Chinese HNW and UHNW Clients – Wealth Structuring & Planning for the World Ahead
Mar 27, 2022
One thing we know for sure as 2022 advances is that in 2021 there was a sea change in the approach of the authorities in China, with regulatory crackdowns across multiple sectors and the announcement of the national thrust to Common Prosperity. Whether this will mean significant change for China’s wealthy, or whether all this is more ‘optical’ than impactful, only time will tell. But China’s HNWIs and UHNWIs and their families ignore these dramatic events and changes at their peril and should be organising their estate and legacy planning and structures in anticipation of more changes to come. The Hubbis Digital Dialogue of February 24th mined down into the evolution of carefully planned and well-executed estate and succession planning, set within the context of the evolution of the wealth management industry in Mainland China and amidst the implications of the events of 2021.
- John Shoemaker, Registered Foreign Lawyer, Butler Snow
- Lee Woon Shiu, Managing Director & Group Head of Wealth Planning, Family Office & Insurance Solutions, DBS Private Banking
- Wei Kang, Partner, Stephenson Harwood
- Katrina Leung, Associate Director, Trust Services, Trident Trust
- Hengka (Henry) Ji, Partner, Zhong Lun Law Firm
These are some of the questions the panel addressed:
- How should we interpret the major unforeseen changes in China in 2021, and what does it all mean for 2022 and beyond for China’s wealthy private clients?
- What is the attitude of the government towards significant onshore and offshore wealth, and are we likely to see inheritance tax, higher income and capital gains tax and so forth?
- Could there be a drive to encourage, or possibly demand, private offshore wealth return to China?
- How are China’s business founders, patriarchs, matriarchs and their families nowadays handling their estate and family business succession needs?
- Is it likely the government will change tax rules to encourage more onshore wealth management and to promote more formalised estate and legacy planning in China?
- Is the wealth management industry paying sufficient attention to these issues and addressing these matters directly with their clients?
- How does the wealth advisory community deliver advice and structures across multiple jurisdictions if the Mainland China clients and/or their families are more globally diversified, as they so often are?
- How are the private bankers and independent wealth management experts working with lawyers, trustees and other specialist advisors to help create and execute successful succession plans and legacy structures that are also compliant with current regulations and tax rules?
- How closely involved are the second and third generations be in this estate and succession planning, and how involved should they be?
- How do life insurance solutions work alongside effective estate and legacy planning, and what solutions are popular or increasing in prominence?
- Which jurisdictions do Chinese clients prefer to utilise for their wealth planning, trust structures and Insurance, and why?
- What role does Residency/Citizenship planning play in the overall estate and legacy planning?
Setting the Scene
The sudden new thrust by the Chinese government to Common Prosperity signals that the state believes Chinese’ dramatic economic advances have been unfairly distributed. Nobody yet knows how this will all play out, but added to the regulatory changes on the technology and education sectors in particular signal that a redistribution of wealth is on the cards.
For example, the long-mooted arrival of inheritance tax is now more likely than before, as China’s government seeks to redress some of the societal imbalances that have seen wealth unevenly distributed across the vast and populous nation. There could be another form of wealth tax, as well, or perhaps instead.
Some people talk of an Indonesia-style tax amnesty to encourage or possibly demand Chinese citizens repatriate wealth that they have shifted offshore over a number of years.
There is talk also of higher income tax and capital gains taxes to take a higher share of revenues from China’s wealthy and redistribute money to the poorer segments of society. So, what does this all mean for wealth, estate and legacy planning & structuring in China and offshore for Chinese individuals and families with assets offshore or with such plans afoot?
Well, there is no doubt that wealth, estate and succession planning solutions are key areas enjoying increasing emphasis in the wealth management market across the Asia region, where private wealth has been increasing so rapidly, even in many cases throughout the pandemic.
The older generations holding so much of the ‘older’ wealth and traditional businesses are being supplanted and supplemented by the vast and rapidly growing suite of wealthy and often uber-rich entrepreneurs across the country.
And more and more of the younger generations are returning from overseas armed with their Western education and plans for the future, ready both to inherit some of China’s vast private wealth and to build the enterprises to create tomorrow's economic dynamism.
Accordingly, and set against the backdrop of a China that could be significantly different in the years ahead, there is greater urgency than ever to address these many questions and to devise the right approaches and the right structures to mitigate the impact of these many changes that have taken place, and that might soon transpire.
The Big Picture – Wealthy PRC clients and families are in a state of questioning how to position themselves
An expert opened proceedings with the simple statement that clients are trying to navigate all of the instability factors, whether those are politics, economics, markets, the pandemic and so forth. “They are seeking to plan and structure their wealth as best they can today, but be forward-thinking and flexible to accommodate future instabilities,” they explained.
Another guest concurred, remarking that with so many regulatory changes, reforms and other events in 2021, clients are greatly concerned about what will happen to them and how their wealth, both onshore or offshore, will be impacted.
“Yes, these clients are more and more aware of the need to protect their assets, and to diversify their jurisdictions and structures, being aware of the geopolitics and other key issues,” an expert remarked. “We have certainly seen an uptick in the number of Chinese clients who want to structure their assets, even to allocate a part of them to philanthropy, charitable work, and so forth, partially because of the Common Prosperity drive in China, and partially because of the awareness that if you don't go with the trends, there may be consequences. There are many complex cross border planning and structuring issues to address.”
