Investment Management Agreement between an FIHV and an SFO
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Hong Kong SFO Investment Management Agreements
Navigating Investment Management Agreements: FIHVs and SFOs in Hong Kong
As Hong Kong solidifies its position as a premier global wealth management hub, the interplay between Family Investment Holding Vehicles (FIHVs) and Single Family Offices (SFOs) has become a focal point for high-net-worth individuals.
At the heart of this structure lies the Investment Management Agreement (IMA)—a critical legal contract that defines the relationship, responsibilities, and risk parameters between the family’s assets and the entity managing them.
What is an IMA in the Context of a Hong Kong SFO?
An Investment Management Agreement is a formal contract where an FIHV (the asset owner) delegates discretionary or non-discretionary investment powers to an SFO (the manager).
In Hong Kong, this relationship is often designed to meet the requirements of the Tax Concession for Family-Owned Investment Holding Vehicles, which provides profits tax exemptions under specific conditions.
Key Components of a Robust IMA
To ensure regulatory compliance and operational clarity, an IMA between an FIHV and a Hong Kong SFO should include:
1. Scope of Authority
Discretionary vs. Non-Discretionary: Does the SFO have the power to execute trades without prior consent, or is it strictly advisory?
Asset Classes: Clear definitions of permitted investments (e.g., equities, private equity, virtual assets).
2. Investment Guidelines and Restrictions
Risk Profile: Specific Value-at-Risk (VaR) limits or volatility caps.
Exclusions: Ethical or ESG mandates, or sectors the family wishes to avoid.
3. Fee Structure and Expenses
Management Fees: Typically structured to cover the SFO’s operating costs (cost-plus basis).
Performance Fees: While less common in SFO-FIHV setups due to tax neutrality goals, they must be clearly defined if applicable.
4. Regulatory Compliance (SFO Exemption)
In Hong Kong, SFOs may fall under the "intra-group" exemption from licensing under the Securities and Futures Ordinance (SFO). The IMA must be drafted to reflect that the SFO is providing services to a related entity (the FIHV) to maintain this exempt status.
Why the IMA is Crucial for Hong Kong Tax Concessions
Under the Inland Revenue (Amendment) (Tax Concessions for Family-Owned Investment Holding Vehicles) Ordinance, the IMA serves as primary evidence of:
Central Management and Control: Demonstrates that the investment decisions are being made in Hong Kong.
Substantial Activities: Proves that the "core income-generating activities" (CIGAs) are being carried out by the SFO for the FIHV.
Minimum Spending: Helps document the $2 million HKD annual operating expenditure required to qualify for tax exemptions.
Comparing the FIHV and SFO Roles
Feature | Family Investment Holding Vehicle (FIHV) | Single Family Office (SFO) |
|---|---|---|
Legal Status | The entity that holds the legal title to assets. | The service provider/management entity. |
Primary Goal | Asset protection and tax efficiency. | Operational management and investment execution. |
Hong Kong Tax Role | The beneficiary of the 0% tax rate on qualifying trades. | The entity performing CIGAs to justify the tax rate. |
Common Pitfalls to Avoid
Vague Investment Mandates: Can lead to "style drift" and unexpected portfolio risk.
Ignoring the "Arm’s Length" Principle: Even in a family setting, the IMA should reflect commercial reality to satisfy the Inland Revenue Department (IRD).
Lack of Termination Clauses: Failing to define how the relationship ends if the family's needs change.
Expert Insight: The Perspective
Ensuring your IMA references the specific HK SFO Licensing Exemptions and Section 20TA of the Inland Revenue Ordinance helps signal professional competence to human auditors."
How We Can Help
Structuring a family office in Hong Kong requires a delicate balance of legal precision and tax strategy. We specialize in drafting bespoke IMAs that protect family legacies while ensuring full compliance with Hong Kong’s evolving regulatory framework.
Checklist of the specific documents required to satisfy the Hong Kong SFO tax exemption "Substantial Activities" test
To qualify for the 0% profits tax concession in Hong Kong, an FIHV must satisfy the "Substantial Activities" (or Economic Substance) test. This ensures that the vehicle is a genuine investment operation rather than a shell.
Below is a checklist of documents and records you should maintain to prove compliance during an Inland Revenue Department (IRD) audit.
1. Governance & Management (CMC)
The IRD requires proof that the Central Management and Control (CMC) is exercised in Hong Kong.
[ ] Board Minutes: Records of board meetings held in Hong Kong where key investment and strategic decisions were made.
