Jurisdiction Updates http://asiaoffshore.org Fri, 20 Apr 2018 14:03:34 +0000 Joomla! - Open Source Content Management en-gb Comparative Advantages of Hong Kong as a Worldwide Trust Centre http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/124-comparative-advantages-of-hong-kong-as-a-worldwide-trust-centre http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/124-comparative-advantages-of-hong-kong-as-a-worldwide-trust-centre Comparative Advantages of Hong Kong as a Worldwide Trust Centre

The Status Quo of Hong Kong’s Trust Industry

The Hong Kong trust industry is comprised of four main types of trust, namely corporate trusts, private trusts, pension schemes and charitable trusts.

Corporate trusts

Corporate trust providers offer core trustee services and essential corresponding activities – such as formation and administration of trusts – while also acting as custodians. These service providers are critical to Hong Kong’s fund management industry.

Corporate trustees offer professional services for wholesale and retail investment products that are normally set up utilizing a unit trust structure, and provide investors with the opportunity to invest in assets or stocks that they might not usually have access to in the open market. This is associated with risk diversification ability.

Private trusts

With the support from advisors who specialize in private trusts, the growth of HNWIs across China and the Asia Pacific region has stimulated a surge in the demand for wealth and estate planning services.

There is a growing demand for these services from HNWIs seeking to manage the inter-generational transmission of wealth and to implement succession plans for family-owned businesses, because Hong Kong is at the center of the world’s largest and fastest growing market for Asia’s wealthy.

Pension schemes

The pension system will continue to mature when assets reach a scalable size, since the government is looking to increase participation and enhance the MPF schemes. The role of the trustee within the design of the scheme will remain pivotal as these schemes are likely to continue to grow. 

Hong Kong’s funds are relatively small when compared with mature schemes in other jurisdictions, since the Hong Kong MPF system is still in an early stage of development.  The proportion of pension assets as a share of GDP will continue to grow, mirroring global trends.

Charitable trusts

Although charitable trusts represent a small proportion of the wider Hong Kong trust industry, they are becoming vital to advisors working with HNWIs as they look to create long-term legacies through philanthropy. 

Onshore charitable trusts – unlike other areas of the Hong Kong trust industry where offshore trusts dominate – are normally set up in Hong Kong under the Hong Kong Trustee Ordinance, in which a charitable trust is one of four structures that can be utilized to form a charity in Hong Kong.

Comparative Advantages of Hong Kong as a Worldwide Trust Centre

Macro conditions

  • Hong Kong is a special administrative region of China;
  • Well-established legal system based on a mixed system of English model common law and Chinese customary law (in matters of family and land tenure);
  • Free market economy, highly dependent on international trade and finance;
  • Hong Kong has substantially implemented the internationally agreed tax standard set out by the OECD guidelines and is part of its white list;
  • Hong Kong complies with the Hague Convention in the recognition of trusts;
  • Hong Kong Trust law currently allows for the situs or the governing law of a trust to be changed from Hong Kong, or for resettlement of the assets in a new trust, subject to the laws of the receiving jurisdiction


  • Tax-efficient legislation with a treaty network of more than 30 double taxation agreements in place;
  • There is no capital gains tax levied in Hong Kong;
  • Taxation of income in Hong Kong is assessed on a territorial basis and only income arising in or derived from Hong Kong is subject to tax in Hong Kong;
  • No estate duty for locals or foreigners

Trust law reform

  • Hong Kong is a world-renowned wealth management center following recent amendments to its trust law. On 17th July 2013, the Trust Law (Amendment) Bill 2013 was passed. This amends Hong Kong’s Trustee Ordinance (Cap.29) and the Perpetuities and Accumulations Ordinance (Cap.257) which date back to 1934 and 1970 respectively. These amendments usher in much-needed improvements and modernization to the legal infrastructure for trusts subject to Hong Kong law. The most significant amendments that will come into force on 1st December 2013 are as follows:
  • Providing appropriate checks and balances

– the trustee must exercise the care and skill that is reasonable in the circumstances, taking into account any special knowledge or experience that the trustee has or has represented that it possesses;

– Professional trustees cannot be exempted from liability for willful misconduct, gross negligence or fraud;

– Beneficiaries have the right to appoint and retire trustees

  • Improvement or validation of certain governing powers or rules

– Settlors can reserve for themselves certain powers;

– Abolition of the rule against perpetuities; a Hong Kong trust can be settled for an unlimited amount of time;

– Abolition of the rule against excessive accumulation of income;

– Provision against forced heirship rules in jurisdictions outside Hong Kong

  • Enhancing trustees’ default powers where the trust instrument is silent

– In view of the complexity of modern-day trust structures, the Trust Law Amendment Ordinance 2013 enhances the default powers of trustees to ensure that the law will support effective administration of the trust even if the trust instrument does not contain specific provisions. These default powers include:

  • The ability to appoint agents, nominees and custodians to perform certain functions;
  • The power to insure trust property against loss or damage;
  • The entitlement to receive remuneration;
  • Authorization to invest in a widened scope of investments

Private trust companies

Hong Kong trust law provides that there is no requirement to obtain a license to act as a Hong Kong trustee. There is no requirement for a Hong Kong trustee to be resident or administered in Hong Kong, or for it to be a Hong Kong Company. This offers a good foundation to establish a Private Trust Company (“PTC”) structure, usually to hold the family business or listed company shares. Correct administration of the PTC is crucial to ensuring successful succession planning and protection provided by the “Family Trust”.

A comparison with Singapore

Hong Kong and Singapore are both reputable international financial centers. Both are dominant players within Asian for the provision of trust-related services and as a jurisdictional base for trusts. 

Hong Kong’s competitive advantage includes its geographical location and legal system that, on one hand, can capture the growth of China  and, on the other, can operate under the common law practices which are identical to those in Jersey, the Cayman Islands, the British Virgin Islands and Singapore. The long history of Hong Kong legislation’s core system is critical to clients.

Singapore has adopted the following strategies to boost its trust industry in recent years:

Government backing of the trust industry – Clear policy and strong government investment backing are cornerstones to the development of Singapore’s trust services.  The infant industry was largely promoted to incentivize international players and clients.

Trust Practitioner Regulation – The requirement that trust practitioners be licensed to practice in Singapore and the condition that specific services be performed by Singaporean licensed practitioners/providers are the two key factors that helped drive demand for local trust services.

Trust Professional Training and accreditation – Singapore has adopted a proactive approach and built up an institution to provide accredited training, which is partly subsidized by the government, whereas Hong Kong has a well-educated workforce and an established pool of professional talent ready to support the industry. 

In practice, not all of the measures taken in Singapore would function and be beneficial to Hong Kong; some industry leaders consider that the Hong Kong government should formulate policy addressing some of these areas. Hong Kong can develop tactics for sustaining its long-term goals for the trust and related industries through analyzing the competitors’ characteristics and latest development.

Below is a table showing a basic comparison between Hong Kong and Singapore trusts:


Hong Kong


Available structure



Maximum trust period

Unlimited unless trust instrument provides otherwise

100 years

Reservation of investment powers by settlor



Reservation of other powers by settlor



Protection against foreign forced heirship rules



Purpose trusts

Yes, only in certain circumstances (e.g. charitable trust)

Yes, only in certain circumstances (e.g. charitable trust)

Other types of trust



Looking forward

The industry, government and regulators need to increase their collaboration, come to a consensus on a medium to long-term vision for the Hong Kong trust industry, and work together rigorously to build on Hong Kong’s strong foundations as an international financial center.

It is also vital for law makers to take a holistic approach to policy setting, which shall support the comprehensive financial services subsectors to foster a robust and independent financial and administrative services market for Hong Kong.

It is important to the Hong Kong government to pursue a long-term vision and policy on developing and promoting the trust industry, thereby creating a favorable environment to foster business growth and to further cement Hong Kong’s position as a truly world-class financial services center in all areas, given that an increased number of overseas jurisdictions are now competing with Hong Kong as a trust center.

Catherine Le Bourgeois, Wilson Yeung

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Tue, 29 Nov 2016 06:53:57 +0000
Wealth Management: The Cook Islands Solution http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/121-wealth-management-the-cook-islands-solution http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/121-wealth-management-the-cook-islands-solution Wealth Management: The Cook Islands Solution

Despite the slowdown in the Chinese economy and continued volatility in its share market, private wealth continues to be generated at unprecedented rates. However, if history teaches us nothing else it is that that such prosperity will not continue indefinitely and the next financial crisis is just around the corner.

That being the case, and given the globalisation of Chinese families and businesses, now is the perfect time for Chinese nationals who have, or are in the process of accumulating, wealth (“HNWIs”), to consult their professional advisors about an international wealth management plan. That is, a plan tailored to the individual’s present and future personal, family and business needs including a structure to hold, invest, manage and protect wealth located outside of his/her home jurisdiction.

