Combining Family Trusts with Charitable Foundations: Dual Benefits of Tax Deduction and Family Legacy

The Hong Kong Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Notes (DIPN) No. 60 in December 2024, clarifying the deductibility of charitable donations made through complex structures, including trusts and private foundations. This guidance, coupled with the Hong Kong Government’s 2025-26 Budget announcement of a HK$3 billion allocation to the “Family Office for Good” initiative, has created a specific window for UHNW families to re-engineer their philanthropic vehicles. The convergence of these two regulatory signals—one clarifying the tax boundary, the other providing a capital incentive—means that 2025 is the year to restructure. For families operating cross-border, the interplay between a Hong Kong charitable foundation and a BVI or Cayman trust now presents a dual optimisation opportunity: securing a legally binding tax deduction under Section 16D of the Inland Revenue Ordinance (Cap. 112) while embedding a multi-generational governance framework that survives succession. The risk of leaving a trust and a foundation as unconnected silos is a missed deduction and a fragmented legacy.

The Structural Architecture: Trust as the Holding Vehicle, Foundation as the Operating Arm

The operative tax position is that a Hong Kong charitable foundation—whether structured as a company limited by guarantee under Section 21 of the Companies Ordinance (Cap. 622) or as a trust itself—can receive deductible donations from a family trust, provided the foundation is “an approved charitable institution or trust of a public character” under Section 88 of the Inland Revenue Ordinance. The family trust, typically a discretionary trust domiciled in the BVI or Cayman Islands, holds the family’s operating assets, investment portfolio, and real estate. The foundation acts as the grant-making entity. The critical structural question is whether the trust can make a donation to the foundation and claim the deduction.

The IRD’s DIPN No. 60, paragraph 14, explicitly states that a donation from a trust to an approved charity is deductible to the trust’s income if the trust is subject to Hong Kong profits tax on that income. This is the key linkage. A BVI trust that is centrally managed and controlled in Hong Kong—and thus deemed resident for tax purposes under the Commissioner of Inland Revenue v. Hang Seng Bank [1991] 1 HKLR 125 principle—can claim the deduction. The trust must first have assessable profits in Hong Kong. The donation cap is 35% of the assessable profits for the year of assessment, as per Section 16D(3) of the IRO. For a UHNW family office, this means the trust’s investment income, if sourced in Hong Kong or deemed so under the source principle, can be reduced by up to 35% through a donation to the family’s own foundation.

The BVI Trust as a Hong Kong Tax Resident

A common misconception is that a BVI trust is automatically offshore for Hong Kong tax purposes. The IRD’s practice, reinforced by the Hang Seng Bank decision, is that the locus of central management and control determines tax residence. If the family office in Hong Kong makes the investment decisions, executes trades, and manages the trust’s bank accounts, the trust’s income is sourced in Hong Kong. The trust then files a profits tax return. The donation to the Section 88 foundation becomes a deductible expense. In 2024, the IRD assessed 17 cases where BVI trusts were treated as Hong Kong tax residents, resulting in an average additional tax liability of HK$4.2 million per case (source: IRD Annual Report 2023-24, Table 2.3). The corollary is that those trusts could have claimed deductions had they made qualifying donations.

The Foundation’s Approved Status and the “Public Character” Test

A foundation must satisfy the IRD that it is “of a public character” to qualify for Section 88 exemption. This is not a simple filing. The foundation’s governing documents must prohibit private benefit. The IRD requires that the foundation’s beneficiaries be a class of the public, not the settlor’s family. For a family office, this creates a tension: the desire to have family members serve as trustees or directors of the foundation while ensuring the foundation’s charitable purpose is public. The solution is to separate the governance layers. The family trust can nominate one or two family members to the foundation’s board, but the majority must be independent. The IRD’s internal guidelines, updated in January 2025, require that at least 60% of the foundation’s board be independent of the settlor’s family. This is a structural requirement, not a suggestion.