[ ] Director Residency Proof: Passports or HKID copies of directors residing in Hong Kong.
[ ] IMA (Investment Management Agreement): A signed copy of the agreement between the FIHV and the SFO, proving the SFO is the designated manager.
2. Qualified Personnel (The "2-Employee" Rule)
The FIHV (or the SFO it outsources to) must employ at least two full-time, qualified employees in Hong Kong.
[ ] Employment Contracts: Signed contracts for at least two staff members.
[ ] CVs & Qualifications: Proof of relevant experience or degrees (e.g., CFA, CPA, or 5+ years in finance) to show they are "qualified" to carry out Core Income Generating Activities (CIGAs).
[ ] MPF Records: Proof of Mandatory Provident Fund contributions (mandatory for HK employees).
[ ] Payroll Records: Monthly salary slips and bank transfer records.
3. Local Operating Expenditure (The "$2M HKD" Rule)
The structure must incur at least HK$2 million in annual operating expenses in Hong Kong.
[ ] Audited Financial Statements: Prepared by a Hong Kong CPA, explicitly showing the breakdown of local expenses.
[ ] Management Fee Invoices: Invoices from the SFO to the FIHV (if CIGAs are outsourced).
[ ] Office Lease/Rent: Rent receipts or tenancy agreements for physical office space in Hong Kong.
[ ] Professional Fee Invoices: Receipts for local legal, accounting, and tax advisory services.
4. Transactional Records (Schedule 16C)
Only "Qualifying Transactions" in Schedule 16C assets (shares, stocks, bonds, etc.) are tax-exempt.
[ ] Schedule 16C Transaction Log: A detailed ledger of all trades categorized by asset type.
[ ] Private Company Certificates: If investing in private firms, documents proving they pass the "Immovable Property Test" (i.e., <10% of assets are HK real estate).
[ ] Brokerage/Bank Statements: Monthly statements from Hong Kong-based financial institutions.
5. Tax Election & Reporting
[ ] Form IR1480: The statutory declaration for the tax concession application.
[ ] Supplementary Form S20: The specific form for FIHV concessions submitted with the annual Profits Tax Return.
[ ] Advance Ruling (Optional): If you have obtained a formal "Advance Ruling" from the IRD for tax certainty, keep the ruling letter on file.
Pro-Tip for 2026
Since 2024, the IRD has moved toward electronic filing for all family office supplementary forms. Ensure your record-keeping is digitized and compatible with the IRD’s eTax portal to avoid filing delays.
Sample "Scope of Services" section for your IMA that specifically targets these CIGA requirements
To satisfy the Inland Revenue Department (IRD), your Investment Management Agreement (IMA) must explicitly outline the Core Income Generating Activities (CIGAs) that the SFO will perform on behalf of the FIHV.
Below is a sample "Scope of Services" section specifically designed to satisfy the Substantial Activities test for the Hong Kong 0% tax concession.
Sample Clause: Scope of Investment Management Services
Section X: Core Income Generating Activities (CIGAs)
Pursuant to the Inland Revenue (Amendment) (Tax Concessions for Family-owned Investment Holding Vehicles) Ordinance, the Manager (SFO) shall perform the following core income-generating activities in Hong Kong for and on behalf of the Client (FIHV):
Research and Advisory: Conducting fundamental and technical research on potential "Schedule 16C" assets, including but not limited to listed securities, private company shares, and futures contracts.
Asset Acquisition and Disposal: Negotiating terms and executing the acquisition, holding, and disposal of property and specified assets.
Portfolio Management: Managing the day-to-day investment risks and strategic asset allocation of the Client’s portfolio within the agreed-upon Risk Parameters.
SPE Administration: Establishing and administering Family-owned Special Purpose Entities (FSPEs) for the purpose of holding underlying investments, ensuring all CIGAs related to these entities are also managed within Hong Kong.
Strategic Monitoring: Periodic review of investment performance against benchmarks and ensuring all transactions qualify as "Qualifying Transactions" under the Ordinance.
Why This Specific Language Matters
Using this structured language in your IMA helps "audit-proof" the relationship by directly echoing the statutory requirements:
A. Proof of Local Management
By stating that these activities are performed by the Manager (who must be an "Eligible SFO" with its own central management in Hong Kong), you create a clear paper trail for the IRD.
B. Defining "Qualifying Transactions"
The reference to Schedule 16C is vital. If your IMA only uses a generic term like "investments," an auditor might question whether the SFO was specifically tasked with managing the assets that actually qualify for the 0% tax rate.