Nowhere is the need for wealth management planning more prevalent than in China where the number of HNWIs continues to grow with those individuals showing a desire to invest, study and explore opportunities outside of China.

Use of a Trust

For centuries trusts have proved to be the ideal wealth management vehicle and therefore the key component in a wealth management plan.  The trust is a creation of English common law and used for a variety of planning purposes, most notably:

  • Succession - the desire to have one’s assets pass to the next generation in accordance with specific wishes;
  • Wealth protection - to protect assets from those who by force, legislation or litigation may try to take them away;
  • Avoidance of probate – remove the need for probate on death by removing assets from the estate now;
  • Tax - the effective legitimate minimization of tax charges on the transfer or sale of assets and the income they may generate;
  • Pre-migration – to structure assets and affairs in a fiscally efficient manner before becoming resident in another country;
  • Confidentiality – to allow the HNWI and his/her family to benefit from their assets and conduct their business without unnecessary disclosure of personal information.

Through a carefully constructed trust the Chinese HNWI can determine how and when a beneficiary will receive assets settled onto the trust, protect assets from uncertain political and economic climates, and avoid forced heirship rights and structure businesses to ensure effective management and corporate succession. The trust is the ultimate asset owning vehicle in the plan. It can hold, directly or indirectly, all types of assets; moveable and immovable, bankable and non-bankable - ranging from investment portfolios to real estate to shares in private holding, investment and trading companies to luxury assets such as yachts, planes and works of art.   The structure implemented can also provide the HNWI with varying and appropriate degrees of control over the investment and management of trust assets without compromising the validity of the trust or the benefits it offers.

Choosing a Trustee 

The first and most important decision to be made when establishing the trust structure to form the basis of the international wealth management plan, is choosing the trustee to manage and administer the trust and its assets. Creating a trust requires ultimate legal ownership of the HNWI’s assets to be with the trustee. The HNWI must therefore be very confident as to the trustee’s experience, substance, professional reputation, and the quality of the professionals it employs. The trustee should be based in a sovereign jurisdiction where the HNWI is not resident.

The jurisdiction will need robust legislation designed to enhance the benefits provided by a trust and protect the individual’s assets and rights, together with a legal system experienced in dealing with trust matters and a reputation for respecting the rule of law. Last and by no means least, the HNWI should want his/her trustee to be regulated by an independent authority that will monitor the trustee’s activities and accept and investigate any complaints made against the trustee by the HNWI or trust beneficiaries. As establishing a trust will require the HNWI to transfer ultimate legal ownership of his/her assets often to a professional corporate trustee in a foreign jurisdiction with whom he/she personally may not be familiar, effective regulation is essential for peace of mind.

Chinese HNWIs will have a number of options when selecting the right trustee and jurisdiction in which to have their trusts established, managed and administered. As the trust is derived from English common law it may not be a familiar concept to those in China, but that unfamiliarity should not be a deterrent to using a trust given the benefits it can provide and the professional advice and management available. 

The Cook Islands Option

When judged against the criteria set out above for choosing a trust jurisdiction and trustee, the Cook Islands would appear to be an excellent option.


The Cook Islands, located in the South Pacific northeast of New Zealand and south of Hawaii, is a mature international finance centre having been in existence for over 30 years. The cornerstone of the Cook Islands international financial services industry is the International Trust established pursuant to the International Trusts Act 1984, as amended (“ITA”). It has made the Cook Islands an industry leader in the preservation of wealth and the trust jurisdiction of choice for foreign HNWIs and their families by providing law better suited to the needs of people in today’s society.  Features of the ITA include:

  • Trustees must act in accordance with a statutory duty of care being that of a prudent person engaged as a professional trustee managing the affairs of others;
  • A trustee has the power to make any lawful investment;
  • A trustee may delegate the exercise of all powers and discretions excluding dispositive powers;
  • The settlor can retain elements of control over the trust and its assets;
  • Certainty is given to the rights of those who might claim against trust assets by reference to specific dates and events;
  • Trusts can be dynastic with no fixed termination date;
  • Forced heirship rules in foreign jurisdictions shall not affect the validity of a trust or transfers on to trusts.
  • Foreign judgements will not be recognised or enforced if inconsistent with Cook Islands law.

In addition to the ITA, Cook Islands legislation provides other structures for holding, investment and protection of assets that may be integrated with an International Trust to produce or form part of an international wealth management plan. Those structures include international companies (International Companies Act 1981-82, as amended), limited liability companies (Limited Liability Companies Act 2008, as amended) and foundations (Foundations Act 2012, as amended).

Tax neutral

Effective tax planning may be possible through the use of a Cook Islands International Trust and will be dependent on where the settlor and beneficiaries are tax resident and assets are located. It is important that a Chinese HNWI obtains Chinese tax advice before establishing a trust and, if he/she or members of his/her family intend to emigrate, in such jurisdictions to where they intend to move prior to arriving. The Cook Islands’ tax laws are designed so that it is possible to incur no tax charges in addition to what the Chinese HNWI would otherwise be charged.


Cook Islands courts are experienced in hearing and deciding upon cases involving trust law and trust issues and have a reputation for respecting the rule of law. The Cook Islands’ High Court judges are experienced New Zealand judges who apply Cook Islands law.

Professional Service Providers

The trustee companies licenced to provide trustee and corporate services in the Cook Islands contain a depth of relevant knowledge, experience and expertise to rival any jurisdiction in the world.  Most of these companies have existed since, and contain professionals who were involved in, the formative years of the Cook Islands as an international finance centre.  They have experience in dealing with Asian and particularly Chinese clients and some are part of organisations with an Asian presence.


Trust Companies in the Cook Islands are licensed to carry on “trust company business”, as that term is defined in the Trust Companies Act 2014 (“TCA”). They are regulated by the Financial Supervisory Commission (“FSC”) in accordance with the provisions of the TCA, which give the FSC the power to vary, revoke or add conditions to a licence as it sees fit. The Cook Islands is committed to the implementation of and compliance with international regulatory best practice. 

When these factors are combined with its modern communication facilities, sovereignty of its government, supportive political environment, banking options and convenient time zone for transacting business, the Cook Islands does stand out as the ideal option for the Chinese HNWI.

The Cook Islands Solution

The international wealth management plan should in all respects be just that – international. It will hold the HNWI’s non-domestic assets in vehicles established in jurisdictions and under laws which provide the maximum protection, flexibility and ease of administration. Financial assets will be custodied and managed in those financial centres with the professionals and institutions best suited to the HNWI’s needs.  Depending on the HNWIs personal and family circumstances, the plan may be relatively simple or it may be more sophisticated requiring detail and focus on particular aspects.  

Given that no two individuals are the same it follows that no two wealth management plans will be the same, however the Chinese HNWIs’ wealth management structure may look something like this:

  • A Cook Islands International Trust administered by a Cook Islands resident trustee. The HNWI names a class of persons (which will include his/her spouse and children) to benefit from the trust;
  • Powers to direct investment of trust assets is reserved to the HNWI or someone nominated by him/her;
  • A bank account is opened in the trust’s name operated by the trustee to receive and hold cash to be distributed to beneficiaries;
  • A letter from the HNWI to the trustee details his/her wishes as to the investment, management and distribution of assets both during his/her lifetime and beyond;
  • The HNWI directs the trustee to invest in a Cook Islands LLC. The trustee is the 100% owner (member) of the LLC and the HNWI, or his/her nominee, can be the manager of the LLC and its assets.
  • One or more offshore holding companies, depending on the type and number of assets to be held, can be transferred to the LLC. The holding companies may already exist or will need to be incorporated and assets transferred in;
  • For example, one holding company holds financial assets, investment portfolios, security trading accounts, another holds real estate, commercial or residential, and a third holds shares in any trading company owned by the HNWI or his/her family;


It is imperative that Chinese HNWIs consult their domestic advisors now to discuss the wealth management possibilities available. Past and current local, regional and global economic and political events highlight the need for them to understand how such issues may impact their present and future wealth and how they might best protect it. A Cook Islands International Trust and Cook Islands resident trustee gives the Chinese HNWI a platform to secure existing and future wealth whilst having it invested, managed and distributed in accordance with his/her wishes both during his/her lifetime and indefinitely after his/her death. The Cook Islands would appear to provide a perfect solution.

By Alan Taylor

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Tue, 29 Nov 2016 06:45:28 +0000
The Cyprus citizenship program http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/116-the-cyprus-citizenship-program http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/116-the-cyprus-citizenship-program The Cyprus citizenship program

Cyprus, with its year-round sunshine, high quality of life, and convenient location between three continents, has long been a magnet for international investors, expats, retirees and those looking to enjoy a second home in a mild and hospitable climate. It seems that despite the uncertainty of fluctuating global economic cycles, these factors continue to have enduring appeal.

Cyprus ranks highly because of its favorable tax regime for new residents – particularly for high-net-worth individuals. Recent legislation, coupled with attractive real estate prices, has triggered new interest in the middle and lower end of the market, while sales of luxury, top-end developments have surpassed expectations.