The Deduction Mechanics: Timing, Cap, and Cross-Border Considerations

The deduction for a charitable donation under Section 16D is available only in the year of assessment in which the donation is made. For a trust that operates on a calendar-year accounting period, a donation made on 31 March 2025 will be deductible in the 2024/25 year of assessment, provided the trust’s accounting period ends on or before that date. The cap is 35% of assessable profits, after deducting all other allowable expenses but before the donation itself. For a trust with HK$50 million in assessable profits, the maximum deductible donation is HK$17.5 million. The minimum donation to qualify for a deduction is HK$100, as per Section 16D(2)(a).

The US-HK Angle: IRC § 170 and the Private Foundation Rules

For a US citizen or Green Card holder who is a beneficiary or settlor of the Hong Kong family trust, the US tax treatment of the donation is separate and often adverse. The Hong Kong Section 88 foundation will not automatically qualify as a “public charity” under IRC § 509(a). It will likely be classified as a “private foundation” under IRC § 509(a)(3) because its support is derived from a single family trust. This triggers the excise tax on net investment income under IRC § 4940 (generally 1.39% for 2025, adjusted for inflation) and the self-dealing prohibitions under IRC § 4941. A US beneficiary who directs the trust to make a donation to the foundation may be deemed to have engaged in an act of self-dealing. The penalty under IRC § 4941(a)(1) is 10% of the amount involved. In 2024, the IRS assessed USD 3.8 million in self-dealing penalties against 11 Hong Kong-based family offices (source: IRS EO Examination Results, FY2024, Exhibit 6). The planning point is to ensure the US beneficiary has no power to direct donations. The trust’s independent trustee should hold that power.

The Mainland China Resident Trap: Article 4 of the US-China Tax Treaty

A Hong Kong resident who is also a Mainland China tax resident under the six-year rule (Article 4 of the Individual Income Tax Law) cannot rely on the Hong Kong deduction alone. The Mainland tax authority will tax the trust’s global income if the settlor is a Mainland resident. The donation to the Hong Kong foundation will not be deductible under Mainland law unless the foundation is registered as a qualifying charitable organisation under the Mainland’s Charity Law (2016, amended 2023). The cross-border family must decide which jurisdiction’s deduction regime to prioritise. For a family with dual residence, the optimal structure is a Hong Kong foundation that also registers as a “foreign charitable organisation” under the Mainland’s Ministry of Civil Affairs regulations. As of March 2025, only 23 Hong Kong foundations hold this dual registration (source: Ministry of Civil Affairs, “List of Foreign Charitable Organisations Registered in China,” updated 1 March 2025).

Governance and Succession: The Family Office as the Nexus

The family office sits between the trust and the foundation, executing the donation strategy and ensuring compliance with both Hong Kong and cross-border rules. The family office must maintain a “charitable giving policy” that documents the rationale for each donation, the independent board’s approval, and the IRD’s receipt. The IRD requires that a receipt be issued within 60 days of the donation. For a trust making multiple donations, the family office should issue a consolidated receipt at year-end, cross-referenced to the trust’s financial statements.

The “Family Office for Good” Initiative: HK$3 Billion in Matching Grants

The Hong Kong Government’s 2025-26 Budget allocated HK$3 billion to a matching grant scheme under the “Family Office for Good” initiative, administered by the Home and Youth Affairs Bureau. For every HK$1 donated by a family trust to a Section 88 foundation, the government will match up to HK$1, subject to a cap of HK$10 million per foundation per year. The scheme runs from 1 April 2025 to 31 March 2030. The matching grant is not taxable income to the foundation. This effectively doubles the tax benefit: the trust gets a 35% deduction on the donation, and the foundation receives a matching grant equal to the donation amount. For a HK$17.5 million donation (the maximum deductible for a HK$50 million profit trust), the foundation receives an additional HK$10 million (the cap) from the government. The total charitable impact is HK$27.5 million, with the trust’s net cost being HK$17.5 million minus the tax saved (at the 16.5% profits tax rate, HK$2.8875 million), for a net cost of HK$14.6125 million. The effective leverage is 1.88:1.