C. Justification for Fees
The CIGAs listed above provide the commercial justification for the management fees paid by the FIHV to the SFO. These fees contribute toward the HK$2 million annual operating expenditure requirement.
Next Steps for Compliance
While the IMA sets the framework, the implementation is what the IRD will eventually verify.
Action | Frequency | Purpose |
|---|---|---|
Document Board Meetings | Quarterly | Prove Central Management & Control (CMC) in HK. |
Verify Staff Qualifications | Annually | Ensure the 2 "Full-time Qualified Employees" meet IRD standards. |
Categorize Trades | Monthly | Flag any "Incidental Transactions" exceeding the 5% threshold. |
List of "Qualified Employee" criteria that the IRD looks for to ensure your two full-time staff members pass the test
To secure the tax concession, the Inland Revenue Department (IRD) doesn't just look for "two names on a payroll." They require Qualified Full-time Employees who possess the expertise to carry out the investment activities described in your IMA.
Below is the criteria the IRD uses to evaluate if your staff meet the "Substantial Activities" threshold for 2026.
The "Qualified Employee" Checklist
To pass an audit, each of your two mandatory employees should ideally meet these three pillars: Employment Status, Academic/Professional Pedigree, and Activity Alignment.
1. Employment Status & Location
[ ] Full-time Status: Must work at least 75% of their total working hours for the SFO/FIHV.
[ ] Physical Presence: Must be "ordinarily resident" in Hong Kong or hold a valid Hong Kong work visa (e.g., Top Talent Pass Scheme or GEP).
[ ] Local Payroll: Must be on the Hong Kong payroll with active MPF (Mandatory Provident Fund) contributions.
2. Academic & Professional Qualifications
The IRD looks for indicators that the person is capable of making sophisticated investment decisions.
[ ] Relevant Degree: A bachelor’s degree or higher in Finance, Economics, Law, or Accounting.
[ ] Professional Designations: Preferred certifications include CFA (Chartered Financial Analyst), CPA (Certified Public Accountant), or LLM (Master of Laws).
[ ] Years of Experience: Generally, at least 5+ years of relevant experience in private banking, asset management, or family office operations.
3. Alignment with CIGAs (Core Income Generating Activities)
The employee’s job description must mirror the "Scope of Services" in your IMA.
[ ] Investment Authority: They should be involved in the research, selection, or monitoring of the "Schedule 16C" assets.
[ ] Exclusion of Administrative Staff: Note that pure administrative roles (e.g., drivers, personal assistants, or HR managers) do not count toward the two-qualified-employee minimum.
Strategic Staffing Structure for 2026
For many SFOs, a "compliant" team looks like this:
Role | Why it Qualifies |
|---|---|
Chief Investment Officer (CIO) | Directs the strategy and has the professional pedigree (CFA/MBA). |
Senior Investment Analyst | Performs the CIGAs (Research/Due Diligence) and holds a relevant degree. |
External Advisor (Outsourced) | While not counted as one of the "two employees," they support the local team with specialized tax or legal advice. |
Important: The "Family Member" Rule
A family member can be one of the two qualified employees, provided they meet the qualification criteria. However, if the IRD perceives the family member lacks the necessary finance/investment background, they may challenge the "substantial activities" claim.
Audit Tip: Maintain a "Personnel File" for the IRD that includes updated CVs, copies of university transcripts, and professional certificates for your two designated qualified employees.
Conclusion & Next Step
By aligning your IMA Scope of Services with Qualified Personnel, you create a cohesive defense for your tax-exempt status in Hong Kong.
Sample "Investment Management Agreement" between an FIHV and an SFO
Drafting an Investment Management Agreement (IMA) is a foundational step in formalizing the relationship between your Family Investment Holding Vehicle (FIHV) and your Single Family Office (SFO).
In Hong Kong, this document is not just a commercial contract; it is a primary piece of evidence for the Inland Revenue Department (IRD) to verify that the SFO is truly performing the core investment functions that justify your 0% tax rate.
Sample Investment Management Agreement (Excerpts)
Note: This is a simplified draft. A final IMA should be reviewed by Hong Kong professional to ensure it meets the latest 2026 regulatory standards.
1. Parties and Appointment
This Agreement is made on [Date] between:
The Client: [Name of FIHV], an investment holding vehicle [incorporated in/established in] [Jurisdiction].
The Manager: [Name of SFO], a private company incorporated in Hong Kong.