Cyprus offers two excellent immigration programs that enable non-EU nationals to acquire permanent residency or citizenship through a real-estate investment.

The Cyprus PR program offers non-EU nationals guaranteed permanent residency within 2 months with a single, secure, real estate investment of €300,000. It applies to the investor, their spouse dependent children up to age 25 and the parents of the applicant and spouse. What’s more, the permits are valid forever! The process is extremely straightforward and can even be arranged remotely.

Pafilia is experienced with the process and will gladly assist you to achieve your residency permit.

Key Points

  • Freedom to live freely in Cyprus
  • Permanent residency for yourself and dependents up to age 25
  • The permits for yourself and dependents are valid forever, no renewal is required
  • It offers an insurance policy for the future
  • It enables you to own a business in Cyprus
  • It gives you the right to apply for EU citizenship - - It enables you to travel throughout Europe with ease
  • It enables you to access first class healthcare and education
  • A risk-free property investment of €300,000 is required
  • The process and requirements are very simple and the permit is guaranteed to be issued within 2 months
  • It has a 100% approval rate
  • Permits are issued very quickly (3 weeks – 2 months)
  • Simple criteria, language proficiency, education certificates and medical examination aren’t required
  • A single day visit, once every two years is required

What Is The Benefit Of Obtaining Permanent Residency In Cyprus?

Permanent residency status means that your family has the right to live freely in Cyprus or continue to live in your home country and just use the permit whenever you need it. It can act as an insurance policy for the future. Permit holders also have the right to own a business in Cyprus or setup a Cyprus company as an intermediary for export trading throughout the world, thus benefit from Cyprus’ excellent business and tax advantages. Cyprus is a superb base for travelling throughout Europe with its excellent flight connections and visas are very easy and quick to obtain. A permit holder can obtain a Schengen visa within just one week. Travel will become even easier when Cyprus becomes a Schengen State in he very near future. The island offers excellent education opportunities which enable your children access to the best universities worldwide. 
It also gives you the right to apply for EU citizenship after 7 years! 
“Permanent residency offers your family the freedom to live freely in the EU and to travel with ease, it provides access to excellent education and healthcare, or simply offers an insurance policy for an uncertain future!”

The Cyprus citizenship program offers the most simple and efficient means of obtaining EU citizenship, it is the only direct EU citizenship program as it has absolutely no residency requirement and passports are issued in just 3 months. Investors and their families can obtain full EU rights, including the ability to live and work in any EU country practically immediately! Dual citizenship offers an effective tool for international tax planning and provides financial privacy for banking and invest- ment. It improves personal security, enables freedom of movement and allows access to the best healthcare and education opportunities.

TIME TO CITIZENSHIP                                                RESIDENCY REQUIREMENT
3 Months                                                                    None

ELIGIBILITY                                                                 VISA-FREE TRAVEL
All Nationalities                                                          168 Countries

DUAL CITIZENSHIP                                                     FAMILY
Permitted                                                                   Spouse & dependents up to age 28

EXIT STRATEGY                                                           TAX CONSEQUENCES
3 Years                                                                       None

Key motivators

-   Mobility   -   Stability & security   -   Healthcare & education 
-   Taxation & Succession planning   -   Investment opportunities   -   Enhanced financial freedom


Cyprus citizenship may be obtained through a secure property investment, the financial criterion is €2.5 Million investment in residential real estate (the investment can be in a single property or portfolio )


> Citizenship granted within three months

> No physical residency requirement

> Passports issued to the investor, their spouse and dependent children up to age 28, provided they are in full-time education

> Cyprus allows dual citizenship

> All nationalities eligible

> No language requirement, medical test or interview

> Exit strategy after 3 years

> Citizenship is passed on by descent, thus offering a legacy to future generations

> No tax consequences, unless you opt to become tax resident in Cyprus

> Pure investment, no donation required


> Unrestricted right to live, work, travel and study anywhere in the European Union

> Visa-free travel to 168 countries

> Free trade within EU, business access to 500 million EU citizens

> Cyprus has no inheritance tax, has a highly favourable corporate tax structure and a comprehensive double tax treaty network

> Cyprus offers a great place to visit/live, it enjoys a strategic geographical position, offers excellent worldwide connections, has excellent infrastructure, a pleasant climate and is highly stable

> Establishment and free movement of services and goods


  1. The main investment may be sold after three years; however, the investor must always maintain/purchase a property with a value of at least €500,000
  2. Property purchased up to 3 years prior to the submission of the citizenship application will count towards the required investment
  3. Applicants must hold a clean criminal record from the country of origin and country of residence if different and their name must not be on the list of persons whose property is ordered to be frozen within the EU

Pafilia offers a total solution for Cyprus residency and citizenship. Our extensive experience, personal service and proven-track record, together with our vast and varied property portfolio have made Pafilia the partner of choice in Cyprus. Pafilia offers excellent support to our clients whatever their needs and wherever they may be. Our experienced professionals are on-hand to manage your needs with condense and care, while our transparent and professional approach combined with our highly secure process assures peace of mind.

> Cyprus’ leading luxury property developer

> Over 37 years’ experience

> Award-winning developments

> Comprehensive property portfolio including the islands most exclusive golf resort, Minthis Hills

> Global presence

> Comprehensive sales, property management and resale services

> A pioneer, in 2015 Pafilia will launch the highest seafront residential tower in the Mediterranean

> Outstanding quality standards

> Personalised service and attention to detail

> Excellent partner support

> Monthly formation of collective citizenship groups

> Excellent partner incentives



Barry Winter – Director South East Asia

0084 1227686019

00357 99 381 684

Website: www.pafilia.com

Email: b.winter@pafilia.com

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Sun, 17 Jul 2016 20:27:47 +0000
Hong Kong takes the lead of corporate treasury centre hub with attractive tax incentives http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/114-hong-kong-takes-the-lead-of-corporate-treasury-centre-hub-with-attractive-tax-incentives http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/114-hong-kong-takes-the-lead-of-corporate-treasury-centre-hub-with-attractive-tax-incentives

Written by: Catherine Le Bourgeois and Wilson Yeung


Nowadays, owing to the growing importance of the Asian market, multinational corporations are encouraged to set up their corporate treasury centres (“CTC”) in the region. Hong Kong has been one of the ideal locations of choice for forming up regional CTCs. Hong Kong’s attractiveness in recent years, however, has been dampened by certain inadvertent taxation consequences, as well as the competition from Singapore, but since the announcement of proposed changes of tax legislation in the 2015/16 budget, as well as the CTC bill recently came into force in early June 2016, there were promising development in this respect in Hong Kong.  

What is a CTC and what are the benefits to a group?

Essentially CTC is an in-house bank within a multinational corporation. It mainly focuses on the optimal procurement and capital usage for the group operation. CTC carries out a couple of functions including intragroup loan, cash management, payments processing to vendors, capital raising support and risk management. CTC brings several benefits to a group mainly by lowering cost and improving operational efficiency. More specifically, CTC reduces the cost of capital by optimising both internal and external fund raising; lowers transactional costs and banking charges by standardising payment systems and multi-currency transactions; decreases foreign exchange risk by centralising foreign exchange management; and strengthen the efficiency of working capital by centralising the management of accounts receivables and payables.

What are the existing tax legislations and why changes are necessary?

By virtue of the prevailing Hong Kong tax legislations, interest expenses paid by a Hong Kong CTC on borrowing from associates outside the territory of Hong Kong may not be tax deductible under certain circumstances. On the other hand, interest income received by a Hong Kong CTC is generally liable for profits tax, resulting in a relatively less appealing taxation environment to carry out corporate treasury activities in here.  Meanwhile, Singapore has all long been offering tax incentives to attract multinational corporations to centralize and manage their regional treasury activities in Singapore.  The Economic Development Board of Singapore administers a scheme called Finance and Treasury Centre, in which approved CTC can be able to enjoy a concessionary corporate tax rate of 10% as opposed to the standard rate of 17%, as well as withholding tax exemption. In view of the above, and since multinational corporations would only select to locate their CTC in a tax efficient jurisdiction, it is believed that certain relaxation of the interest deduction rules for those qualifying CTC activities and a concessionary 50% discounted profits tax rate regime (i.e. 16.5% x 50% = 8.25%) for qualifying CTCs would help enhance the competitiveness of Hong Kong and show the determination of Hong Kong Government in providing a market-friendly taxation framework for CTC operations in Hong Kong.  

How is the latest development of CTC activities in Hong Kong?

