FIG head from: Oriental the IC; public channel number from the micro herein: the case of financial Institute (ID: RuShiYanJiu); OF: Xu Zaijun
In the context of internationalization of assets, China has been paying more attention to the high net worth of overseas trusts. Only in the last two months of last year, mainland investors have established more than 300 overseas family trusts.
So what is the "new thing" of the trust community's new favorite overseas trust? What's the difference between a local trust and a local trust? What are the prospects for future development? What kind of unique charm does it have? How can we choose the place of establishment and the entrustment agency?
This article will answer the above questions for everyone, hoping to help you understand overseas trusts and establish investment logic.
1. Overseas trust under the relative concept
1. The meaning of overseas trust
An overseas trust, as its name implies, is a trust established in a foreign country. The academic argument is the relationship between the principal, the trustee and the beneficiary established in accordance with the laws and regulations of the jurisdiction in a country with a sound trust law.
This is a relative concept, for foreigners, China's local trust is also an overseas trust. After signing a trust contract, some national trusts are registered with the Trust Registration Office or other competent authorities, and some trusts are exempted from registration or registration.
Just as trust in China is regulated by mainland law, overseas trust is regulated by the jurisdiction of the place where it is established.
However, overseas trust is only distinguished by the place where it is established, the trust contract is not necessarily written in the local language, nor is it necessarily signed locally, and the trust property is not necessarily located in the country in which the jurisdiction is located. Even trustees can be outside the jurisdiction of the place of registration, so many institutions in China can set up overseas trusts.
2. The difference between overseas Trust and Local Trust
The transaction structure of the overseas trust is not much different from that of the Chinese local trust. It is also the trustee's operation of the trust property in accordance with the client's wishes.
However, since the trust institution itself is a party to the trust relationship, the trustee of the overseas trust will evade more, and the trust property will be directly loaded into a company established specifically for the trust, and the trust company will be operated by an independent company. The holding company is owned by the principal or Its designated person is the company's investment adviser.
If for special purposes such as tax avoidance, offshore companies will also be set up. Some domestic things management trust will also use this mode of operation.
Chart 1: Structure chart of overseas trust transactions, Source: Financial Research Institute
Second, China's overseas trust development ushered in a new opportunity
China's trust industry started relatively late, in 1979, there was a real trust company, until the beginning of this century, there was the Trust Law, and the whole trust industry was not rectified in 2007.
Compared with the United Kingdom with more than 800 years of trust history and the United States, which has only a history of more than 100 years of trust, it is not only an overseas trust. The development of the entire trust industry in China is relatively backward, and the entire market is forced to develop.
In the last two years, domestic trusts have begun to lay out overseas and family trusts after discovering that high-net-worth clients are looking for overseas and family trusts.
1. Reasons for the lag of overseas trust development
For a long time, the overseas trust business in China has been mainly carried out by foreign banks or independent trust companies such as Singapore and Hong Kong, and the supply of overseas trust services by local institutions is seriously inadequate.
The overseas trust business of local institutions began to rise with the development of family trust business. Most family trusts are offshore trust structures. In early 2013, Ping An Trust released the first family trust in the mainland, and overseas trust started later.
In addition to being affected by the backwardness of the overall development of the trust industry, there are four main reasons for the lag of the overseas trust development of domestic trust companies:
First, it is impossible to set up branches. The establishment of overseas subsidiaries of trust institutions has been under envision, and relevant laws and regulations have not been issued. At present, only five trust institutions, Zhongrong Trust, China Credit Trust, CITIC Trust, Jianxin Trust and Shanghai Trust, have set up overseas subsidiaries to carry out wealth management business. The overseas subsidiaries of the trust institutions are in a state of stagnation.
Second, there is a lack of experience in overseas investment. China's trust institutions only began to layout overseas business in 2010. Due to the lack of investment experience, the initial stage is more cooperation with overseas investment experienced institutions, or directly with overseas institutions.
Even now 18 trusts have received QDII quotas, and many trust companies have resold QDII quotas directly, with few trust institutions really doing their own overseas investment business.