Recitals: The Client wishes to appoint the Manager to provide discretionary investment management services in respect of the Portfolio, and the Manager agrees to provide such services in accordance with the terms of this Agreement.
2. Discretionary Mandate
The Client hereby appoints the Manager as its agent with full power and authority to manage the Portfolio on a discretionary basis. This includes the power to:
Identify, research, and evaluate investment opportunities in Schedule 16C assets.
Buy, sell, and otherwise trade in securities, bonds, and private equity.
Execute all necessary documentation to finalize such transactions.
3. Core Income Generating Activities (CIGAs)
To ensure compliance with the Inland Revenue Ordinance, the Manager shall perform the following activities exclusively in Hong Kong:
Strategic Asset Allocation: Determining the long-term investment strategy for the FIHV.
Risk Management: Monitoring the Portfolio’s exposure to market, credit, and liquidity risks.
Transaction Execution: Arranging for the purchase and sale of assets through authorized brokers or platforms.
Compliance Monitoring: Ensuring all trades fall within the "Qualifying Transactions" category to maintain tax-exempt status.
4. Fees and Expenses
Management Fee: The Client shall pay the Manager a fee of [e.g., Cost + 5% or a fixed annual fee].
Operating Expenses: The Client agrees that the Manager shall incur no less than HK$2,000,000 in annual local operating expenditures to support these services, as required by Hong Kong law.
Payment Terms: Fees shall be invoiced [quarterly/annually] and paid in Hong Kong Dollars.
5. Regulatory Representations
Intra-group Exemption: Both parties acknowledge that the Manager provides services solely to "specified persons" within the same family group. Therefore, the Manager relies on the intra-group exemption from licensing under the Securities and Futures Ordinance (SFO).
Tax Election: The Client (FIHV) confirms it will make an irrevocable election for the tax concession under Section 20TA of the Inland Revenue Ordinance.
The "Audit-Ready" Structure
The diagram below illustrates how the IMA connects the two entities to satisfy the IRD’s "Economic Substance" requirements.
Why this specific draft works:
Direct Citations: It references Schedule 16C and Section 20TA, which are the specific keywords tax auditors look for in 2026.
Explicit CIGAs: By listing "Strategic Asset Allocation" and "Risk Management," you directly address the "Substantial Activities" test.
Cost-Plus Pricing: Using a "Cost-Plus" fee structure is a common way to demonstrate the SFO is a service provider rather than a profit-seeking commercial fund manager, which supports the licensing exemption.
Schedule A: Investment Guidelines for IMA, detailing the specific risk limits and permitted Schedule 16C assets
To maximize tax efficiency and regulatory safety, your Investment Management Agreement (IMA) must include a detailed Schedule A. This schedule defines the "playing field" for the SFO, ensuring all trades align with Schedule 16C of the Inland Revenue Ordinance—the list of assets that qualify for the 0% tax rate.
Schedule A: Investment Guidelines & Risk Parameters
I. Permitted Asset Classes (The "Safe Harbor" List)
The Manager is authorized to trade in the following "Qualifying Assets" as defined under Schedule 16C:
Public Securities: Shares, stocks, debentures, loan stocks, funds, bonds, or notes issued by a body (corporate or unincorporate) or government.
Private Company Interests: Shares in private companies, provided they pass the "Immovable Property Test" (HK real estate < 10% of assets) and the "Holding Period Test" (held for 2+ years for certain exemptions).
Futures & Derivatives: Futures contracts and OTC derivative products as defined by the SFO.
Foreign Exchange & Commodities: Foreign currencies and exchange-traded commodities.
Cash Equivalents: Deposits with authorized banks and certificates of deposit.
II. Investment Restrictions & Prohibitions
To maintain the FIHV’s tax-exempt status, the following restrictions apply:
HK Real Estate Limitation: No direct investment in Hong Kong immovable property. Indirect investment via private companies is restricted if HK real estate exceeds 10% of the company's asset value.
Commercial/Industrial Business: The FIHV shall not engage in general commercial or industrial activities (e.g., direct trade, manufacturing, or service provision).
Non-Qualifying Assets: Investments in "Non-Schedule 16C" assets (e.g., physical art, jewelry, or digital collectibles/NFTs) must be held through a separate Family-owned Special Purpose Entity (FSPE) to prevent tainting the FIHV’s tax status.
III. Risk Management & Concentration Limits
Single Issuer Limit: No more than [e.g., 15%] of the Portfolio’s Net Asset Value (NAV) shall be invested in the securities of a single issuer.