In August 2015, Hong Kong Government said that Hong Kong shall amend its Inland Revenue Ordinance for those provisions relevant to One Belt One Road (“OBOR”) in 2016, in order to attract more China and overseas enterprises to set up their CTC and captive insurance company in Hong Kong. Hong Kong Government thinks that the local insurance cost is relatively low, which can diversify the enterprises’ risk during their development phase, so it is believed that a lot of enterprises around the world shall be attracted to Hong Kong for such purpose. Recently, Chinese enterprises like CNOOC, CGN and CNPC have already incorporated their captive insurance company in Hong Kong, so as to manage their overseas operation. Such trend shall be continued.

To attract China and overseas enterprises to set up their CTC in Hong Kong, coupled with the fierce competition between jurisdictions facing such golden opportunities given by OBOR, Hong Kong Government insisted to change its tax law to cater for this need as abovementioned.

In addition, Hong Kong, with 32 comprehensive double tax agreements (CDTA) signed and effective with its trading partners, is eager to extend its CDTA network with those countries along the OBOR, including India, Russia, Romania and Germany, etc. 

Why Hong Kong is an ideal place for CTC location?

Despite the recent announcement made by Singapore Government to have their corporate income tax rate decreased to 8% for CTC qualifying companies and transactions, it is believed that Hong Kong still takes the lead of CTC hub in the region.  Hong Kong has a very simple and competitive tax system. Hong Kong does not levy tax on dividends, capital gains and estates. She also does not impose withholding tax on dividend or interest payments. Furthermore, there are no indirect tax such as business tax, value-added tax (“VAT”) or sales tax in Hong Kong. Below is a diagram showing the tax advantageous of Hong Kong when compared to Mainland China and Singapore.   

Type of tax

Hong Kong

Mainland China



Profits tax rate for CTCs (Concessionary)





VAT / Sales Tax





Individual tax rate





Social security (Employer)





Social security










* subject to cap 

** varies between cities and subject to cap  





In addition to attractive tax system, Hong Kong also possesses some other excellent factors for multinational corporations to consider opening up their CTC in here, which include well-established common law regulatory system, international financial market, banking network, as well as talent pool, etc.


The development of Hong Kong as an Asian regional CTC hub would benefit both the financial and business sectors, and help strengthen the capital market which include the offshore RMB market. A lot of multinational corporations would co-locate their CTCs with their regional headquarters, and thus the change of Hong Kong tax legislations in providing a more tax efficient and market friendly environment, particularly for those China groups wanting to go aboard, is a positive move to induce more real inflow of funds into Hong Kong and provide catalyst for developing Hong Kong’s headquarters economy.  


Masson de Morfontaine is an international tax and business advisory services firm having offices in Hong Kong and Shanghai specializes in providing comprehensive professional services for worldwide clients. As an AOA Regional Chair Firm of Hong Kong (2015-2016), we are experts helping our clients with practical tax and business advices and keen on advising as well as implementing corporate treasury centre operations. We are more than welcome to discuss with you about our services. Please call or email us should you require more information. 

Catherine LE BOURGEOIS                           Wilson YEUNG

Main Partner                                              International Tax Director

catherinelebourgeois@masson-de-morfontaine.com    wilson@masson-de-morfontaine.com

Hong Kong office: +852 3953 4880

Shanghai office: +86 21 3120 3208

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Fri, 08 Jul 2016 04:47:32 +0000
Operation and Use of RMB Funds in Cross-border Investment & Financing http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/105-operation-and-use-of-rmb-funds-in-cross-border-investment-financing http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/105-operation-and-use-of-rmb-funds-in-cross-border-investment-financing

In spite of the global economic slowdown, the export-oriented feature of the Chinese economy has constantly been reinforced. With the volatility of currency exchange rates, there is a stronger desire for idle domestic capital to be converted into foreign capital. By setting up private funds, domestic, industrial and financial capital takes an active role in cross-border mergers and acquisition, and stimulates industrial integration on both a global and a regional basis.

Compared with foreign-raised private USD funds, the so-called RMB funds have international vision,and operating capability. They integrate profound government and industrial resources, and thus play an important role in transnational investments, and mergersand acquisitions. This article briefly discusses the application of RMB funds in cross-border investment and financing by analyzing some case studies.

Advantages of RMB funds in cross-border investment

For the domestic enterprises participating in cross-border investments for strategic reasons, RMB funds can help them overcome regional, financial, or operational limitations, and reduce the financial, legal and operational risks of cross-border investment.

Firstly, to complete large-scale mergers and acquisitions, domestic enterprises are often under financial pressure. If such enterprises can sign consortium agreements with one or more cross-border equity investment funds to make investments together, the financial risks of the investment can be greatly reduced.

Secondly, domestic enterprises lack practical experience in performing multinational operations and managing invested enterprises. Their lack of familiarity with this territory, as well as their lack of international vision is largely what causes difficulties in the operations after investment. Large RMB funds often focus on the financing, and mergers and acquisitions of specific regions or industries, and know well the operational procedures for making and maintaining investments. They always appoint directors or other senior supervisors to the board of directors, so as to assist the operation and grasp the company’s direction for development. Besides this, based on the principles of maximizing investors’ benefits, equity investment funds often emphasize strategic and financial matters before withdrawal, thus effectively improving corporate performance.

Thirdly, by utilizing standardized operational procedures, professional legal terms, detailed due diligence reports, globalized top-level investment banks, and legal resources, domestic enterprises can introduce RMB funds as strategic investors to effectively control the financial, legal and operating risks during foreign investments.

Fourthly, the supporting policies and supervising conditions for the overseas investment of RMB funds have been greatly improved. In particular, the Chinese government has been vigorously promoting the construction of free trade zones (FTZ) and opening a more effective channel for the overseas investment of RMB funds.

On August 19, 2014, Order No.3 of the Ministry of Commerce, Measures for Overseas Investment Management, established the new management model of "Primarily focusing on filing and secondarily on ratification" to further facilitate overseas investment. Relevant authorities in Shanghai have also formulated Managing Measures for Filing and Documenting the Establishment of Overseas Enterprises and the Managing Measures for Filing and Documenting Overseas Investment Projects for Shanghai’s FTZ. According to the regulations, so long as the overseas investment projects do not involve investments in sensitive countries and regions, and the amount of investment is less than 300 million US dollars, relevant enterprises can directly file an application for currency exchange with the State Administration of Foreign Exchange for overseas development after completing the project filing with relevant departments, such as the management committee of the FTZ.

The supervision of FTZs in the filing of overseas investment projects mainly focuses on technicalities, that is, whether the filing data is complete, whether the legal framework of the overseas investment complies with regulations, how relevant departments ensure supervisions during and after investment, and how to ensure that the exchanged currency flows into the filed projects rather than into other investments beyond the filing. However, the filing departments don't examine the framework and relevant clauses of specific project investments.

At the same time, compared to the previous examination and approval process of cross-border investment projects, the FTZ’s prevailing cross-border investment project filing and currency exchange system greatly simplifies examining procedures and shortens the time, thus facilitating the overseas investments of domestic enterprises and greatly speeding up the development of overseas investments. Based on this, the overseas investments using equity investment funds as a financial intermediary will eliminate supervision problems; more precisely predict the time of establishment and improve the efficiency and certainty of international investments.

Operation and Use of RMB Funds in Cross-border Investment

The financial and industrial logic of the cross-border investment of RMB funds is not different from that of the domestic investments in nature, as the following graph shows:

Funding Pool


Financial Tool

Financial Program


Asset Pool

Simply speaking, one constructs the funding pool domestically and the asset pool beyond domestic borders. Not only should the local properties and legal environment of overseas target assets be taken into consideration, but also the supervising requirements of the flow of international capital. Based on this, the legal arrangements and risk control measures should be considered.

Taking cross-border equity investment as an example, the practical operations are to establish a private fund in China, and complete the filing of overseas investment according to domestic supervision policies, then incorporate a special purpose company in an offshore jurisdiction, and take such a company as the investment subject for purchasing the equity of target enterprises offshore.

Recently, we have directly participated in a case where the controlling shareholder of an overseas listed company was offered RMB funds for financing to complete the privatization, delisting, and spin-off listing of a target listed company. The private financing transactions had the following key points:

Firstly, the actual controller of an overseas listed company established the privatization plan, financing plan and transaction path. (Generally, when the share price is substantially undervalued, the investment banks help the controlling shareholder establish a privatization plan.)

Secondly, the controlling shareholders of the listed company reached agreements with the funds on the terms sheet of the financing plans.

Thirdly, fund managers set up private RMB funds through a public offer according to the financing scale determined in the financing plan in China, and dealt with the filing procedures of overseas investments according to domestic laws and regulations.

Fourthly, when the controlling shareholder increased its shareholding of the target listed company through bridge loans and triggered the fund subscription conditions, several domestic and overseas institutions (including this RMB fund in China) provided controlling shareholders with financing to complete the privatization and delisting by subscribing to the equity of the controlling shareholder's shareholding platform.

Fifthly, after the completion of delisting, the target company will carry out the spin-off and reorganization according to the strategic development objectives of the company, and then list it again on the Hong Kong or US stock market.

