Presentation is loading. Please wait.

Presentation is loading. Please wait.

Chinese tax structures and planning alternatives to prepare for Outbound Chinese Investments & China's next export: BILLIONAIRES Peter Guang Chen Fiduciary.

Similar presentations


Presentation on theme: "Chinese tax structures and planning alternatives to prepare for Outbound Chinese Investments & China's next export: BILLIONAIRES Peter Guang Chen Fiduciary."— Presentation transcript:

1 Chinese tax structures and planning alternatives to prepare for Outbound Chinese Investments & China's next export: BILLIONAIRES Peter Guang Chen Fiduciary Future Conference - Cyprus - 31 st October 2012

2 Current state and trend of private wealth growth in China Private wealth planning – PRC tax considerations Private wealth planning – Other PRC considerations PRC Outbound Investment Planning Pre-IPO planning using trusts Who we are and how we can work with you Table of Contents 2

3 3 China’s Next Great Export On 21 st September 2012, a visitor to the China Property Investment Show in Beijing, touring booths of foreign property developers

4 4 China’s Next Great Export Two weeks ago, on 16 th October 2012, the Wall Street Journal (“WSJ”), in a story titled “ Cash Leaks Out of China”, reported: “Zheng Nan recently spent €300,000 ($390,000) on a beachfront condo in Cyprus. At 50 years old, he says he is retired from selling telecommunications gear in China for foreign manufacturers. "My plan is to spend winter there because of the pollution in Beijing," he says. "And we will be back for summer.“ “

5 5 China’s Next Great Export “According to a Wall Street Journal analysis, in the 12 months through September 2012, about $225 billion flowed out of China, equivalent to about 3% of the nation's economic output last year.” Source: Wall Street Journal, 16 th October 2012

6 CURRENT STATE AND TREND OF PRIVATE WEALTH GROWTH IN CHINA 6

7 Top 10 Sources of Billionaires Source: Forbes 2011 RankingCountryNumber of Billionaires 1United States413 2China (including Hong Kong and Taiwan)176 3Russia101 4India55 5Germany52 6Turkey38 7United Kingdom32 8Brazil30 9Japan26 10Canada24 Global Billionaires 7

8 Top 10 Billionaires in China and their Global Rankings Source: Forbes RankNameNet Worth (Billion USD) AgeSource 95Robin Li$9.442Internet 114Liang Wengen$8.854Manufacturing 169Zong Qinghou$5.966Beverages 179Li Li & family$5.747Pharmaceuticals 185He Xiangjian$5.569Appliances 185Wu Yajun & family$5.547Real estate 200Hui Ka Yan$5.153Real estate 208Zhang Jindong$548Retail 208Ma Huateng$540Internet 232Wang Jianlin$4.657Real estate Billionaires in China 8

9 Chinese High Net Worth Individuals HNWIs with more than USD1.5 million in individual investable assets Source: Private Banking White Paper 2012 (Bank of China and Hurun Research Institute) Growth of Wealth in China HNWIs with more than USD15 million in individual investable assets

10 Top Chinese Companies in Fortune Global 500 In 2012, China has companies in the Fortune Global 500 Top Private Chinese Global 500 Companies RankingNo. of Global 500 Companies United States133 Japan68 China61 73 Country Rank CompanyGlobal 500 Rank CityRevenues (Million USD) 8Noble Group91Hong Kong80,732 17Dongfeng Motor142Wuhan62,911 16Shanghai Automotive130Shanghai67,255 19China FAW Group165Changchun57,003 22Baosteel Group197Shanghai48,916 33HeBei Iron & Steel Group258Shijiazhuang40,023 Growth of Wealth in China 10

11 Overseas Listings Based on a recent survey, 165 domestic enterprises listed abroad with over cumulative capital raised of over USD 120 Billion Target markets: –Most listed on the HKEx –SGX –NYSE and NASDAQ –RTOs into smaller US exchanges and OTC –AIM 2000June 2005As at end of Sept No. of H Shares co (including 2 delisted co.) 171 Growth of Wealth in China 11