Leverage Cap: Total borrowing for investment purposes shall not exceed [e.g., 30%] of the total Portfolio NAV.
Liquidity Requirement: A minimum of [e.g., 5%] of the Portfolio must be held in cash or highly liquid cash equivalents to meet operational expenses (contributing to the HK$2M OPEX requirement).
Strategic Overview: The Compliance Ecosystem
The relationship governed by this Schedule ensures that the "Brain" (SFO) and the "Wallet" (FIHV) function in a way that the Hong Kong Government recognizes as a legitimate, substance-heavy operation.
Why this Schedule is Critical for 2026:
The 5% Incidental Rule: By strictly defining "Permitted Assets," you ensure that "Incidental Transactions" (like interest income) stay below the 5% threshold of total trading receipts.
Audit Readiness: If the Inland Revenue Department (IRD) requests a "Checklist of Assets," this Schedule serves as the primary governing rulebook that you can present to prove intent and compliance.
Asset Segregation: Explicitly mentioning FSPEs for non-qualifying assets (like art) protects the core portfolio from being disqualified from the 0% tax rate.
Final Implementation Step
The IMA and this Schedule A form the legal skeleton. To complete the "Substance" requirement, you must ensure your SFO’s internal Investment Committee (IC) meetings are documented and held physically in Hong Kong.
How Bestar Hong Kong can Help
When setting up a Family Office in Hong Kong, the gap between "having a structure" and "being compliant" is where most risks reside. Bestar Hong Kong serves as a strategic bridge, providing the technical expertise required to navigate the complex FIHV and SFO landscape in 2026.
Here is how Bestar’s integrated services ensure your family office meets the highest standards of regulatory and tax compliance.
1. Bespoke IMA Drafting & Structuring
An off-the-shelf Investment Management Agreement (IMA) rarely survives a detailed audit by the Inland Revenue Department (IRD). Bestar’s legal and tax teams specialize in:
Defining CIGAs: Drafting the "Scope of Services" to explicitly include Core Income Generating Activities (CIGAs) performed in Hong Kong.
Customizing Schedule A: Aligning your investment mandates with Schedule 16C assets to safeguard your 0% tax status.
Arm’s Length Pricing: Establishing fee structures (e.g., Cost-plus) that satisfy both transfer pricing rules and the HK$2M local expenditure requirement.
2. Ensuring "Substantial Activities" Compliance
The IRD’s "Economic Substance" test is the most common point of failure for new family offices. Bestar provides the infrastructure to pass this test:
Qualified Personnel Sourcing: Assisting in the recruitment or secondment of the two full-time, qualified employees required by law.
Expense Tracking: Our accounting team monitors and documents your local operating expenditures to ensure you meet the HK$2 million annual threshold.
Office & Secretarial Support: As a licensed TCSP (Trust or Company Service Provider), we provide the physical presence and statutory oversight necessary to prove Central Management and Control (CMC).
3. Regulatory Navigation & SFC Exemptions
Most SFOs aim to rely on the "intra-group" exemption to avoid the need for an SFC Type 9 license. Bestar’s compliance experts:
Perform Gap Analysis: Reviewing your family structure to ensure the SFO and FIHV meet the 95% beneficial ownership rules.
Draft Legal Opinions: Providing formal assessments on whether your specific activities qualify for SFC licensing exemptions.
RO & MIC Support: If a license is required, Bestar manages the entire SFC WINGS application, including the vetting of Responsible Officers (ROs).
Summary of Bestar’s One-Stop Solution
Service Pillar | Key Deliverable | Strategic Value |
Tax Advisory | IR1480 / Section 20TA Election | Secures 0% tax rate on qualifying profits. |
Legal/IMA | Audit-ready Investment Agreements | Defends against "sham" or "shell" company allegations. |
Accounting | Schedule 16C Asset Ledger | Provides a "clean" trail for IRD queries. |
Compliance | SFC Exemption Review | Prevents criminal penalties for unlicensed regulated activities. |
The Bestar Advantage: A Regional Network
Wealth is rarely confined to one border. With a presence in Hong Kong, Singapore, and Malaysia, Bestar can manage cross-border "remittance" issues and help families compare the Hong Kong FIHV regime with Singapore’s 13O/13U schemes in real-time.
Next Step
To ensure your current or planned structure is fully optimized for the 2026 tax year, we recommend a Preliminary Compliance Audit.
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