Lastly, as a strategic investor, private funds plan to continue to hold the shares of the newly listed company within a certain period after its listing, or to gradually exit. According to the financing arrangement reached by concerned parties, if the target company fails to complete the privatization, breaks the contract, or fails to complete the re-listing within a specified period after the privatization, the RMB fund will exit according to the agreed merger and acquisition contract.

Core terms of RMB fund in cross-border equity investment

The key terms of the investment transaction followed by RMB funds and invested enterprises strictly limit interested relationships, distribution of equity, capital injection conditions, investment supervision, and performance indices between the fund and enterprises. Such terms can be preliminarily classified into the following terms:

Firstly, equity ratio terms: such terms specify the investment amounts invested by the fund on the enterprise, equity procurement price, and corresponding equity ratio in detail. At the same time, to ensure that the equity ratio held by the fund is not diluted, generally we adopt preemptive rights, preemption rights, anti-dilution terms, or equity lockup terms to make sure the equity ratio enjoyed by the fund in the enterprise remains unchanged.

Secondly, corporate governance structure terms: such terms reflect in details the intervention of the fund in the operation and management of the invested enterprise after investment. For example, the funds may enjoy certain board seats, voting rights and decision-making participation rights, or veto power as to the decisions on particular matters specified in the investment agreement.

Thirdly, exit terms: the funds should take a full consideration of the exit mechanism of their investments. The exit methods include listing, transfer of agreement, repurchasing and liquidation. In the investment agreement, terms on repurchasing, repurchasing guarantee and consideration, co-sale rights, drag-along rights, liquidation preferences, and promises of invested enterprise may be arranged to ensure the effective exit of funds. 

Besides, theterms sheet of fund investments should also establish particular terms in accordance with the project requirements, including but not limited to: preconditions on investments, arrangement of preferred shares and ordinary shares, share option schemes, and exclusive terms.

Senior partner of Jincheng Tongda & Neal (Shanghai) Law Firm, Senior Trust Finance and M & A lawyer. Master of Finance, Fudan University, Shanghai. Lawyer Xu has served as a member of the Real Estate Research Committee, Fund Research Committee and Trust Research Committee of the Shanghai Bar Association successively. Lawyer Xu is mainly engaged in corporate financial business, real estate financial business and offshore financial business and has been providing legal counsel services for a number of large-scale and medium-sized enterprises for many years.

Liu Dongming graduated from East China University of Political Science and Law with a Bachelor degree, and later received LLM from University of Minnesota in the USA. After joining JT&N in October 2014, Liu Dongming has undertaken various legal affairs on company securities, merger and acquisition, and trust. She also provides long-term legal consulting service for domestic companies.


editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Mon, 07 Dec 2015 00:00:00 +0000
Don’t Lose Trust in Trusts http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/104-don-t-lose-trust-in-trusts http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/104-don-t-lose-trust-in-trusts

When it comes to setting up a trust, it’s very easy for people to get confused, frustrated and lost. Indeed, trusts can be a very complicated topic because they have to simultaneously deal with so many complicated issues such as tax, jurisdictions, estate planning, asset managements and family citizenship. There is no one-size-fits allsolution. But if you area Chinesepassport-holding parents who are thinking of setting up a trust for the benefits of your US-citizen children (or children who will potentially become US citizens), this article is right for you. If not, please consult with a legal expert or professional in the trust industry.

There is so muchjargon associated with trusts nowadays. The most common terms  among itall are“living trust”, “grantor trust”, “irrevocable trust”, “Delaware trust”, “foreign trust”,and so on.I am sorry, but you may have to force yourself to learn them all to appreciate the real options. For a simple structure, the person who sets up the trust is called grantor or settlor. The persons who receive the trust’s benefits are named beneficiaries. The person or organization who manages the trust is called the trustee. A person can become both grantor and trustee, or both grantor and beneficiary. However, they cannot be all three because it would make for a self-fulfilling deal, and go against the spirit of setting up a trust.

The purpose of setting up a qualified trust is part of estate planning for many high net worth individuals who have a strong desire to pass on their assets to selected beneficiaries such as children, spouses and charitable organizations, with the least tax consequences and burden possible. If you know that the highest estate taxes reach up to 55% on US federal tax level alone, you would be wise to spend some timelearning to understand these issues and to seek out the best options to avoid or even eliminate this US tax madness. Oftentimes, setting up a trust of some kindis the most valid option.

Instead of randomly discussing all kinds of trust issues and making everyone feel lost and bored, I would like to present a real life situation that applies to Chinese citizens who are facing the decision of establishing the “right trust” for the benefits of their US-citizen children, or potentially US-citizen children who are still in US colleges. There are many ways for a child to obtain US citizenship through working visas, family investments, immigration, or marriage with a US citizen.

As a general rule of thumb, a non-US citizen should set up a foreign trust. This will prevent all tax filing problems with regards to US law. If you are a US citizen, you have no choice but to set up a US or domestic trust to comply with all the US tax laws.

The person who sets up the trust is called settlor. If a settlor wishes to maintain the power to alter or cancel the trust, he has to set up a revocable trust. This simply means that the terms, or the entire legal document, can be overwrittenat anytime. Under this revocable trust, if the US-citizen children are the trust beneficiaries, this trust becomes a “revocable grantor trust”.  Having grantor status is extremely important because it enables the non-US citizen parents (settlors)to transfer assets to their US citizen children without the consequences ofUS gift tax and estate tax. These tax benefits are actually tax-free distributions during a settlor’s lifetime and, after a settlor’s deathassets received on the basis of a settlor effectively “stepping down”. A non-grantor trust will lose all of these tax benefits. Therefore, by all means, make the trust a “grantor trust”.

If you are willing to give up altering power, you can set up an irrevocable trust. However, to obtain the “grantor status” under irrevocable trust is not easy. The only way to set up an irrevocable trust with grantor status is to make the settlor or the spouse become the trust beneficiary. In other words, the US-citizen children have to be excluded from being beneficiaries of the trust, which may not make much sense for Chinese parents. Including a US-citizen child into the irrevocable trust will cause the trust to become a “non-grantor trust”, which will face very ugly US tax consequences. As a result, the key is not irrevocable or revocable; it is the grantor status that a Chinese parent will want to make happen.

So far, I hope you are still with me, and not lost. If you are lost already, please go back and re-read everything, or email me with questions. I may not have succeeded in presenting the informationabout these complicated issues at a level that everyone can understand.

In a nutshell, for non-US citizen parents, the best idea is to set up a “foreign revocable grantor trust” and to enjoy the following benefits:

  • No estate tax for each generation if the trust is properly structured
  • Only income tax needs to be paidon the income generated by the trust
  • Avoid the troublesome (costly andtime-consuming) probate
  • Asset protection from creditors

Let’stake it a step further. As trustsare maintained throughout generations, the situation may change,and the next generation’s thinking has to be considered and honored along the way.  For example, if US-citizen children plan tokeep their US citizenship forever, the best jurisdiction to set up a foreign revocable grantor trustis under the US Delaware’s trustee laws. Thisis because Delaware’s automatic conversion benefits can avoid tax penalties such as phantom income tax, throwback tax and interest charges caused by the trust staying offshore after a settlor’s death.

In general, when the settlor passes away, its foreign revocable grantor trust needs to be converted into a US irrevocable non-grantor trust because his US citizen children are obligated to file and pay heavy US estate and income taxes. However, a potential filing delay or even non-filing are often committed due to lack of incentives for the foreign trustee and lack of knowledge of the children on complicated trust issues. The potential delay and conflict of interests by replacing a foreign trustee with a US trustee may cause serious US tax penalties.

If the US-citizen children are not 100% sure that they will keep their US citizenship for the rest of their life, setting the trust up under Delaware law is still ideal because the settlor can easily add a stipulation in the Delaware trust to move the governing law and trustees from Delaware to an offshore jurisdiction. Children can keep the option of giving up their US citizenship later in their life if they see that the US tax bills would eat up half of their inherited assets.

If the US citizen children are 100% sure that they will give up their US citizenship during settlors’ lifetimes, setting up a trust offshore is appropriate. Popular offshore jurisdictions include the Cayman Islands, the British Virgin Islands, and Jersey.

One important point to bear in mind is that the US-citizen children should never give up their US citizenship after a settlor’s death because theywould face a serious tax penalty. It is simply too late to give up US citizenship because, in the eyes of the IRS, this is behavior that constitutes tax evasion,regardless of the jurisdiction the trust is set up.

The decision of keeping or giving up US citizenship for the children might seem to be a big deal. However, don’t lose sleep over this issue right away because you may still have time to evaluate the options.  For instance, if theUS-citizen children are 18 years old or below, they have no capacity or legal right to give up their US citizenship yet. Therefore, please relax for 18 years. However, do mark on your calendar the critical six month period when your children are between 18 and 18.5. These six months present the best exit window for your children to give up their US citizenship and enjoy their free assets from you without the ugly US tax burdens because no expatriation tax would be levied on the assets. From that point on, your children will become rich and happy foreigners. However, if your children have already reached 18.5, it is a bad time to give up their US citizenship because it will trigger the expatriation tax bomb when the settlor passes away, and the assets would be required to be distribute to the children as the trust beneficiaries. 

