By Mark Lea.
Many articles provide information on a particular new law or on what a particular country offers. Such an article really deals with what the writer, or those he represents, wish the reader to know and use. Hopefully this article looks through the spectacles of the reader, who is the Chinese resident business man. The pertinent questions are what this reader wants and needs and what solutions there may be to assist him.
The Wishes And Needs of The Client:
Many clients have different requirements from others. Even if they have the same requirements, their circumstances may be different. However, there seems generally to be a common theme of wishes by many clients and these are now referred to.
Such clients have often externalized assets outside China as part of their business or investment plan. Technology has resulted in globalization and the investments and businesses can be spread over many countries. This article is concerned with the assets of the Chinese reader which are situated outside China.
Many Chinese clients have acquired their wealth by hard work and innovation of business ideas. They are aware of the risks they have taken and want to protect their new wealth. Therefore asset protection is important.
As these businessmen continue to build successful business empires, they understand the benefit of taking their companies public and therefor they often wish to plan for an IPO.
It may be said that, where there has been a one child policy, planning for family succession is not top of the agenda. Even so, family members may choose to live in high tax jurisdictions outside China or purchase assets in such jurisdictions. That means planning for holding and looking after those assets bearing in mind the taxation and other requirements of the foreign countries concerned.
Also the spread of assets through many jurisdictions means that a single Will may not be enough. Certainly where real estate is concerned, which is governed by the law of the jurisdiction where it is situated, Wills limited to the disposal of assets in those jurisdictions would be sensible. Otherwise, Probate of a single Will in the country of the domicile of the individual concerned will be needed first. Then there will be a need for Probate in all the other countries where assets are situated. This will be time consuming and costly. Planning to avoid the problems and costs of Probate is a common goal.
If the owner of a group of companies has made their creation his life’s work, he will want to ensure their ongoing control after him. If he does create a structure of wealth management solutions during his life, he will certainly wish to retain control during his lifetime, despite the nature of the solutions he has adopted.
China presently does not have capital taxation in the form of inheritance, gifts and wealth taxes. The Chinese entrepreneur and investor may seek to externalize his assets from China to try and avoid any future taxation of that nature in respect of them.
Such food for thought needs the conversion of wishes into solutions. This article now looks at some of those solutions topic by topic.
Asset Protection:
To avoid attack against one’s assets by creditors, or even predatory spouses, there is a need to consider creating a Trust or Foundation and transferring assets to that Trust or Foundation. To seek to take such action with the main or primary purpose of avoiding one’s creditors will not succeed. The action to achieve this solution needs to be taken in advance of any known or possible problem. It should be part of an overall estate plan to achieve several objectives of which asset protection is but one. Rules differ from country to country. Generally, the transferor of the assets needs to be solvent before and after the transfer and statutory period of time needs to elapse between the date of the transfer and the moment when the creditor’s cause of action arose. It is sensible for this to be a reasonable period (perhaps 2 or 3 years). It is also not sensible to seek to simply use the Trust Law or Foundations Law of a suitable jurisdiction without have any other connection with it. Certainly the Trustee or Council should be in that jurisdiction and administration of the Trust and Foundation too. It would be wise also for a Trust, which is not a legal entity, to hold the shares of a company in the jurisdiction concerned which in turn will hold the assets.
Examples of suitable jurisdictions are Labuan and Samoa with good Trust Law in this respect and a 3 year and 2 year period respectively. Labuan has extended the rules of asset protection in its Trust Law to its Foundations Law and Samoa is considering draft Foundations Law which will do the same.
Avoidance of Probate:
The tax status of the individual concerned is all important and so is the nature and situs of the assets which that individual owns. These factors will determine the taxation implications and practical costs involved in the transfer of the assets. If these are not a deterrent then a solution may be found.
To avoid holding assets in many jurisdictions, it may be possible to transfer them to, say, a company in a suitable jurisdiction, which will be an “umbrella” for the holding of the assets. The shares of that company will then be the asset for which Probate will need to be obtained. Examples of jurisdictions of companies often suitably used for this for their simplicity of shareholder and director and practical use are the British Virgin Islands and Samoa.
This still leaves the shares of the holding company with their owner to be the subject of a Will and Probate. Probate can only fully be avoided by transferring the assets concerned to a Trust or Foundation during life and the taxation and cost implications of any such transfer will need to be considered as well as the initial and ongoing cost of running the Trust and Foundation. The Trust or Foundation will provide for the succession for the family Beneficiaries. It may well be that the transferor of the assets may remain a Beneficiary of the Trust or Foundation and ways of retaining day to day control, even though the assets have been transferred to a Trust or Foundation, are considered next. A Trust could even be revocable, if there are no adverse taxation consequences, enabling the transferor to terminate the Trust and take the assets back at any time.
