MBR_ISSUE 52_JUNE-compressed (5)

Malta Business Review
SPOTLIGHT: CHINA
China:
NOWHERE TO HIDE...
By Claire Coe Smith
A raft of changes to the Chinese tax system that
came into effect on 1 January 2019 have created
work for wealth advisers in the region.
As the number of billionaires in China continues to escalate,
reaching 476 in 2018, second only to the United States
with 585 and well ahead of India in third place with 131,
according to Forbes, the government has moved to cut
taxes for the masses by pursuing the assets of the wealthy.
New rules mean owners of offshore companies will not only pay
tax on dividends but also up to 20 per cent on corporate profits,
and taxes on overseas earnings will now be payable by all Chinese
nationals, where previously they could be avoided if individuals also
held foreign passports.
Clifford Ng, co-managing partner with the law firm Zhong Lun, says:
“The tax changes have prompted a lot of people to restructure
their offshore assets, including setting up trusts. Moving forward
in 2019, we expect more clarification from the Chinese tax
authorities on implementation, to find out how the law will be
administered. There will also be people that were caught off guard
and did not act before the rules took effect and will now look to
take remedial action.”
The impact of the Common Reporting Standard (CRS) in China is
also now being felt, with information related to tax on financial
accounts being exchanged between China and other countries
as of September 2018. The Chinese tax authorities can see the
overseas incomes of residents, including all sources of wealth, for
the first time. Philip Marcovici, a consultant to global families on
tax and wealth management, says: “Continuing tax compliance and
information exchange is having an impact, with families connected
to Mainland China being much more conscious of needing to focus
on what the regulations actually require and what needs to be done.
There is a lot more focus on the tax laws and the residency laws,
and an increased use of wealth planning, including trusts strategies
but also planning that relates to choices of where family members
might choose to live.”
Ng adds: “The client base is clearly becoming alert to the fact that
the Chinese tax authorities are going to look at offshore assets, so
I expect we will see a lot more new work for high net-worth clients
with assets offshore.”
Michael Olesnicky, a leading tax adviser in Hong Kong, has just
returned to work at law firm Baker McKenzie after several years with
KPMG. He says the private wealth industry in Hong Kong is currently
busy working for Chinese clients for three reasons: the economic
substance laws in offshore jurisdictions impacting clients with
offshore companies; the recent fundamental changes to China’s
income tax laws; and much more transparency for the Chinese
tax authorities. He says: “As a result of CRS, in April the Chinese
authorities received information from 75 jurisdictions about the
bank accounts and securities of resident Chinese in those countries.
With the new laws, they now have more powers to investigate and
challenge those structures, so the question is what they will do and
how long it will take them to process what they now have.”
At the same time, the ongoing trade war between the US and China,
which began when the US launched an investigation into Chinese
trade policies in 2017, is also impacting clients. The US has so far
imposed three rounds of tariffs on Chinese goods, covering a wide
range of industrial and consumer items.
Hubert Tse, partner with the law firm Boss Young in Shanghai, says:
“The Renminbi has depreciated quite a lot versus the greenback,
and that always has an effect on people looking at their long-term
assets. The trade war itself has been going on for a while now and
there are a lot of uncertainties there, but the consensus is that the
worst is probably over. Still, people are delaying decisions about,
for example, buying assets in the US, and at the same time the US
market itself may be more hostile to Chinese activity, so people
might look elsewhere.”
While Chinese economic growth may have slowed, a report by
Business Insider US estimates the country creates a new billionaire
every three days, noting that 97 per cent of Chinese billionaires
are self-made and, being 56 years old on average, they are about a
decade younger than their American counterparts.
Tse says: “Just like elsewhere, the wealthy Chinese are focused on
guarding their wealth and preserving it, and given the different
economic, financial and political risks they face, they often want to
diversify their assets. Wealth creation continues, particularly in real
estate, technology and via the stock markets, and that drives the
purchase of assets – mostly properties – outside of China, in Hong
Kong, Singapore, europe, the UK, America and Canada.”
As a result of the growing wealth there is a move towards the
greater use of family offices in the region. Tim George, a partner
with the private client and tax team at Withers in Hong Kong, says:
“People are talking much more about family offices. We see more
families starting to think about setting up proper single family
offices and I expect that to grow. Alongside that, we are getting
more families prepared to pool resources and look at proper family
fund structures.”
Several bodies are lobbying the Hong Kong authorities to introduce
similar incentives for family offices to those now in place in
Singapore, where the Finance Minister announced in February
that tax exemptions already in place for family offices are to be
extended. “Singapore has undoubtedly been first to market in the
family office space with its regime,” says George. “But there are now
more millionaires worth more than $30 million in Hong Kong than
there are in London or New York, so this is still a global hub for the
world’s wealthy.”
One big change for the wealth industry in Hong Kong has been the
introduction of a licensing regime for trusts and corporate service
providers last year, which has led to a flurry of enforcement action.
Joanna Caen, partner with Herbert Smith Freehills in Hong Kong
and head of the Greater China trusts and estates practice, says: “We
are working with a couple of businesses affected by enforcement
action, where they had looked at the companies within their group
and thought that while some definitely would need licenses and
some wouldn’t, there were some they were not sure about. The
regulators are now coming down hard on instances where licenses
were not sought and perhaps should have been, and we have seen 22
prosecutions already in the first year of the regime, with potentially
quite significant implications for the individuals involved.”
With new tax rules and the arrival of CRS forcing a drive towards
more sophisticated structuring in China and Hong Kong, just as the
macro-political climate is bringing new challenges to cross-border
asset allocations, wealth advisers find their practices busier than
ever. MBR
Credit: Citywealth
22