflect the post-2013 Hong Kong statutory position, including the anti-forced-heirship provisions and the reserved-powers protection? Does the structure satisfy the substance conditions required by the FSIE regime and the offshore holding jurisdictions' rules for the type of income the business generates? And is the governance boundary between the trustee's role and the family's operational control of the business clearly documented?

Where the answers disclose a gap, the remedial steps range from deed amendment to re-domiciliation of the holding entity, from updating the letters of wishes to restructuring the protector provisions. Hong Kong's inward company re-domiciliation regime, which commenced in 2025, adds an option that was not previously available – parties should verify the current commencement date and eligibility conditions before relying on it.

For families with beneficiaries in forced-heirship jurisdictions, the analysis extends to a conflict-of-laws review. The Trustee Ordinance's firewall is a tool. Whether it is sufficient for your family's map depends on the specific jurisdictions engaged. Our desk works with allied counsel admitted in the relevant jurisdictions on the cross-border interface.

If an earlier structuring attempt produced an adverse or stalled result, a second read can identify the strategic error and the routes still open. For a preliminary read on your family business trust structure and the enforcement route, email info@lockhartyip.com.

Related practices

• Private Wealth – succession, trust structures and asset protection across jurisdictions
• Cross-border family planning guide – matrimonial property planning across multiple legal systems
• Asset protection for Mainland-exposed principals – structuring and protection across the Mainland–Hong Kong corridor

Speak with Lockhart & Yip

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

Related

• Private Wealth
• Prenuptial Matrimonial Property Plan Cross Border Family Guide
• Asset Protection Principal Mainland China Exposure Mainland China 3

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