Third, there are obstacles to legal supervision. All businesses of overseas trusts are subject to overseas laws and regulations. Different countries have different legal environments and different trust supervision policies. Domestic trust institutions cannot quickly become familiar with overseas laws and regulations in a short period of time, and even carry out overseas business. Need to assist, it is more difficult to set up an overseas trust independently.
Fourth, the demand in the early stage is insufficient. Most of the overseas trusts were set up for special purposes such as tax avoidance and intergenerational inheritance, so most of the overseas trusts were business management trust, while the demand for transaction management trust was insufficient for a long time. Before 2014, the proportion of transaction management trust was less than 20%. In recent years, the demand has gradually increased, anti-traditional investment and financing trust, accounting for more than half of the rivers and mountains.
Figure 2 Insufficient demand for transaction management trusts in the early stage; Source: China Trust Industry Association, such as the Financial Research Institute
2. Overseas trust demand is gradually increasing
In the past two years, the investment demand of China's overseas trusts has gradually emerged. The economic downturn, CRS, and new tax adjustments have all catalyzed the investment needs of overseas trusts. In the last two months of last year, mainland investors established more than 300 overseas family trusts. There are Lei Jun, founder of Xiaomi, Wang Xing, founder of the US Mission, and Xu Shihui, founder of Dali Garden Food.
In the next few years, overseas trust demand will grow rapidly:
First, the main force of overseas trust investment is increasing. On the one hand, the number of high net worth individuals in China has increased.
High-net-worth individuals have always been the mainstay of overseas trusts. The earliest overseas trust and investment entities are Hong Kong rich businessmen who are deeply influenced by the Commonwealth culture. Now the mainland's high-net-worth people's vision has gradually become internationalized, and more people have set up overseas trusts. The well-known Wu Yajun couples like Longhu Real Estate and Niu Gensheng of Mengniu Dairy have set up overseas trusts.
On the other hand, demand for overseas investment shifted to the middle class. In recent years, overseas investment is no longer the patent of high-net-worth people, the middle class is emerging, offshore trust investment has become one of the ways for the middle class to invest abroad.
The new middle class in China is becoming larger and larger. In 2017, the number of middle class in China reached 385 million, ranking first in the world.
Therefore, under the dual role of the increase of high net worth population and the extension of investment subjects to the middle class, the investment demand of overseas trust is becoming more and more obvious with the increase of audience.
Second, overseas trust can better meet the increasingly diversified purpose of trust establishment.
More and more high-net-worth people are beginning to consider issues such as their children's study abroad, immigration, and overseas investment. These require certain overseas assets, as well as special needs such as tax avoidance, intergenerational inheritance, and charity.
Unlike domestic trust products, which focus more on investment functions, overseas trust is more focused on service-specific trust plan design, which is more in line with these diversified needs.
Third, local trusts are difficult to circumvent the expectation of inheritance tax.
At present, more than 100 countries in the world have levied inheritance tax, gift tax or other taxes on inheritance, high probate notarization fee and so on, but China has not collected inheritance tax.
Although the Ministry of Finance has officially stated that it has never issued regulations or drafts related to inheritance tax, the expectation of the introduction of inheritance tax in China is not reduced.
However, the Trust Law of our country stipulates that the right to benefit can be transferred and inherited. if the inheritance tax is really introduced, the beneficiary may also be included in the category of inheritance tax taxpayer, so it is difficult to be exempted from inheritance tax as the American family trust. There is potential growth room for overseas trust.
Third, the four advantages of overseas trusts
In the past two years, the demand for overseas trust has begun to rise because its diversified functions have been gradually discovered. In addition to investment and financial management, intergenerational inheritance, philanthropy and other local trust routes, overseas trust also has the following four major advantages:
1. Stronger confidentiality.
The trust of overseas trusts is extremely strong. Most trusts in offshore jurisdictions do not need registration at all. Many overseas trusts do not know about its existence. Even some classic overseas trust cases expose the existence of the trust to the public. Next, it is difficult for non-trust participants to understand the specific establishment of overseas trusts, and trust property and trust beneficiaries can be more confidential.
