This is an extract from the Family Offices in Asia report.
How simple is it to structure a Family Office in Asia?
It really depends on how structured and organised a family wants it to be. Traditionally families would set up holding companies or Special Purpose Vehicles, often in offshore jurisdictions, to hold their investments. Increasingly this is difficult to manage with increasing tax and reporting obligations making multi-jurisdictional structures harder to administer and control what information is publicly available.
Today it is often more structured than that with an Investment Management Company and an Investment Holding Company held under a consolidated holding company as a minimum. Typically, the board of the Investment Management Company would have a mix of both family members, which can include the next generation and investment professionals to help the family make the Investment decisions and build a successful track record. The investments are then held in an Investment Company or even a family fund type structure.
The more sophisticated families are then holding this corporate structure under a Trust or Foundation type structure, which could be structured to enable the family to maintain a level of control, typically through a Private Trust Company.
It isn’t necessarily complex to set up, but I would say spending time with good advisors and service providers to carefully consider what the family priorities are, what they want to achieve and considering how much they want to keep in house and what to outsource, will help.
What are the advantages to setting up a Family Office in Asia?
Both Hong Kong and Singapore are supportive jurisdictions looking to attract HNW families to establish a Family Office in their jurisdiction.
Hong Kong has a territorial basis of tax, where carrying on trade/business and deriving Hong Kong sourced profits from that trade would be chargeable to Hong Kong profits tax. To achieve a tax neutral position, the typical Family Office activities would have to be performed outside of Hong Kong in order for the income not to be taxed in Hong Kong.
Singapore also has a territorial basis of taxation, however Singapore’s government has introduced a number of incentive schemes to make Singapore attractive as a jurisdiction for Family Offices. These are Sections 13D, 13O and 13U (formerly Sections 13CA, 13R and 13X) of the Income Tax Act, which allow for family investment vehicles to enjoy tax exemptions from Specified Income derived from Designated Investments.
These investment vehicles would typically need to meet certain conditions such as being managed by a Singapore based Family Office and may require upfront approval from MAS.
Either way it is important to work with tax and legal specialists to ensure a full understanding of the tax and legal implications before implementing any structure.
Hong Kong and Singapore do benefit from having an excellent talent pool for Family Office’s to pick from, which is largely due to the depth of the Financial Services Industries in both markets. I would say there are some differences between the two jurisdictions, when it comes to cultural and language skills but overall both jurisdictions have a hard working, well educated population. Finance is also intrinsically woven into the fabric of both locations as well-established financial hubs.
From a Regulatory perspective both Singapore and Hong Kong have strong regulatory and compliance frameworks. It is generally clear what the family needs to do to ensure they are compliant. In Singapore, the Monetary Authority of Singapore (“MAS”) having regulatory oversight enables them to have a view as to how things are progressing and can interview or change direction as necessary.
From a structuring perspective, what idiosyncrasies separate Asia-based Family Offices to those in the UK, US or Europe?
Often the very wealthy families are viewed to have similar traits to their European and American families, but they often embody a different mindset, particularly in a couple of examples:
First generation wealth typically generated from manufacturing and monopolistic empires which have taken years of toil to succeed often meant that their investments would often be in their business or physical assets such as large real estate portfolios held in extended family member names or close associates sometimes with little structuring. With the huge increase in self-made entrepreneurs, benefitting from the technology boom and with the success, often a greater risk tolerance to seek higher gains, this mixed with increasingly complex tax and legal regimes has lead to the use of more complex structures with families turning to fund structures like Variable Capital Companies to help achieve their investment aims.
Asian families have traditionally placed the family unit of high importance. Respect for one’s elders and the family’s values, hierarchy and loyalties have effectively been unwritten rules for generations. This can be demonstrated at Chinese New Year, when family members will go to great lengths to make it back from anywhere in the world to ensure they spend time with their family over this festive period. However, where many wealthy families have their wealth and business interests intertwined, it can also lead to a potential conflict, particularly between family members of different generations. Taking care to structure the family’s affairs properly has never been more important to preserve a family’s wealth.