In a nutshell, for non-US citizen Chinese parents trying to pass assets to their US-citizenship children, here are the take-away solutions based on the children’s ages:

  • 1-18: set up a foreign revocable grantor trust under Delaware’s law and the children keep the US citizenship
  • 18-18.5: convert the trust from Delaware’s law to offshore law and the children give up US citizenship within this 6-month time frame
  • 5 - later: children should keep their US citizenship

For other situations, such as a Chinese citizens without children or Chinese citizens wishing to donate assets to charitable organizations, it is a relatively straightforward case. Even the attorney who helps to set up the legal trust documents can offer free advice and consultation on this.

By Rocky Chan

Over 15 years of investment experience in US and China, Rocky is the partner and CFO of Mind Fund Group based in Hong Kong. Rocky was also the head of family office for the Baidu in Beijing.

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Mon, 07 Dec 2015 00:00:00 +0000
2015: The Tortuous Development of Offshore Trusts in China http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/103-2015-the-tortuous-development-of-offshore-trusts-in-china http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/103-2015-the-tortuous-development-of-offshore-trusts-in-china

So far, most international trustees have to admit that the promotion of offshore trusts in the Chinese market is far from the optimistic expectations they held five years ago, but it is also not as pessimistic as what those who have retreated describe. Like other businesses which entered China for a share of the local market, a very high threshold stands in the way of such a large market, especially for offshore trusts. Due to the significant gap between local trusts and offshore trusts, promoting offshore trusts in China is like selling shoes in a country where people don't wear shoes. It is exciting but desperate, but when you feel hopeless, a sparkle makes you fall into reverie. 

No Stars

The number of speeches I've made in 2015 regarding offshore trusts is almost larger than the total number of speeches I have ever made before. I have exchanged ideas with so many peers on and off stage. No one in the commercial circle will give you precise data on their transactions, but relying on years of experience in practical situations, I'm sure that no major trust companies have achieved a lot in China. I can't speak of the precise data, but I can make an analogy with shoe selling again. You sell shoes in a country where people don't wear shoes. You notice that people walk contentedly with no shoes, and may hurt their feet sometimes, but they just don't buy your shoes. However, some people who hurt their feet come to you and ask "if I wear your shoes, will my injured feet be immediately recovered?" Of course, the answer is negative, so they continue to walk with bare feet.

Due to the characteristics of family trusts, that is, high confidentiality and customization, the relationship between trustor and trustee must be very close. Unlike with other products, therefore, it is hard to create a dominant position in such an industry because it requires a long time to build a relationship. Therefore, if you have not achieved much as a trustee, don't worry and don't give up. Your job is continuing to persuade the people wearing no shoes. Patience is a valued quality.

Prepare for a War with No Enemy

Several large trust companies haven’t managed to get started, let alone the medium-sized ones. Offshore trusts seem to be less popular than Fengshui masters. The stories of being deceived by Fengshui masters are repeatedly quoted by offshore trust masters. They suggest that people keep away from Fengshui masters, but to accept offshore trusts. However, it seems that Chinese people still prefer the romantic sense of Fengshui to trusts which don't conform to Chinese-style logic (for example, the case of Gong Ruxin in Hong Kong). While offshore trusts suffer a setback, some local wealth management institutions in China seem to thrive. Although no significant results have been achieved, it cannot be denied that they have brought new possibilities to the market as path-breakers.

The China Will Registration Center in Beijing stores the wills of the old for free. This institution can expect booming business when these old people die. Of course, it is a platform for public benefits. Its commercial value is yet to be explored. The wealth management association that originated from Shenzhen has established branches all over China. As a member of the association, I think it seems to be pro forma. The oath-taking rally is grandiloquent, but we didn't know where the enemies were. Today, as the power of the crowd economy is magnified by several times and all kinds of banker clubs exist everywhere, the question is still the same: where are the clients?

An Innovative Choice of Opportunism 

Since many Chinese clients like to ask embarrassing questions about matters like how much they need to invest and whether the profits are guaranteed, some customized offshore product packages with a starting amount of 1 million US dollars and an annual return of above 10% preferred by Chinese people have been launched to satisfy market demand. The results can well be imagined. The coupling arising from misunderstanding will surely lead to the break up when it is better understood. The offshore trust pursues privacy, inheritance and preservation rather than risky increase in value. Such innovation is surely not welcomed by clients or recognized by the market. I have not discovered any popular trend of such trust company products.

Pressure is the Key

It cannot be denied that, besides the natural skepticism of Asian people against the transfer of "entrusting the assets to the trustee", insufficient external pressure is also one of the reasons that offshore trusts are developing prosperously in the Chinese market. One important piece of evidence is that, currently, many high net-worth individuals use family trusts to avoid the high tax in the US (of course, inappropriate planning may make the bad worse rather than providing timely help) rather than avoiding domestic problems. The pressure in China mainly comes from the implementation of inheritance tax and gift tax. If both taxes are implemented, the originally blurry pressure will become distinct and the familiar planning tools won’t work anymore. Even if you want to prevent crises before they emerge, the rational conduct is to carry on planning five years in advance. However, few people have such foresight.

The Actions of Chinese Trusts

Today, although financial trust products are not popular, both local private banks and trust companies in China manage to find high net-worth individuals’ metaphorical “large cakes”. It is impossible to make offshore trusts a trustee of any domestic cash assets, so carefully dealing with Chinese trust law becomes the key point of the research and development of domestic trust companies. Up until 2015, several trust companies conformed with the times and launched innovative trust service products which didn't have profit as the main objective (such as overseas study trusts, alimony trusts, and marriage and family security trusts) while some radical Chinese lawyers even claim that Chinese family trusts have a protector system and Chinese clients therefore don't need offshore trusts. It is obvious that, while offshore trusts provide local trusts in China with an idea for reform, they also quietly compete with local trusts in the family wealth management market.

A Foundation for Reshaping Relationships

The last few years witnessed the tortuous development of offshore trusts in China. Still, they have not gained a firm foothold. Most of the methods in the past don't work, because they are either short-sighted or negative and cannot be used to establish a long-term partnership with high net-worth families. Once upon a time, many people thought corrupt officers and upstarts would become the main clients. The fundamental mistake in such thinking is that those who grow up in the jungle only believe in the law of the jungle and reject the rule of civilization, and only entrepreneurs who have undergone all sorts of hardships and deprivation adopt the law of civilization. However, most marketing strategies adopted by trustees and their representatives are too negative and speculative. For example, some claim that all guaranteed income from investments is typical speculation because entrepreneurs are good at profit making, while trusts are for safeguarding one's heritage. 

Indeed, tax avoidance is important, but avoiding tax by concealing things will not last for long. Clients will never reach a long-lasting consensus with a service provider if they stay on the dark side, just like two bad guys in a movie can never sincerely cooperate with each other. In fact, on the level of wealth management, the trustees and clients may make concerted efforts in many positive fields, like charity, leadership, spiritual inheritance, and optimization of foreign investment. Besides, only by establishing legal and honest partnerships can the sustained development be achieved. Maybe, this is exactly the starting point to remedy the tortuous development of offshore trusts in China.

Michael Liu

Managing Director CIL Group Ltd.

Member of STEP

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Mon, 07 Dec 2015 00:00:00 +0000
On the Development of Family Trusts from the Perspective of the Trustee http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/102-on-the-development-of-family-trusts-from-the-perspective-of-the-trustee http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/102-on-the-development-of-family-trusts-from-the-perspective-of-the-trustee

In recent years, the wealth management issue that has received the closest attention in China is no doubt the reform of the trust system. As trusts are no longer a purely financial product or instrument, they have also become a mechanism for truly assisting people in managing and passing on their wealth. However, taking a broad view of the international community, every country that has successfully implemented the trust system has without exception steered a cautious course in designing the relationships between the Trustor (or Grantor), the Trustee, and the Beneficiary.

Due to the immature environment in the past and the profit-making intentions of some practitioners in the industry, China’s trust market has gone through constant disturbances and several rounds of rectifications. In recent years, whether it is regarding the revisions to the Trust Law or the introduction of relevant opinions or guidelines, the focus has always been the regulation of the Trustee, with the purpose of safeguarding the rights and interests of the Beneficiary. Such a direction of development is also consistent with the international trend. The Guidelines on the Supervision Rating and Classified Supervision of Trust Companies, issued in 2010 and revised in August 2014, was introduced with the hope of achieving the classified supervision of the Trustee in commercial trusts (that is, trust companies) on an ongoing basis.