Some overseas trusts are not fully disclosed to beneficiaries. In overseas trusts, the principal can agree that the beneficiaries cannot be informed of the share of the beneficiary rights they have obtained, thus avoiding the dispute of inheritance. For example, the trust fund established by the well-known film tycoon Shao Yifu was entrusted to an organization registered in Bermuda's ShawTrustee (Private) Limited, which has both charitable and family trust functions, but what property and beneficiaries are placed in the trust. Which are still a mystery.
It is rumored in the media that the scale of the Shaw Trust is close to $10 billion. What can be determined is that the Shaw Trust was set up at the beginning of its establishment, including 100% of Shaw Brothers' equity assets and 100% of Shaw's Fund's equity assets. It is not known whether the Shaw Award Foundation is fully included. There is no public information on the size of the Shaw Prize Foundation, and it can also include real estate in Singapore, department stores and some film and television assets in Hong Kong, all of which are available through ShawHoldingsInc.. The holding platform is held.
Of the two identified assets, Shaw Brothers shares were sold for HK $8.6 billion in 2011 and re-injected into the trust, while Shaw Fund currently owns a stake in TVB3.64%.
Before 2009, the beneficiaries of this trust were not known, even if the list of specific beneficiaries was announced in 2009, it is still uncertain whether the beneficiaries have changed since then.
2. More flexible tax planning
It must be emphasized that the phrase “can avoid tax through trust” is wrong. Whether tax avoidance requires comprehensive consideration of the types of trust property, income form, and taxpayer identity, even for overseas trusts.
However, the choice of overseas trust establishment sites is more flexible, and it can make full use of the different taxation systems of various countries, and realize the reduction of trust property and income, tax exemption or tax deferral through tax planning.
The need for overseas trust tax avoidance for high net worth people in China is mainly due to the following two reasons:
First, not all trust property in China is exempt from taxation, and countries with mature trust systems are basically not required to pay taxes.
The establishment of trusts in China is required to be registered. Trusts that are not registered do not have legal effect. For the registration of equity and real estate, they are deemed to be subject to high taxes and fees, and only non-trading is obtained through non-trading. It is possible to achieve tax avoidance by transferring assets to the name of the trust.
And under the law of our country, even the transfer of equity through donation can not be tax-free. Therefore, most of the trust property in our country exists in the form of cash, and other property trust is very few.
However, in overseas trust, property, equity and real estate registered abroad can be exempted from donation tax by setting up offshore trust in some countries and transferring ownership by donation.
Jobs's three properties were put into two trusts and exempted from taxes.
Second, domestic trust income will be subject to income tax, while overseas trusts can reduce tax burden through tax planning.
Therefore, setting up trusts in tax havens such as the Cayman Islands and the British Virgin Islands is the most traditional means of tax avoidance.
However, countries have launched "global tax recovery" one after another, and more than 100 countries, including China, have joined the CRS (automatic Exchange Standard for tax-related Information in Financial accounts), and the number of areas in which China has determined the relationship of information exchange is increasing. In March this year, 66 trust exports and 93 information were identified for entry into the judiciary, of which the world's five largest tax havens (Bermuda, Cayman, British Virgin, Turks and Caicos and the Strait Islands), Only the Strait Islands do not need to exchange information to mainland China.
The Chinese version of CRS also includes offshore trusts in the information exchange scope, and penetrates the actual beneficiaries who identify some trusts. Once they are audited, they will not only be taxed, but also pay late fees and fines. The tax optimization function of offshore trusts therefore Affected by certain factors, the number of countries joining the Chinese version of CRS will continue to increase, and the choice of tax havens will be reduced.
In addition, as mentioned above, if China really levies inheritance tax, the tax planning of intergenerational inheritance will become another key area of overseas trust tax planning business.
3. More thorough asset isolation
The asset isolation function of trust is based on the independence of trust property, but only the trust property of discretionary trust is completely independent.