Are there certain jurisdictions in Asia that offer a more attractive proposition than others?
In my opinion, Singapore has worked hard to provide a conducive environment to attract Family Offices to its shores. It is estimated that Singapore has over 500 Single Family Offices established in the City State. Initiatives like MAS/IBF’s Family Office Skills Maps help to build a workforce with the right specialist skills to serve family offices and these are the kind of initiatives with will help to ensure sustainability in the years to come.
Hong Kong has always long been viewed as the gateway to China and continues to hold this mantle. However, Singapore is deemed to be the preferred gateway to Asia, being an attractive hub for foreign investment supported by an extensive DTA network.
Have you witnessed a growth in the number of Family Offices setting up in Asia over the last year?
Without doubt, the level of interest in establishing a Family Offices in both Hong Kong and Singapore has continued to increase. In 2020 the number of Family Offices set up was approximately 200, so you can see the number has more than doubled by the end of 2021. This is partially a result of the largest ever Wealth Transfer in history currently taking place. Wealth-X, a research firm specialising in high-net-worth individuals, estimates that US$1.9 trillion (S$2.6 trillion) of wealth in Asia will be passed on to the following generation over the next decade. The interest is not just from Asian families, but also from Family Offices in other parts of the world looking to gain a foot print in Asia to use as a springboard for their Asian investments.
Another factor is that Asian Families have increasingly matured to the level where they want the next generation/s involved in the management of the family assets. Doing this in Asia is also cost effective when being able to outsource the more administrative functions to organisations like IQ-EQ.
What nationality are the majority of families setting up an office in Asia?
The majority are still Asian families and a proportion of these are from China, where there has been continued interest. That being said, we do see ongoing interest from clients the Indian sub-continent too.
Would you say there are certain Family Office hubs within Asia to see more growth over the last year?
I would say Singapore and Hong Kong have been at the forefront of the race for Family Office establishment due to the favourable regimens in place. Singapore continues to take an interest in trying to understand what Family Offices are trying to do and then looking at where they can help them to succeed in their aims, such as making the environment more investment friendly or easier to do philanthropy.
Singapore also has the Global Investor Programme (“GIP”), this offers Singapore Permanent Resident status to eligible global investors and includes an option that is specifically designed for Family Offices. Eligible Investors have to invest SGD2.5 million in a Singapore Based SFO that has AUM of over SGD200million for a period 5 years. This could also be attractive for those looking to base themselves in Singapore.
Why have many of these families made the move to Asia? Does that answer differ based on the objectives or nationality of the family?
I believe many families see long term future growth opportunities in Asia and having a base in Asia allows them to be at the doorstep of more potential investment opportunities. It is easier for them to complete background research and due diligence checks before making any investment. Many families now co-invest with other families or get invited to so called “club deals” and so having feet on the ground in Asia make this easier to achieve.
What are the key considerations that UHNW families need to think about before structuring a Family Office in Asia?
There are many Service Providers in Asia and finding one like IQ-EQ that can offer a “one-stop solution” can be a powerful and appealing proposition. Being able to handle the establishment and ongoing administration along with the regulatory and compliance support through to providing consolidated reporting of their investments makes for a robust proposition for a Family Office to partner up to.
Hiring the right staff is also essential for success and being able to bring existing talent into the country or recruit from the local talent pool is an important consideration.
Singapore and Hong Kong are culturally diverse countries where multiple languages are well spoken. Settling into both jurisdictions is also easy from a cultural perspective, as I have experienced both.
And finally, can you list the three first steps that UHNW Families should take when embarking on setting up a new FO structure in Asia?
Understand your Family’s requirements – What does the family want to achieve, who will benefit, what assets and how much to be managed, what services to be provided etc.
Talk to other families who have set up their own Family Offices – learn from their experience as to where and why they structured as they did.
Work with good advisors and service providers to get an understanding of the process and requirements and find people you are comfortable with as its likely to be a long-term relationship.
Download the full report here. Are you expanding your Family Office team in Asia?