Here is an outline of important recent legal, tax and regulatory developments affecting wealth managers conducting business with or in Hong Kong.

Here are further guides to legal, regulatory and tax developments across Asia as they affect wealth managers, private client lawyers and their clients. The overviews come from Baker McKenzie. This specific item is written by associates Lisa Ma and Wenwen Chai. The editors are grateful to the authors for sharing this content. The usual editorial disclaimers apply. We welcome feedback and commentary. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com. See the previous overviews on Singapore and Malaysia here.

Stamp duty updates
Transfers of non-residential property
In 2013, the Hong Kong Government introduced the double ad valorem stamp duty (DSD) on transfers of non-residential property in order to maintain property market stability against the backdrop of an overheating property market.

In November 2020, the Hong Kong Chief Executive announced in her policy address the abolition of the DSD on transfers of non-residential property with effect from 26 November 2020, in order to facilitate enterprises to cash out by disposing of non-residential properties to address liquidity needs arising from the economic downturn during the COVID-19 pandemic. The relevant legislation was gazetted on 19 March 2021. This means that the transfer of non-residential property is now subject to ad valorem stamp duty at the single duty rates (not exceeding 4.25 per cent) which applied before 2013.

Transfers of Hong Kong shares
On the other hand, the Government recently announced that, for the transfer of Hong Kong stock, the rate of ad valorem stamp duty payable by buyers and sellers will be increased from 0.1 per cent to 0.13 per cent (i.e., 0.26 per cent in total per transaction). The relevant legislation was passed in March 2021, and the new rate will take effect from 1 August 2021.

Wealth management professionals may wish to consider whether potential stamp duty exemptions or reliefs could be available during the course of any transaction planning.

Consultation paper on enhancing regulation and supervision of trust business in Hong Kong
In July 2020, the Hong Kong Monetary Authority (HKMA) launched a consultation paper foreshadowing a Code of Practice for Trust Business. The code will contain general principles and practical standards to govern the conduct of authorised institutions (AIs, being principally banks) and their subsidiaries that conduct trust business in Hong Kong.

The consultation concluded in October 2020 but the code is yet to be promulgated. We set out below some observations on the draft code which wealth management industry participants may wish to consider.

(a) Application - The draft code proposed that it will apply to all AIs that conduct trust business in Hong Kong, either themselves or through their subsidiaries. Locally incorporated AIs should ensure that their trust company subsidiaries comply with the code. Other entities that conduct trust business in Hong Kong are merely encouraged to adopt the code. (The HKMA has no legal authority to regulate non-AIs.) Trustee companies that voluntarily seek to comply with the code will be named in a list published by the HKMA. Questions arise as to how the HKMA will review the list from time to time to ensure that the "volunteers" (who are not subject to the HKMA's supervision given they are not AIs) comply with the code; and whether (and if so, to what extent) these volunteers may later be subjected to other supervisory regimes as suggested by the HKMA in the consultation paper, including but not limited to off-site surveillance and on-site reviews by the HKMA.

(b) Definition of "trust business" - The definitions of "trustee" and "trust business" under the draft code are very broad and are not confined to acting as "trustee" in the narrow and usual sense of the word. The term "trust business" covers the provision of management of assets held on trust, administration services for a trust, etc. If these definitions remain widely drafted in the final code, potentially some other industry players may be subject to additional unintended regulatory regimes, e.g., investment managers who are licensed or registered to conduct regulated activities under the Securities and Futures Ordinance may be subject to regulatory requirements imposed by both the Securities and Futures Commission as well as the HKMA. 

(c) Definition of "customer" - In the draft code, a "customer" is defined to mean the settlor and beneficiaries of a trust. However, the term "customer" is used in different parts of the code in different contexts. This gives rise to potential contradictions with general principles of trust law, e.g., the draft code provides that a trustee should treat the interests of customers as paramount but, under trust law principles, a trustee should treat the interests of the beneficiaries as paramount. This creates a conceptual difficulty, especially if the settlor is not a beneficiary under the trust. It is unfortunate that the regulation of the trustee industry is being placed in the hands of an authority that is not experienced in dealing with family trusts. It remains to be seen if the language of various parts of the code will be tightened in its final version. 

We expect that the HKMA will review submissions from different stakeholders and consider these issues further before the final code is released. Meanwhile, wealth management industry participants (in particular, AIs and their subsidiaries) should undertake internal assessments to determine the potential application of the code to them and its possible effects.
 