Retention of Control:
This is often the prime requirement when seeking to transfer assets to a wealth management structure. There are several methods of achieving this and some of those solutions are as follows:-
There are Trusts with reserved powers sometimes on the basis that these will not invalidate the Trust. They can be very wide and capable of reservation to the Settlor, such as in the Cayman Islands or Jersey. By contrast in Singapore and Hong Kong the powers which can be reserved to the Settlor alone are of investment and investment management. Too great a reservation to the Settlor may mean that there is no Trust and merely a nominee arrangement for the Settlor.
If statutory certainty is required rather than relying on future common law, then examples of reservation wider than to merely the Settlor can be found, for example, in Guernsey, Labuan and Samoa. Labuan and Samoa in particular provide the ability to reserve wide powers to a Protector, who is a watchdog for the Beneficiaries. Samoa provides for “prescribed directions” which may be given by any person or combination of persons or by persons in succession.
Perhaps reserved power Trusts are for quoted securities and cash and, if they have underlying companies, then the ability for the Trustees to let others run such companies needs to be considered. This raises the specter of the decision in Bartlett v Barclays Bank Trust Co. Ltd.through to the cases such as Johnston v Gore-Wood. Trusts therefore often contain “anti-Bartlett” clauses to seek to permit Trustees to let others than them run companies, the shares of which are owned by the Trustees, without the Trustees being liable. How far these clauses will be upheld where has yet to be seen.
Foundations, which unlike Trusts are legal entities, own their own property and are run by a Council, can provide reserved powers to the Founder and the Founder can assign such powers. The presently proposed Samoan Foundation will enable maximum ability for ongoing assignment of such reserved powers. If the person with the powers fails to assign them, then they will vest automatically in a Guardian.
There are possible solutions such as two separate Trustees with separate duties provided by New Zealand, split share capital companies with controlling shares and shares with value and Private Trust Companies, of which Singapore provides a good example. Each of these solutions arguably has its detractions.
There are special Trust regimes, the purpose of which are to permit the Trustees of a Trust to hold and retain the shares of a company and permit the directors of such company to run it without the Trustees being liable. These Trust regimes are the British Virgin Islands Special Trusts Act (“VISTA”), the Labuan Special Trust (“LST”) and the Samoa International Special Trust Arrangement (“SISTA”). The Trustee has to be as designated from the jurisdiction concerned; this is usually a licensed Trust Company but in Samoa will include a Samoan Foundation which can be an exempt Private Trust company. The Trust has to hold “designated shares”, which must be from a company of the same jurisdiction. There can be “office of director rules” and the Trustees cannot use their role as shareholder to remove directors, take action against them or require a dividend. Upon a specified ground of complaint “an interested person” or an”Appointed Enquirer” can make an “intervention call” requiring the Trustee to intervene in the alleged misdeeds of the directors. Even though the purpose of the Trust is to retain the designated shares, there are powers for the Trustees with consents to sell the shares or for the Court to order the sale of the designated shares.
These are Trust structures which enable the Settlor or his family, or others for them, to retain control of the company with the assets despite the existence of the Trust. Perhaps this structure is for companies or groups of companies which can be held by the designated company as their holding company.
There is yet one further structure which provides for retention of control. This combines the use of a Limited Partnership combined with a Trust. Under all statutory Limited Partnership laws the
General Partner must hold the assets of the Limited Partnership for the partners and must control the business and investments of theLlimited Partnership day to day. If the General Partner has but a small percentage interest in the Limited Partnership, he or it has full control. The majority interest of the Limited Partner will directly or indirectly be the asset of the Trust. In this way, value is dissected from control in Limited Partnership Law and not Trust Law. This arguably makes the structure that much more robust and it should be used for complicated and valuable assets including groups of companies. It may well be a suitable structure for planning pre IPO with a holding company in a jurisdiction suitable for listing.
Only Samoa has legislated for this structure to provide that, if the Trust is governed by Samoan Law and the asset of the Trust is directly or indirectly the interest of the Limited Partner in a Limited Partnership, then the Trustee shall permit the General Partner to control day to day and shall not be liable for the acts or omissions of the General Partner.
Samoa also proposes in its Foundations Law to provide the similar legislation for a Limited Partnership in combination with a Samoan Foundation. There are a number of suitable solutions for the choice of jurisdiction for a Limited Partnership, depending on the circumstances, such as Guernsey, Labuan, New Zealand, Samoa and Singapore.
This structure needs to be carefully put together and, as advised by Cirque du Soleil, one should not try the exercise at home.
Some Conclusions:
Chinese clients wisely wish to have precise answers for solutions to their problems. It is very important not to lose sight of the objectives when carrying out the estate planning and putting in place the wealth management solutions. Clear instructions are necessary to achieve success. Hopefully this article will provide a focus on the probable objectives of such clients and some ideas on the solutions which can be offered to them.
Mark Lea
Managing Director – Lea & White International Advisers Limited
Partner – Lea & White, Solicitors, Hong Kong
mark.lea@leawintl.com
Tel No: 852 25282097