The so-called discretionary trust is the trustee's decision to operate the trust property. Not all overseas trusts are discretionary trusts. For example, the US trust is divided into a revocable trust and an irrevocable trust. Only an irrevocable trust is a discretionary trust.
However, under the trust law of our country, there is no concept of discretionary trust at all. Not only some trust agreement trustees and trustees manage together, but also our trust is naturally revocable, even now there is an irrevocable trust. It only limits the right of cancellation of the client, and does not limit the right of cancellation of others.
According to the Trust Law of our country, if the principal sets up a trust to harm the interests of the creditor, the creditor shall have the right to apply to the people's court to rescind the trust.
In theory, this provision is mainly to prevent malicious debt avoidance. The trust property injected before the debt is deliberately avoided for a long time does not meet the revocation conditions, but one of the flaws is that this clause does not clarify the creditor. The time when the trust can claim the right, that is to say, in the actual trial, once a debt dispute occurs, even the previously established trust property that is not for debt avoidance purposes may be used to pay debts.
Moreover, under the legal system of “one thing and one right” in China, the trustee’s trust property ownership may not be recognized, so that even if the definition of debt avoidance is not considered, the beneficiary or the principal is required by the identity of the owner. Debt repayment is also reasonable.
Therefore, only the establishment of an irrevocable overseas trust can achieve the risk isolation between different properties. This function of overseas trust is also the most widely used, and it is mostly used in the distribution of divorce property, debt avoidance or asset divestiture under the same control. Under the economic downturn, there are more and more entrepreneurs who have taken precautions to set up overseas trusts to avoid debts.
The family trust established by Wu Yajun, the chairman of Longhu Real Estate, is a classic case of Chinese divorce property distribution.
Prior to their divorce, the two men indirectly held shares in the company through the status of beneficiaries of the Wu family trust and the Tsai family trust, respectively, and the actual ownership of these shares was vested in the HSBC International Trust, the co-trustee of the two trusts. Divorce did not lead to changes in corporate ownership, avoiding corporate equity disputes and sharp fluctuations in share prices.
Li Jiacheng's family trust cleverly uses the independence of trust property to isolate risks between companies.
Li Jiacheng has made the shares of the 22 companies into separate trust plans, so that any of the 22 companies has an operating risk, even if the actual controller of the company is the same person. Other companies do not have to bear joint and several liability, business will not be affected.
What's more, Li Ka-shing puts the company's management rights and voting rights into equity trusts through the establishment of two types of trusts, such as equity and property. The company's assets are loaded into property trusts and realize the company's management rights. Separated from property rights.
People with management ability become beneficiaries of equity trusts, and company decisions are not subject to intervention by other heirs.
In the next generation of beneficiary arrangements of Li Ka-shing, Li Zezhen, who is more capable and practical, has become the beneficiary of the equity trust, and Li Zemin, as the beneficiary of the property trust, can also enjoy the company's dividend income.
4. Circumvent foreign exchange control
On the one hand, in the global economic downturn, in order to diversify risks; on the other hand, to explore investment opportunities in overseas markets, such as Thailand, Vietnam and other countries, real estate investment demand for high net worth individuals in China has increased.
However, in addition to special and reasonable needs such as studying abroad and providing valid proof, individuals can only exchange 50,000 US dollars or equivalent foreign exchange a year. These foreign exchanges are far from meeting the needs of overseas investors.
As a result, many investors have other paths, such as buying Rolex watches and other luxury goods to return and exchange foreign exchange, borrow other people's foreign exchange quota and so on.
However, in the past two years, China’s foreign exchange control has become stricter, and strict control over the purchase and sale of foreign exchange, fictitious payment settlement, public-transfer private cash, cheque cashing, etc., will inadvertently violate the criminal law.
Overseas trusts are regulated by offshore jurisdictions, and foreign exchanges can be circumvented by setting up overseas trusts in areas with loose foreign exchange controls.
