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Hong Kong, Singapore plot divergent paths for family offices

Hong Kong may be about to turn the tide in its battle with Singapore to attract more family offices.
Family concepts with home or saving and people

The principal of a family office was recently asked to attend a meeting with Singapore’s central bank as he had applied to set up operations in the city-state.

The first part of the meeting was formulaic, mostly involving verifying information such as the name of the investment manager and the structure of the family office.

But the second half of the meeting took him by surprise as it turned into what he described as “a sales pitch”, in which the Monetary Authority of Singapore (MAS) staff member began listing all the ways the central bank could help facilitate investment in the city-state.

For anyone who has been paying attention to the competition in Asia to attract family offices, this will not come as a surprise. Nowhere is the rivalry between Hong Kong and Singapore more cut-throat than in the family office sector.

However, whereas Hong Kong is now rolling out the red carpet for family offices in an effort to stop the haemorrhaging of family offices to its main rival, Singapore is being more discerning about the types of family offices it seeks to attract, which market observers said may tip the scales back in Hong Kong’s favour, at least in terms of numbers.

“If you look at all these things together, Singapore is going to the next phase of the family office journey. We have gone through a period of promoting Singapore as a destination to manage private wealth through family offices. We have accumulated a lot of liquidity in Singapore. The next phase is probably looking at quality,” said Kia Meng Loh, senior partner and chief operating officer at Dentons Rodyk & Davidson.

“Whereas Hong Kong lost a lot of AUM to Singapore, I think Hong Kong is in clawback mode as they try to stem the flow. If Hong Kong is going to lose a certain percentage of AUM to Singapore, let’s stem the flow with certain incentives that are coming out and see if we can we get some of the AUM flowing back to Hong Kong.”

It is difficult to put an exact figure on the number of family offices operating in either Hong Kong or Singapore, although what data does exist suggest that the number leaving the Chinese special administrative region for Singapore or bypassing it altogether has been surging lately.

According to the MAS, the number of family offices operating in Singapore rose to around 700 at the end up 2021, up from just 50 as recently as 2018. Market observers estimated that the number now could be as high as 1,500 as family offices have decamped from Hong Kong due to China’s political crackdown and its pursuit until recently of a zero-Covid policy.

“If Hong Kong is going to lose a certain percentage of AUM to Singapore, let’s stem the flow with certain incentives that are coming out and see if we can we get some of the AUM flowing back to Hong Kong.”

Kia Meng Loh, senior partner and chief operating officer, Dentons Rodyk & Davidson

To try to remedy this, in March, the Hong Kong government held its inaugural closed-door Wealth for Good summit, which was attended by over 100 global family office representatives and announced a series of incentives including a revamped investment migration scheme, plans to develop art storage facilities at the city’s airport and new tax concessions.

The new tax concessions came into effect last month and exempt single-family offices (SFOs) from profit tax provided they meet certain criteria such as having minimum assets of at least HK$240m ($30.6m), at least two full-time employees in Hong Kong and at least HK$2m in operating expenditure.

The new measures were widely cheered by SFOs, although one principal at a Hong Kong-based SFO expressed disquiet about the ownership restrictions in place, specifically the fact that the family members must hold at least 95% in beneficial interest to qualify.

The main advantage of the tax concessions is seen as the fact that they automatically apply provided the SFOs meet the minimum criteria, whereas in Singapore, SFOs seeking to benefit from similar tax concessions must seek approval from MAS first.

“It’s a sort of programme where you sign up and you get pre-approval, whereas Hong Kong’s one is quite different. Hong Kong says that these are the criteria that you need to meet and even existing family offices that have been operating if you qualify, we will give you the tax incentives. That’s something I thought was quite different from Singapore. It’s quite dynamic,” said Dentons Rodyk & Davidson’s Loh.

Moreover, Singapore has been moving in the opposite direction and has been making it much tougher for SFOs to qualify for existing tax concessions.

Singapore has long had in place several tax concessions for SFOs, specifically sections 13D, 13O and 13U of the Income Tax Act but in April last year it tightened the criteria for SFOs seeking to qualify for tax exemptions under sections 13O and 13U.

Following the change in regulations, SFOs seeking tax exemptions under section 13O must now have minimum assets under management of S$10m ($7.43m) at the time of the application with a commitment to increase that to S$20m after two years.

For SFOs seeking tax exemptions under both section 13O and 13U, there are also requirements now around minimum number of investment professionals, operating expenditure and local investments.

According to market observers, this is very much in line with Singapore’s efforts to attract more high-quality family offices having seen a flurry of smaller family offices move to Singapore from Hong Kong or bypass the Chinese city altogether. This should tilt the scales in Hong Kong’s favour in attracting more family offices.

“The new tax measures have a relatively tight scope form single family offices to briefly, but broadly speaking it’s a sign from Hong Kong that they recognise the relevance of the family office space and it should move the needle. It should put Hong Kong, if it wasn’t already, on the map,” said the principal at one SFO.

Part of the Mark Allen Group.