12 60% of China’s HNWIs have completed steps to emigrate or are considering emigration Primary reasons for emigration of HNWIs: Children’s education; asset protection; better living environment; flexibility Most desired destinations for emigration: 1.USA 2.Canada 3.Europe 4.Others China’s Next Great Export 12

13 PRIVATE WEALTH PLANNING – PRC TAX CONSIDERATIONS 13

14 Residents are subject to individual income tax on worldwide income; nonresidents are taxed on China sourced income only –A resident is defined as a person whose domicile is in China or whose domicile is not in China but lives in China for a full calendar year –In general, a Chinese person who obtains foreign citizenship or permanent residency and doesn’t live in China for a full calendar year is considered a nonresident –A person is not considered “living in China for a full calendar year” if the person makes: Any single trip overseas longer than 30 days; or Multiple trips overseas the total length of which are more than 90 days PRC Taxation on Individuals 14

15 Current individual income tax system is income category based, not on a consolidation basis –Income is classified into 11 categories –Wages and salaries are taxed on a monthly basis –Partnership income is taxed on an annual basis –Other income such as investment income is taxed on a transaction basis, i.e. taxed each time when the income is received –Dividends, interest and capital gains are subject to income tax at 20% –Capital gains from public stock and mutual fund investment is currently exempt from income tax –Insurance payment is tax exempt PRC Taxation on Individuals 15

16 No exit tax on changing tax residency No gift tax No estate tax No rules on trust taxation PRC Taxation on Individuals 16

17 Introduction to outbound investments Current state of outbound investments – Total investment amount now exceeds US$300 billion (including both new investment and dividend reinvestment), which makes China the fifth largest capital export country (after the US, Germany, France and HK) – Investments in energy, natural resource and financial industry continue, but investments into other sectors such as manufacturing, logistics, technology, retail, agriculture, luxury brand, tourism, and entertainment grow very fast – Players now include many private held companies and investment funds – Investment destinations are all over the world, including developed countries 17

18 Introduction to outbound investments Choice of legal entity for outbound investments – Branch office (not a legal person) No deferral of the taxation in China Profits of a foreign branch can be used to offset with domestic losses, but the losses of a foreign branch cannot be used to offset domestic profits – Subsidiary (a legal person) Deferral of Chinese taxation until the distribution of dividends – Partnership (not a legal person) No deferral of the taxation in China People are not very familiar with this type of legal vehicle – Investing through an intermediate holding company Typical structure for cross-border investment Tax deferral + exit flexibility Enjoy treaty based lower withholding tax on dividends 18

19 Foreign incorporated Chinese tax resident –A foreign incorporated company is treated as a Chinese tax resident if its effective management is exercised in China –The four criteria under Circular 82 The senior management officers reside in China and perform their duties mainly in China The finance decisions and human resource decisions are made or approved by the personnel in China The main assets, accounting books, corporate seals, and the minutes of the board of directors and the shareholders are located in China Half or more than half of the directors or senior officers who have voting power reside in China –It is not clear if similar criteria will apply to individual owned foreign entities Common Corporate Tax Issues regarding Cross-border Investments 19

20 Consequences of being a Chinese tax resident –The dividend/interest/royalty paid to a non-Chinese shareholder is subject to a 10% Chinese withholding tax –The sale of the equity interest in such a company is subject to a 10% Chinese capital gains tax (see the case below) Common Corporate Tax Issues regarding Cross-border Investments 20

21 Chinese Tax Resident - Beijing Case S Co. is a leading telecom company in the United Kingdom and T Co. is a red chip company registered and listed in Hong Kong As a strategic investor, S Co. purchased a 2.5% equity interest in T Co. at USD 2 billion in 2000 S Co. purchased more equity in T Co. later and its total interest in T Co. reached 3.2% S Co. sold its equity interest on September 8, 2010 for a gain of USD 3.3 billion The Chinese tax authorities found the sale taxable in China, because T Co. should be considered a Chinese tax resident under Guoshuihan [2009] No. 82 On October 27, 2010, a capital gains tax of RMB 2.2 billion was paid to the Chinese tax authorities T Co S Co. Hong Kong United Kingdom 2.5% T Co S Co. Hong Kong United Kingdom 3.2%