Meanwhile, on the basis of comprehensively evaluating the development of the market, the China Banking Regulatory Commission (CBRC) will also adjust the evaluation elements and criteria for the supervision rating of trust companies according to the principle of “prudent supervision” in a timely manner. The evaluation elements here mainly include three aspects: risk management, asset management, and compliance management. The risk management element mainly evaluates the rationality of trust companies’ governance structure, the effectiveness of their internal control system and risk management system, the status of their capital management, the risk management of their trust business, and so forth. It is aimed at guiding trust companies to establish a sound risk management system; the asset management element mainly evaluates trust companies’ comprehensive operating capacity, trust business operating capacity, profitability, R&D and innovation capacity, marketing capacity, and reputation management capacity, aiming to guide them to improve their active management capacity and profitability level. The compliance management element mainly evaluates the construction of trust companies’ compliance management system and their compliance with relevant laws and regulations, as well as companies’ systems and trust documents, and inspects whether supervisory measures, administrative punishment, criminal punishment, and so forth, have been taken for the violation of laws and regulations. It also aims at guiding them in fulfilling the obligations of honesty, credibility, prudent management, and safeguarding the interests of the Beneficiary.

In addition, there has been a change in the way of thinking on the part of regulators in 2015 regarding the rating of trust companies, that is, from the previous supervision rating to the present dual-rating mode of supervision rating and industry rating. The China Trustee Association (CTA) issued the Guidelines on the Industry Rating of Trust Companies (Trial Implementation) (Consultative Draft) to some trust companies, and summed up their feedback and comments in May. The Guidelines covers four indices, that is, capital strength index, risk management capacity index, value-adding capacity index and social responsibility index, and classifies trust companies into three levels: level A (85-100 points), level B (70-85 points), and level C (below 70 points). To be specific, the capital strength index (30 points) consists of net capital (10 points), net capital/risk capital ratio(15 points) and net capital/trust risk project scale ratio(5 points); the risk management capacity index (30 points) consists of non-performance rate of inherent credit risk assets (10 points), normal liquidation rate of trust projects (10 points), and recovery rate of trust property loss (10 points); the value-adding capacity index (36 points) consists of return on net assets (6 points), trust business income/total revenue ratio (6 points), operating expense/revenue ratio (6 points), per capita net trust income (6 points) and share of self-marketing trust products (6 points); the social responsibility index accounts for 10 points.

However, what needs to be pointed out here is that the Guidelines is a rating initiative that is independent of supervision rating and that intends to comprehensively evaluate the operating management of trust companies. Given that currently there is no authoritative system for the evaluation of trust companies in China’s trust market, it’s indeed necessary to establish an authoritative system for the competitive evaluation of trust companies that is independent of supervision ratings to a certain extent, so as to facilitate the selection of the Trustee by the Trustor and provide substantial support to the development of family trusts, which has been receiving widespread attention in recent years.

The selection of the “Trustee” is of great importance for the trust system, and also constitutes a major breakthrough point in the course of development. As far as the establishment of a trust is concerned, the emphasis should be placed on the ability of the Trustee and the Trustor’s trust in the Trustee, especially since, in the course of the essential development of a trust from investment channels to transaction management, the Trustee will also abandon the index indicating the high return. Thus, as far as the development of family trusts is concerned, success will come when conditions are ripe.

However, in addition to the development of onshore family trusts, the structure and establishment of offshore trusts are also closely related to the Trustee. For instance, is there a unified judicial jurisdiction when selecting a Trustee within the same judicial jurisdiction as the place of the trust’s establishment, and is it possible to prevent the judicial perplexity of conflicting rules? What form does the Trustee take on, and will there be functional differences when an individual, an institution, a private trust company or a third-party agency (like a law firm) is selected as the Trustee? Besides, when an offshore location has gradually become a mainstream place of establishment for trust, to clear up the doubt of the Trustee, the role of the trust protector is becoming increasingly important.

Given that British Virgin Islands, Cayman Islands, Cook Islands, Singapore, and so on are all important regions in the offshore planning of family trusts, so the laws and regulations of these regions have been correspondingly adjusted. For instance, Singapore allows the imposition of limitations on the obligations of the Trustee in the trust contract, and the transfer of the investment obligation to an external investment consultant (who may be designated by the Trustor); the criteria for due diligence investigations are relatively rigorous, and there are also relevant specifications for declaration. With regard to the hope that the Trustee will hold a family enterprise and assets on a long-term basis for the purpose of passing on the wealth without the Trustee getting too deeply involved in the operations of the family business, British Virgin Islands has introduced the Virgin Islands Special Trust Act (VISTA) as a response. In other words, as long as this law applies to a certain trust, the Trustee will be banned from interfering with any operation of the enterprise held, and the directors or professional manager of the enterprise will be responsible for implementation.

What’s also noteworthy is that the revised new Trust Law of Hong Kong officially took effect on December 1, 2013. The new law reformed the old laws of 1934 and 1970, including the conference of a greater presupposed power to the Trustee, the coverage of insurance, commission agents, franchise investment and remuneration collection, the abolition of two principles of common law, the introduction of anti-forced heirship regime, and so on, which established a niche for Hong Kong’s family trust industry. In addition, the new Trust Law has clarified the powers and obligations of the Trustee, the Settlor, and the Beneficiary, included proper checks and balances as a supplement, and offered incentives for private wealth management institutions, so that more trustors are once again willing to accept Hong Kong as a jurisdiction for modern trusts. Furthermore, according to the provisions of common law, unless authorized via a trust instrument or under specific circumstances, the Trustee shall not collect any remuneration. The new Trust Law has made major revisions to this section, and stated that, as long as the trust instrument has expressly stated the issue of remuneration collection, a professional Trustee may collect remuneration from the trust fund.

Meanwhile, the new law has conferred power to the Trustee to delegate the agent, nominee and custodian, and the Trustee may also buy equal insurance according to the market value of the property. The law has also eliminated the limitations to the amount of insurance by the Trustee. As for franchise investment projects, the Government of Hong Kong has also lowered the investment threshold, changed the amount of market capitalization of equity investment from 10 billion HKD to 5 billion HKD, removed the provision of five-year dividend payouts regarding investment companies, and changed it into the provision of three-year dividend payouts in the past five years (scrip dividend). More importantly, the law has preserved the power of trust asset investment and asset management for the Trustor, which is equivalent to providing double insurance for family trusts. In addition to the fact that the Trustee should employ insurance, stock, and fund investment to maintain the stability of trust assets according to the statutory duty of care, the Trustor may also change the investment portfolio according to the risk preferences in different periods, thus providing maximum flexibility for trusts established in Hong Kong. This is especially important for the high net-worth individuals from Mainland China who attach great importance to the right of ownership of property.

In conclusion, the healthy development of the trust system depends on the three parties of the trust properly playing their respective roles. When the trust is no longer deemed as an investment channel but is brought back to the right path of development, and when the rights and obligations – as well as information of the Trustee – have become transparent, the foundation of the trust relations between the Trustee and the Trustor will be established. In the past years, the development of family trusts have not been as successful as expected, which is largely related to the unclear orientation of the Trustee. With the increasing maturation of various rules and regulations and the gradual connection of onshore and offshore decrees, it can be expected that family trusts will take root and sprout on China’s land.

Dr. Lee, Chih-Jen

Chief Consultant, Fidelity Law Group With a dual background in law and finance, Dr. Lee has extensive experiences in production, academic research, and as a government officer. Dr. Lee is currently a versatile talent with paying special attention to the trust development in Chin, and is playing an active role in Mainland China, Hong Kong & Macao, and Taiwan in the offshore industry.

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Mon, 07 Dec 2015 00:00:00 +0000
Definition and Designated Use of Offshore Companies http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/101-definition-and-designated-use-of-offshore-companies http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/101-definition-and-designated-use-of-offshore-companies

In the coastal cities of China, enterprises have been gaining an increasingly deep understanding of offshore companies. Meanwhile, in recent years, more and more offshore institutions have been established and registered. An offshore company refers to a limited liability company established in an offshore jurisdiction according to its laws and regulations on offshore companies. Local government collects no tax but only a small amount of corporation administration charges from offshore companies.

Besides, most major banks in the world recognize and accept offshore companies, agreeing to open bank accounts for them and provide them with financial operation services. Offshore companies feature strong data confidentiality, zero corporate income tax and free capital flow. Therefore, many Chinese enterprises, including state-owned enterprises, adopt offshore company structures within corporate operations and development for cost-saving and tax planning reasons, and to provide a financing platform.

The common purpose of offshore companies is for international trade. A company can register an offshore company as a trader, purchase products from Country A and sell to Country B to make a profit, and then apply for tax-free overseas gains. In such a way, the operational cost of enterprises may be reduced. In addition, offshore accounts can improve the fund utilization rate of enterprises because they are not restrained by foreign exchange controls.