Intestacy and inheritance rights of same-sex spouses
In September 2020, the Court of First Instance (CFI) published its judgment in the case of Ng Hon Lam Edgar v Secretary for Justice [2020] HKCFI 2412. It found that the exclusion of spouses in same-sex marriages from entitlements and benefits under the Intestates' Estates Ordinance (IEO) and the Inheritance (Provision for Family and Dependants) Ordinance (IPO) constituted unlawful discrimination on the ground of sexual orientation.

Mr Edgar Ng was a male Hong Kong permanent resident of Hong Kong. He married another male Hong Kong permanent resident in London in January 2017. Mr Ng was concerned that, if he died intestate, his assets would not pass to his spouse pursuant to the intestacy law.

Under the IEO, a surviving "husband" or "wife" of an intestate is generally entitled to take the personal chattels of the intestate as well as the whole or a portion of the intestate's residuary estate. "Husband" and "wife" are defined in the legislation to mean, in relation to a person, "a husband or wife of that person by a valid marriage." "Valid marriage" is defined under the legislation to include only opposite-sex marriages. Clearly, the marriage between Mr Ng and his spouse did not fall within the scope of the ordinance as a matter of statutory interpretation.

On the other hand, the IPO empowers the court to make orders for financial provision out of the estate of a deceased for the benefit of the certain family members and dependants of a deceased person, including but not limited to the surviving "wife" or "husband" of the deceased, or any person who immediately before the death of the deceased was being maintained by the deceased. The definitions of the expressions "husband," "wife" and "valid marriage" in the IPO are materially the same as those in the IEO.

In June 2019, Mr Ng sought clarification from the Secretary for Justice as to whether same-sex marriages performed according to the laws of foreign jurisdictions would be recognised as marriages for the purpose of probate, inheritance and intestacy. The Secretary for Justice refused to provide the clarification sought.

Mr Ng then brought an application for leave to apply for judicial review at the CFI. One of the grounds put forward by him was that the definitions of "valid marriage," "husband" and "wife" under the IEO and the IPO did not recognise and make provision for same-sex marriages, and this failure violated the principle of equality, amounting to unjustified discrimination against Mr Ng and his husband on the ground of sexual orientation. (1)

Mr Ng also sought a declaration that, for the purposes of the IEO and the IPO, references to "marriage" should be read to also include civil partnerships and civil unions between persons of the same sex.

The court agreed that these provisions constituted unlawful discrimination on the ground of sexual orientation.

In reaching its decision, the court followed the two-stage approach adopted in the earlier of Leung Chun Kwong v Secretary for Civil Service (2019) 22 HKCFAR 127:
-- Stage 1 - whether there was a differential treatment on a prohibited ground under the IEO and IPO; and if so,
-- Stage 2 - whether the differential treatment could be justified.

As to Stage 1, the court held that sexual orientation was a prohibited ground. Same-sex married couples and opposite-sex married couples are in a comparable position, and there was clearly differential treatment between the two under the legislation in question.

As to Stage 2, the court held that the legislative provisions pursued legitimate aims including (i) supporting and upholding the integrity of the traditional institution of marriage in Hong Kong, being the voluntary union of one man and one woman to the exclusion of others; (ii) encouraging heterosexual unmarried couples to marry to ensure that their spouses will be afforded spousal status or priority under inheritance law; and (iii) maintaining the overall coherence, consistency and workability of the laws of Hong Kong involving the institution of marriage. However, the CFI considered it illogical to suggest that the denial of benefits under the IEO or IPO to same-sex couples could promote these legitimate aims.

Hence, the differential treatment accorded to same-sex married couples and opposite-sex married couples under the IEO and IPO was not rationally connected to these legitimate aims, and could not be justified. They therefore constituted unlawful discrimination.

The court granted leave to apply for judicial review and held that the proper remedy to be granted should be a declaration of these principles and remedial interpretation of the IEO and IPO. 

However, because the Applicant had not entered into a civil partnership or civil union, the judge refused to deal with the position of civil partnership or civil union for the purposes of the IEO and IPO. The decision therefore applies only to foreign same-sex marriages.

Despite there appearing to be progress in Hong Kong in recognising the rights of same-sex married couples, private clients should still be encouraged to have properly drafted wills and/or trusts in place in order to plan their succession ahead of any legislative or judicial developments.

Footnote:
1, As guaranteed by Article 25 of the Basic Law and Articles 1(1) and 22 of the Hong Kong Bill of Rights.