22 Common Corporate Tax Issues regarding Cross-border Investments Controlled foreign corporations (“CFCs”) –Article 45 of the PRC Enterprise Income Tax Law With respect to enterprises that are located in tax jurisdictions where the effective tax rate is significantly lower than that of other tax jurisdictions as provided for in Paragraph 1 of Article 7 and are controlled by Resident Enterprises or controlled by Resident Enterprises and resident individuals, the share of profits attributable to the Resident Enterprises shall be booked as current year taxable income of the Resident Enterprises, if the profit is either not distributed or incompletely distributed absent a reasonable business operation need. –Definition of a CFC Is a foreign company 100% owned by a Chinese individual a CFC? How is the effective tax rate defined? 22

23 Common Corporate Tax Issues regarding Cross-border Investments Controlled foreign corporations (“CFCs”) –Consequences of becoming a CFC Immediately taxable at the Chinese corporate shareholder level –Exceptions CFCs located in a country listed on the White List –Currently 13 countries Companies that mainly conduct active trade or business CFCs with annual profit of less than RMB 5 million 23

24 Common tax issues regarding outbound investments Other anti-avoidance rules – Transfer pricing rules in China and the destination country – Chinese general anti-avoidance rule – Other anti-avoidance rules in the destination countries Thin capitalization rules Anti-treaty shopping rules 24

25 Common tax issues regarding outbound investments Foreign tax credit limitation – Per-country limitation Only the income and losses from the same country can be offset with each other – Three-tier limitation The credit is limited to three tiers below the Chinese parent 25

26 China US HK China Lux UK US The tax paid in HK and the tax paid in the US cannot be blended 16.5% 35% Per-country limitation Three-tier limitation The tax paid in the US cannot be credited 26 Common tax issues regarding outbound investments

27 China Lux UK US Three-tier limitation issue If HK is a partnership or a Chinese tax resident, can this solve the three-tier limitation issue? HK 27 Common tax issues regarding outbound investments

28 Tax planning for outbound investments Preparation before the investment – Understand the tax systems in China and the destination country – Have a big picture and be forward-looking Leave planning flexibility for future investment – Use professional help 28

29 Tax planning for outbound investments Effective use of tax treaties – Reduce the destination country’s withholding tax on dividends, interest and royalties – Reduce the destination country’s capital gains tax on exit – Save tax through the avoidance of a permanent establishment – Use the tax sparing credit to truly enjoy the tax incentives offered by the destination country – Use the mutual agreement procedure to solve the tax disputes with the destination country 29

30 Tax planning for outbound investments Holding company planning – Investing through a third country holding company E.g. China-Cyprus-Europe, China-Singapore-Indonesia, China-HK- Luxembourg-Canada, etc – Using a regional holding company or global holding company to invest E.g. a regional holding company in Cyprus, HK or Singapore – Pros and cons of using a tax haven holding company 30

31

32 PRIVATE WEALTH PLANNING – OTHER PRC CONSIDERATIONS 32

33 PRC Trust Law PRC Trust Law became effective on Oct 1, 2001 and is similar to the trust laws of many other countries However, there is a fundamental difference between a PRC trust and a foreign trust, i.e. whether or not the legal title of the trust assets is transferred to the trustee is not clear under the PRC trust law A PRC trust is mostly used as an asset investment/management tool currently 33

34 Dealing with an Offshore Trust Is it recognized under the PRC law? Does the transfer of assets require any PRC government approval (including foreign exchange control)? –Offshore assets –Onshore assets 34

35 Matrimonial property –Community property: Property acquired by husband and wife during marriage is jointly owned –Other assets are generally personal properties –Marital agreements are recognized Wills are recognized Statutory inheritance order in the absence of a will –Estate first goes to: Spouse, children and parents –If there is no first tier, estate goes to: siblings, grandparents and grandchildren –Equal distribution within each tier No probate required Other PRC Considerations 35