With the development of Chinese policies, offshore companies can also be used for round-trip investments. For example, by filing an application with the State Administration of Foreign Exchange and the Ministry of Commerce, Company A in mainland China may establish a wholly-owned subsidiary Company B in Hong Kong (i.e. Company A is the shareholder of Company B) and then transfers its fund to Company B in the name of an investment fund. Afterwards, Company B can make investments in mainland China using a round-trip investment and apply for the corresponding preferential policies with the government, thus maximizing corporate interests.

China encourages enterprises to make investments abroad, but the foreign investments of many Chinese state-owned enterprises are restrained by Chinese policies. Furthermore, due to the lack of familiarity with the laws and tax systems of other countries, such investments are exposed to certain risks. Offshore companies can be used by large enterprises as a springboard to avoid China's governance of foreign investments and to make investments abroad while holding companies as an international holding company. Due to the confidentiality of shareholders’ data, offshore companies can also conceal the identity of the investors, spread the investment risks of the enterprises, and use them to assist with tax planning.

As the bubbles of the market economy become increasingly visible and bank policies are tightened up, most enterprises in mainland China will be confronted with a problem: the difficulties in and high costs of financing. In contrast to China, if enterprises have legitimate operations overseas and establish complete auditing accounts, they can obtain financing at a lower cost from foreign banks to expand the financing channel with a letter of guarantee issued by domestic banks to foreign banks. The most common financing mode is overseas loans under domestic guarantee, which features both low financing costs and an arbitrage space. However, problems arising from exchange rate risks – especially the sharp rise against the US dollar this August – have significant impact on the cross-border, cross-currency financing of enterprises. Offshore companies are widely used. Offshore service institutions like Zhuorui will establish different offshore structures for different enterprise objectives to exploit the advantages of offshore companies to the maximum.

By Biao Su

Biao Su, General Manager of Zhuorui Enterprise Management Consulting Ltd., Zhuorui Accounting Ltd. and Hongrui Capital Investment Management Ltd. He
joined offshore registration industry in 2004 and since then provided offshore registration and offshore structure establishment services for clients from more than 1000 enterprises in Zhejiang, Liaoning, Fujian and Shandong provinces, covering sectors from international trading, manufacturing to real estate, etc. He has rich experiences in offshore practices.

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Mon, 07 Dec 2015 00:00:00 +0000
Trusts Versus Foundations, What Should You Choose? http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/100-trusts-versus-foundations-what-should-you-choose http://asiaoffshore.org/index.php/news/jurisdiction-updates/item/100-trusts-versus-foundations-what-should-you-choose

It is well known that offshore companies are widely used in China with Hong Kong, BVI and Cayman companies being the most common. Such structuring is of great benefit particularly in relation to outbound investment. As time moves on, entrepreneurs and investors are giving increasing attention to matters of estate planning to ensure that the fruit of their labours can be passed to the next generation as efficiently as possible, and ideally in such a way that assets do not need to be broken up or sold in order to settle inheritance tax bills.

It is with such planning in mind that important decisions need to be made. In the UK, trusts have been used for some 800 years and are an integral part of many transactions ranging from estate planning, to investments and insurance. However, trusts are a product of common law and explaining the benefits of transferring wealth to trustees, and the control of that wealth presents challenges for clients from civil code countries, and particularly so in China.

Historically in the UK, if a trust was to be established, a family would appoint their solicitor or a family member as trustee; somebody with a long established and detailed knowledge of the family and its businesses. In today’s globalised world, this is less practical and often the resources of a professional trust company are better served to meet the complex and often international needs of the family. The key challenge is for the trust company to combine the personal approach of the traditional family solicitor with the increasing complexity of modern family aims and objectives. This is particularly important in China where personal relationships are key in conducting business.

A Question of Control

Having gained the confidence of the client, the variety of financial services centres and within them the broad number of structuring options provide plenty of scope to achieve those family objectives. More often than not this involves the thorny question of control. There will inevitably be those clients who are reluctant to relinquish complete control of their assets and a number of provisions are available to remedy this situation. Protectors may be appointed, or certain powers reserved to the settlor can create peace of mind. There are trusts specifically designed to avoid the need for the trustees to interfere with the operation of a business, such as VISTA in the BVI.  A Private Trust Company (PTC) is another solution. A PTC is a company which is the sole corporate trustee of the family trust. The board of directors of the PTC will include family members sitting alongside professional trust company officers.In some PTC arrangements the head of the family will own all the shares of the PTC.

We have also noticed considerable recent interest in foundations, a civil law version of a trust, but with some key differences. Foundations have a similar legacy within continental Europe to UK trusts, with medieval and largely ecclesiastical origins. The use of foundations for financial and estate planning became more widespread in the 1920’s with the enactment of Liechtenstein’s Foundations Law. Over the past 20 years, foundations laws have been introduced in a number of International Finance Centres such as Jersey, Guernsey and Seychelles, with a view to broadening the estate and wealth planning options to suit clients in both civil and common law based countries. 

It is the comparison between trusts and foundations that has generated consistent interest from our Chinese clients and contacts.

Themain similarities between trusts and foundations are:

  • Both may be created for asset protection, succession planning and wealth preservation.
  • The settlor/founder can transfer assets to both.
  • Both can be set up during the founder/settlor’s lifetime
  • Both entities have the ability to be revoked(with appropriate drafting)
  • A Protector or Enforcer can normally be appointed for both.

 With certain types of trust, such as a BVI VISTA the settlor is able to exercise the power to direct the investment functions (including the power to sell or retain trust assets and to direct the investment). Where he is director of the underlying company he can control the management of the company owned by the VISTA trust.  Similar conditions can be replicated in a foundation where the Founder, as a member of the Council, can exercise control over the foundation assets.

Notable Differences Are:

A trust does not have separate legal identity from its trustees. In contrast a foundation has an independent legal identity and holds assets in its own name. The foundation therefore goes through a registration procedure, whereas the trust doesn’t, it is established upon the execution of the trust instrument and transfer of assets from the Settlor to the trust. As a trust does not have separate legal personality the trusteesmust contract personally in their own names, however,a foundation can contract in the name of the foundation. It does not require the mediation of a trustee or council member to hold title to assets.

Foundation Regulations (which govern the foundation) are private but the Foundation Charter (containing basic information) is a public document. In contrast, the trust instrument remains private.

The beneficiaries of a foundation do not have equitable rights over the assets of a foundation, whereas beneficiaries of a trust do have equitable rights.  The rights of the beneficiaries of a foundation are essentially contractual.

The foundation is usually established with the sole purpose of holding wealth or assets and in some jurisdictions legislation prevents any commercial activity being conducted by foundations. 

A foundation council must comply with the precise terms of the regulations of the foundation as set by the founder, whereas the trustee must act at all times in the best interests of the beneficiaries.

What Would You Choose?

While the foundation is a rival concept to the trust and has many advantages, it is a fact that the trust will continue to be widely used in international tax and wealth planning for two key reasons.

Many countries do not recognise the concept of trusts but this can be an advantage because countries that do not recognise the trust concept cannot enact specific anti-avoidance legislation against trusts;

Even where countries recognise and enact anti-avoidance legislation against trusts it is possible to advise with greater certainty in relation to such legislation and its impact on settlors and beneficiaries; trusts have been widely used as family succession planning vehicles for many years in prestigious jurisdictions, so a large body of case law has built up which makes advice in the context of trusts arguably more certain.

Topical Debate

This debate of trusts versus foundations has also recently become very topical in the context of company legislation in the UK and the subsequent impact this has on China outbound/UK inbound investment.

The Small Business Enterprise and Employment Act was passed on March 26th 2015. A consequence of this legislation is the creation of a new register that all UK companies must create: a register of “persons with significant control” (PSC) or human individuals with a beneficial interest in over 25% of the shares in a company. This is a public register and is anticipated to become effective in April 2016.  This is part of an EU wide initiative and similar provisions will be introduced throughout the European Union in due course.

From our experience, many foreign investors in UK businesses prefer to keep their interests away from the prying eyes of competitors, the media and general public.  For such clients the creation of a trust to hold shares in UK companies presents a viable option as trustees are considered to be PSC’s.  Foundations may achieve similar results.

So, Trust or Foundation?

The current interest from China in trusts and foundations illustrates a growing appreciation of the importance of wealth and estate planning. Whilst pure company registration business remains a key element of outbound investment, trusts and foundations will play an increasingly crucial role in the management of intergenerational global wealth.

Either choice can be very effective for succession, asset holding and privacy issues and as with any matter relating to professional services, the pros and cons of each will be determined by each individual situation.

By John Swann

John has worked in the corporate services industry for over 30 years, and has been at Jordans since 1986, in which time he has run Jordans operations in Gibraltar and the BVI. Now based in the UK, John has responsibility for overall business development, with a focus on Asia, and specifically China.

editorialuser2@mxmedia.com.hk (stacy) Jurisdiction Updates Mon, 07 Dec 2015 00:00:00 +0000