IV. Location and organization choice of overseas trust
The most important thing to set up an overseas trust is to choose the right place to set up the trust according to its own needs and the property that wants to be put into the trust, and to entrust a reliable trust institution to take care of the trust property.
1. The choice of setting up a place
No matter what purpose the overseas trust is established, it is necessary to consider the following three aspects in choosing the place of establishment of the overseas trust: first, the national legal system and the trust supervision system, the trust is essentially a kind of legal relationship, Only under the perfect legal system, can this kind of relationship get the thorough legal protection, and the legal system which matches the nature of the trust can make the role of the trust give full play to it. For example, the contradiction between the attribute of "one thing, two rights" of trust and the legal system of "one thing, one right" in our country affects the function of isolating trust assets.
Second, the macro environment, including the political environment, the economic environment, and overseas investment policies, is not only an overseas trust investment, but all domestic investments need to consider the macro environment;
Third, the tax environment, which is particularly important for overseas trusts with tax planning as the main purpose, when overseas trusts for other purposes choose the final place of establishment in countries where the main objectives can be met. Priority will also be given to low-tax countries.
However, depending on the purpose of the establishment, there will be different and more suitable locations for setting up:
Overseas trusts with tax planning as the main purpose were previously mainly located in more than 50 countries and regions that offer tax preferences for different offshore operations, such as Bermudian, Cayman and so on.
However, when China has joined the CRS, it is necessary to pay attention to the latest list of determined exchange information released by OECD to the judicial districts in mainland China when choosing the place to be set up, and try its best to avoid CRS member states in order to avoid being taxed.
Figure 3 list of judicial districts in mainland China where information was exchanged as of March 2019; source: OECD official website, such as the Institute of Finance
For the main purpose of confidentiality, mainly in countries where registration is not required, it is desirable that the local legal system support confidentiality provisions such as confidentiality of the beneficiary's benefit share, such as Malta and the Isle of Man, which do not require trust registration, The Isle of Man Trust can only be created by giving trust terms to the trust property and transferring it to the trustee, and the Maltese trust can even be created directly and verbally.
In addition, the same country may have different registration rules for different trust assets, and it is necessary to pay attention to the distinction.
For example, the establishment of a general trust in New Zealand does not require registration, but if there is land or property assets in the trust property, it needs to be recorded in writing.
With the main purpose of asset segregation, it is necessary to pay attention to the degree of protection of trust property independence by overseas legal systems, including whether it is possible to establish a discretionary trust, whether to support the legal relationship between “one thing and two rights” and whether the trust law conflicts with other laws. Are there any precedents for conflicts and whether they are case law systems?
Most trust, such as the United States and the United States, started early, and mature countries are more suitable for the establishment of trust for this purpose.
2. Choice of trust institutions
The selection of trust agencies focuses on three points:
One is the ability of trust structure design.
Overseas trusts are mostly set up for special purposes. They need to design a trust structure that matches specific purposes and trust property. A sophisticated trust structure can maximize the function of the trust, such as Li Ka-shing's family trust. Overseas trust institutions or domestic foreign banks have earlier implemented trust structure planning and have more experience.
The family trusts established by the top domestic richest people are generally the trustees of top overseas trusts such as HSBC International Trust.
The second is to look at the working time and historical cases of overseas trust.
The choice of overseas trust sites is very crucial. Trust institutions, which have been engaged in overseas trust business for a long time and have a wide range of historical cases, are better aware of the advantages and disadvantages of trust systems, legal environment and political environment in overseas countries. In order to choose a more suitable area for the purpose of setting up.
The third is to see if there are branches in the overseas trust to set up a destination.
On the one hand, some countries require that the trustee of the trust be a local company or a trust-controlled offshore company director needs to have a national citizen, etc. If the commissioned institution does not have a branch in the local area, there may be a double commission, that is, the trust institution re-trusts the trust. To the local trust institutions, such trust management operations are chaotic, which is not conducive to asset management.
On the other hand, the trust institutions with local subsidiaries are more familiar with the local investment environment, policy and legal environment, which is more conducive to investment and operation, and is more convenient to provide follow-up trust services.
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