36 There are no rules on trust taxation –No rules on putting assets into the trust –No rules on distributing income/assets to the beneficiary –No rules on holding assets and income produced by the underlying assets –No rules on tax reporting Tax Issues regarding Trusts 36

37 PRE-IPO PLANNING BY USING TRUST 37

38 Tax Asset Protection Succession Planning Flexibility in Future Planning Employee Benefit Planning Using Trusts 38

39 Typical Structure 39 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co

40 Holdco 1 Listco Intermediate Holdco China Co Offshore Onshore Major Shareholder Public Major Shareholder as director 5%-10% 0% Distributions to major shareholders or families: PRC individual income tax at 20% Distribution: should be structured to attract no tax Distribution: withholding tax at 5% or 10% (depending on jurisdiction of foreign Holdco) 20% Holdco 1: PRC EIT at 25% if management is controlled by PRC resident. Tax – Without Trust 40

41 Holdco 1 Listco Intermediate Holdco China Co Offshore Onshore Major Shareholder Public Major Shareholder as director Tax – Without Trust 41 Distribution For every $100 distributed from China, $54 net is received. 100*(1-10%)*(1-25%)*(1-20%) = 54 TAX NET RECEIVED

42 Holdco 1: NO PRC tax because it is not managed or controlled by a PRC resident 5%-10% 0% Distribution to major Shareholders or families: NO PRC tax Distribution: should be structured to attract no tax Distribution: withholding tax of 5% or 10% (depending on jurisdiction of foreign Holdco) Trustee Client nominated independent directors Holdco 1 Holdco 2 Listco Intermediate Holdco China Co Offshore Onshore Trust BeneficiariesSettlor Public Trustee appointed directors 0% Distribution: should be structured to attract no tax Holdco 2: NO PRC tax because it is not managed or controlled by a PRC resident Trust: No PRC tax Tax – With Trust 42

43 For every $100 distributed from China, $90 - $95 net is received. Calculated as 100*(1-5% or 10%) Trustee Client nominated independent directors Holdco 1 Holdco 2 Listco Intermediate Holdco China Co Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Tax – With Trust 43 TAX NET RECEIVED Distribution

44 Protect family asset against –Creditors –Beneficiaries’ spouses –Other related claimants Settlor’s spouse - matrimonial property on transfer? "Ringfence" beneficiaries Asset Protection 44 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co

45 Succession 45 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co Unify majority shareholding Unify management and control Protect control block value Separate ownership from control and economic benefit Provide flexibility in determining management and control Beneficiaries can enjoy economic benefits WITHOUT dilution of value or control

46 Can add or remove beneficiaries as determined by settlor or as planned Can adjust to changes in: –Family composition –Tax residence of beneficiaries –Laws Flexibility 46 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co

47 Allow employees to benefit based on shares WITHOUT having to open brokerage accounts Individual income tax neutral Enterprise income tax neutral Company ensures compliance for tax and withholdings on payments to employees Beneficiaries Employee Benefit Plans 47 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co

48 Add additional layer for reporting Need coordination Timing of reports Consistency of reports BUT trustee can handle reporting obligations for client Disclosure Requirements 48 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co

49 Need to put personal planning structure in place in coordination with pre-IPO reorganization for listing If NOT done BEFORE IPO, the transaction will be subject to lock-up, general offer and additional disclosure requirements Timing 49 Trustee Holdco 1 Holdco 2 Listco Intermediate Holdco Offshore Onshore Trust Beneficiaries Settlor Public Trustee appointed directors Client nominated independent directors China Co