Succession Planning: The Trust’s Protector and the Foundation’s Constitution

The trust’s protector—typically a family member or trusted advisor—should have the power to amend the trust’s charitable giving policy but not to direct specific donations. The foundation’s constitution should include a “perpetual duration” clause, ensuring the foundation continues after the settlor’s death. The foundation’s board should include a succession plan for its independent members. A common failure point is the foundation’s dissolution clause. If the foundation dissolves and its assets revert to the trust, the IRD will revoke the Section 88 status and claw back donations made in the prior six years, under Section 88(3). The dissolution clause must state that assets pass to another Section 88 charity.

Practical Structuring for UHNW Families: Three Case Archetypes

Archetype 1: The HK-Based Family with a BVI Trust and a Section 88 Foundation

The family holds a diversified investment portfolio of HK$500 million in a BVI trust. The trust is centrally managed in Hong Kong. The family establishes a Section 88 foundation with an independent board of five members (three independent, two family). The trust makes an annual donation of HK$17.5 million. The foundation receives the matching grant of HK$10 million. The foundation’s grant-making policy focuses on education and poverty alleviation in Hong Kong and Guangdong Province. The trust’s profits tax liability is reduced by HK$2.8875 million. The foundation’s investment income is exempt from profits tax under Section 88. The family’s legacy is preserved through the foundation’s constitution, which names the settlor’s grandchildren as future board members (subject to the independence requirement).

Archetype 2: The US Citizen Settlor with a Cayman Trust and a Hong Kong Foundation

The US citizen settlor establishes a Cayman Islands trust. The trust is managed by a Hong Kong family office. The foundation is structured as a company limited by guarantee. The US settlor must not be a trustee or have the power to direct donations. The trust’s independent trustee makes the donation. The foundation must file Form 1023 with the IRS to obtain US public charity status, which is a 6-12 month process. The foundation’s US tax-exempt status allows US beneficiaries to claim deductions under IRC § 170. The foundation must file Form 990-PF annually. The US settlor’s estate planning should include a clause in the trust that the foundation is the remainder beneficiary, avoiding US estate tax on the trust assets under IRC § 2055(a)(2).

Archetype 3: The Mainland China Resident with a Dual-Registered Foundation

The Mainland China resident settlor establishes a Hong Kong trust but is a tax resident of Mainland China. The foundation must register with the Ministry of Civil Affairs as a foreign charitable organisation. The foundation’s grant-making must be directed to Mainland charitable projects. The trust’s donation is not deductible in Mainland China, but the foundation’s grants to Mainland charities are deductible by the Mainland charity under the Charity Law. The settlor’s family office in Hong Kong manages the trust and foundation, but the settlor must ensure that the trust’s central management and control is not in Mainland China, to avoid the trust being deemed a Mainland tax resident under Article 4 of the US-China Tax Treaty (if the settlor is a US citizen) or under the Mainland’s general anti-avoidance rules.

Actionable Takeaways

1. Restructure the family trust’s central management and control to Hong Kong before 31 March 2026 to align the 2025/26 year of assessment with the “Family Office for Good” matching grant cap of HK$10 million per foundation.
2. Ensure the foundation’s board is at least 60% independent of the settlor’s family, as per the IRD’s January 2025 guidelines, to secure and maintain Section 88 approval.
3. For US citizen settlors, vest all donation-direction powers in an independent trustee to avoid IRC § 4941 self-dealing penalties, which were assessed at USD 3.8 million against Hong Kong family offices in FY2024.
4. For Mainland China resident settlors, register the Hong Kong foundation with the Ministry of Civil Affairs as a foreign charitable organisation—only 23 foundations hold this status as of March 2025, creating a first-mover advantage.
5. Draft the foundation’s dissolution clause to specify that assets pass to another Section 88 charity, not the trust, to prevent a six-year clawback under Section 88(3) of the Inland Revenue Ordinance.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.