50 SOHO China Limited (HK Stock Code: 410) SITC International Holdings Company Ltd. (HK Stock Code: 1308) Goodbaby Holdings Ltd. (HK Stock Code: 1086) Trony Solar Holdings Company Ltd. (HK Stock Code: 2468) Sateri Holdings Ltd. (HK Stock Code: 1768) China ZhengTong Auto Services Holdings Limited (HK Stock Code: 1728) Greatview Aseptic Packaging Co. Ltd. (HK Stock Code: 468) Sihuan Pharmaceutical Holdings Group Ltd. (HK Stock Code: 460) International Taifeng Holdings Ltd. (HK Stock Code: 873) Costin New Materials Group Ltd. (HK Stock Code: 2228) E-Commerce China DangDang (NYSE Stock Symbol: DANG) Soufun Holdings Limited (NYSE Stock Symbol: SFUN) JinkoSolar Holding Co. Ltd (NYSE Stock Symbol: JKS) Camelot Information Systems Inc. (NYSE Stock Symbol: CIS) China Lodging Group Limited (NASDAQ Stock Symbol: HTHT) Shanda Interactive Entertainment Ltd (NASDAQ Stock Symbol: SNDA) Vimicro International Corporation (NASDAQ Stock Symbol: VIMC) Examples of Offshore Listings with Trusts 50

51 HONG KONG OFFICE Peter Guang Chen AREAS OF PRACTICE Peter’s practice covers all tax aspects of cross-border investments and transactions, investment structuring and restructuring, M&A, financing, pre-IPO restructuring, transfer pricing, and tax planning for private individuals clients. BACKGROUND Peter is both a certified public accountant and an attorney with more than 25 years of experience. His has advised China, Hong Kong and US corporations on their inbound and outbound transactions; China and international tax issues, investment structuring, regulatory, and business issues; mergers, acquisitions; and the reorganizations of multinationals in China and the Asia Pacific region. He has represented companies and individuals to resolve tax disputes with tax authorities in China and the US. Previously, Peter was a with a major economic consulting firm and also was a tax partner at Deloitte, where he was responsible for the China Desk in NYC, and served as China leader of the Deloitte International Core of Excellence. He is fluent in English and Chinese (Mandarin, Shanghai, and Cantonese dialects).. Who We Are 51

52 HONG KONG OFFICE Clifford S.M. Ng AREAS OF PRACTICE Clifford is a partner in Zhong Lun’s Hong Kong office. He has been working with some of Asia's leading business families for over 20 years. Clifford started his practice in Canada and returned to Hong Kong in He provides strategic advice to private clients including major shareholders of listed companies to address asset preservation, corporate, securities, succession and tax issues. Clifford is recognized by Chambers as one of the leading private client lawyers in China. BACKGROUND Clifford is a solicitor in Hong Kong, England and Wales and a barrister and solicitor in British Columbia, Canada. Clifford graduated with a Bachelor of Arts degree in Economics from the University of British Columbia. He obtained his LL.B from Dalhousie University, Canada. Clifford articled and practiced with one of Canada's leading firms before moving to that firm's Hong Kong office in He practiced with a global firm in Hong Kong from 2003 leading their Asia offices until 2011 when he joined Zhong Lun. Who We Are 52

53 SHANGHAI OFFICE Yongjun Peter Ni AREAS OF PRACTICE Peter’s practice covers all tax aspects of cross-border investments and transactions, with a focus on market entry and exit strategies, investment structuring and restructuring, M&A, financing, pre-IPO restructuring, import and export, transfer pricing, tax-efficient supply chain management, tax dispute resolution, executive compensation, and private wealth management. Peter is recognized by Chambers as one of the leading tax lawyers in China. BACKGROUND Peter is the head of Zhong Lun Law Firm’s tax practice. Before joining Zhong Lun, he led White & Case’s Greater China tax practice. Prior to that, he led the International Tax Practice of Ernst & Young China. Peter has more than 15 years of international tax experience, including nine years in the US. Trained as a lawyer, he is able to provide tax advice in the proper legal context. Peter has been ranked as a Leading Individual in China Tax by many international directories. Peter graduated from Harvard Law School, New York University School of Law and Fudan University in China. He is qualified to practice law in both the US and China. Who We Are 53

54 Major Practices Areas include: Banking and Finance Competition/Antitrust Dispute Resolution Foreign Direct Investment Intellectual Property Mergers and Acquisitions Real Estate and Construction Structured Finance and Securitization Bankruptcy and Corporate Reorganization Corporate Finance and Capital Markets Employment International Trade and WTO Private Equity and Venture Capital Technology, Media and Telecommunications Securities Tax Private Client Zhong Lun was founded in 1993 as one of the first private partnership firms in China. Since then, Zhong Lun has emerged as one of China’s leading law firms with approximately 800 lawyers in offices in Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Hong Kong and Tokyo. Zhong Lun was named by Chambers Asia as National Law Firm of the Year for China for 2011 Zhong Lun was named by Chambers Asia as National Law Firm of the Year for China for 2011 Zhong Lun Law Firm 54

55 Asia Law and Practice Leading Lawyers ( ) A number of Zhong Lun partners were rated Leading Lawyers for several consecutive years Excellent results in ChiNext Listings As at 31 October 2010, Zhong Lun acted for 13 enterprises in applying for listing on the ChiNext (the growth enterprise market of Shenzhen Stock Exchange), 12 of which have been approved by the China Securities Regulatory Commission (CSRC), which earned Zhong Lun a No.2 position in terms of market share among law firms. According to ChiNext statistics 2010, Zhong Lun also has the highest rate of ChiNext listing application approvals. Pacific Business Press (PBP) China Best Real Estate Law Firm Award One of the Best Real Estate Law Firms of China”, Asian-Counsel Firms of the Year 2009 – Representing Corporate Asia Survey Practical Law Company (PLC) – Highest Ranking in the China Region Zhong Lun’s real estate practice was awarded the highest ranking in the China region for the year 2009/2010. Zhong Lun was the only PRC- based law firm among the 4 recommended firms. International Financial Law Review: The Guide to the World’s Leading Financial Law Firms 2012 Tier One Firm in capital markets, M&A and private equity, Tier Two Firm in banking and project financing Top rankings from Chambers and Partners “Winner, International Trade Law Firm” (Chambers China Awards 2011) “Winner, Real Estate Law Firm” (Chambers China Awards 2010, 2011) “China Law Firm of the Year 2011 (National)” at the Chambers Asia Pacific Awards –Banking and finance (band 1) –Capital markets: securitization and structured finance (band 1) –Competition/antitrust (band 1) –Construction (band 1) –Corporate/M & A (band 1) –International trade (band 1) –Private equity (band 1) –Real estate (band 1) –Restructuring & insolvency (band 1) –IT, telecommunications, media and entertainment (band 1) –Capital markets: debt securities (band 2) –Dispute resolution (band 2) –Employment (band 2) –Intellectual property (band 3) China Law & Practice Awards 2011 China Real Estate & Construction Team of the Year Real Estate & Construction Deal of the Year (Shanghai Disney Project) Project Finance Deal of the Year (Gansu Guazhou Wind Power Project) Zhong Lun Law Firm 55

56 Our Private Client Practice As the private sector grows within the Chinese economy, the planning for private wealth will become more important for entrepreneurs and business people in China. Zhong Lun is unique among domestic firms with a dedicated private client practice focused on the issues faced by high net worth clients. We advise clients on asset protection, succession planning, philanthropy, business continuation and governance, tax and other issues. Through our Hong Kong office, we also advise clients on compliance regimes for securities regulations and tax and other laws applicable to listings overseas. Our professionals have extensive experience working with business people with family members, businesses and assets in different countries under different legal regimes. We work with leading international financial institutions and advisors around the world to ensure families achieve their business and family objectives. Our Taxation Practice Zhong Lun is one of the very few law firms in China that offer comprehensive tax services with a focus on international tax. Our tax lawyers have extensive experience on cross border as well as domestic transactions in China and overseas. Zhong Lun’s tax services cover all the areas related to cross- border investments and transactions, with a focus on: Tax planning for private clients and corporate executives Investment structuring Restructuring and M&As, including pre-IPO restructuring Financing structuring Tax efficient supply chain management planning Tax advisory services on day to day company operations Tax planning for import and export Transfer pricing Tax dispute resolution Our Tax Practice and Private Client Practice 56

57 Thank You


Download ppt "Chinese tax structures and planning alternatives to prepare for Outbound Chinese Investments & China's next export: BILLIONAIRES Peter Guang Chen Fiduciary."

Similar presentations


Ads by Google