Pre-emptive planning is essential, and then agility of approach and structures are vital
A banker observed that the last two years have clearly taught all the high net worth families in China and the advisory community that policy changes can hit swift, and they can hit hard. “This underscores our advice to clients to plan pre-emptively,” he told delegates. “For clients who are keen to do offshore structuring and restructuring of their onshore wealth, the best time to start was obviously yesterday, the next best time is today. In this region, Singapore, and Hong Kong offer great potential for structures and the right types of jurisdictions.”
There are many Chinese HNW and UHNW clients who need guidance on the US
Expert Opinion - John Shoemaker, Registered Foreign Lawyer, Butler Snow: “We continue to see a large demand for US Green Cards and the US citizenship naturalization process from mainland China based clients.”
A guest said that in trying to offer guidance on US issues to high net worth and ultra-high net worth families, there had been some notable maturation of the regulatory and the legal framework within China, whether changes in individual income tax, or the beginnings of the development of robust onshore trust laws. “As that takes place, it's becoming easier to work with local counsel and get clarity,” he reported. “This helps us, the clients and the onshore advisors.”
He added that US privacy laws are appealing to Chinese clients, given in particular the regulatory and social thrusts away from banking and other privacy in Europe. “To some extent the US is seen by these clients as a jurisdiction where they think they have maybe a heightened sense of privacy, or protection or greater certainty,” he said. “However, perhaps that might be changing in the US, with the rise of new corporate transparency rules there. But all in all, the situation is quite good for the clients, for advisors regarding the ongoing improvements and developing greater certainty.”
Expert Opinion – Katrina Leung, Associate Director, Trust Services, Trident Trust: “As to how closely involved the second and third generations are or should be in estate and succession planning, this varies considerably. Some families (more often the case) want to involve their second and other generations. As trustee and long-term professional partner of clients, we try to weave this into conversation as appropriate, not just at the beginning of planning process but throughout the relationship. Frankly it’s too costly to not involve younger generation, as well as short-sighted. If and when engaged, this topic of family governance can be a salient feature in planning and presents quite an excellent opportunity to discuss topics that truly matter for clients.”
Expert Opinion - John Shoemaker, Registered Foreign Lawyer, Butler Snow: “The development of onshore trust regulations in China has really assisted foreign law practitioners in driving home compliance risks to mainland China based clients.”
Wealthy Chinese clients are increasingly global in their assets and their activities, so wealth structuring is a growth business
A lawyer remarked how diversified wealthy Chinese clients had become in terms of their properties, other assets, their businesses, lifestyles, family members’ residence situations, education for younger generations, and so forth. “Our clients need to integrate their planning but keep businesses and personal/family to some extent separate,” he reported. “But often their lives and their businesses commingle, and it is all more complicated. There is usually not only a single legal issue; you need a team to work together and to provide their perspectives and finally, provide some of the solutions to clients. Hence, all the solutions will need different kinds of advisors - we need private bankers, we need tax advisors, lawyers from different jurisdictions.”
The Hubbis Post-Event Survey
Do you think the (quite surprising) regulatory developments seen in China during 2021 and the thrust to common prosperity will change the approach of China’s wealthy private clients to wealth and estate structuring? Why or why not?
Comment: The overwhelming response was ‘Yes’ with only a sprinkling of ‘no’ replies. We have selected some of the key replies and summarised them as follows:
“As the core of the common prosperity policy is a campaign aimed to redress income inequality in China, and the system encourages ‘third distribution’ by creating opportunities for the wealthy group of individuals and enterprises to give back to society, i.e. through philanthropy, voluntary gifts and charitable donations, this will inevitably change the approach of China's wealthy private clients to wealth and estate restructuring.”
“This will definitely impact the attitudes of China’s wealthy private clients to wealth and estate structuring, as structures in particular offshore ones which minimise tax, are frowned upon as not ethical or moral and not in line with the common prosperity narrative. We expect more clients will prefer onshore structures to be set up instead of offshore structures.”
“I think this will draw some high net-worth clients to arrange more robust and more compliant wealth planning immediately.
“I do not see this changing anything really. I have been in the industry long enough and have always believed that this will be coming. Hence, we have always been advising clients to take appropriate steps in their wealth planning. The regulatory developments will not change the approach but will endorse and accelerate actions to be taken.”
“Yes, wealthy Chinese clients will be more aware the importance of getting professionals to help with proper and comprehensive structure advice for wealth and succession planning to cover all areas to avoid future challenges.”
“Yes. there has been an inflection point in China under common prosperity era which will have deep implications in China for business front and wealth planning. Regulations, tax, wealth planning and many financial related services will need to adapt and ride on with all the new changes.”
“Private clients in China may have to be politically correct and provide portions of their wealth for donations. This will affect their overall wealth and legacy planning.”
“There will surely be a crackdown forthcoming on non-compliant people who abuse the system and they will therefore try and regularise their positions with better and more forward-looking structures.”
“Many clients are already looking for ways through trust and other structures to protect their wealth as they now see that the Chinese Government will seize their wealth if any wrongdoing is detected.”
“Yes, given the country is trying to distribute wealth more evenly they might increase the tax payment from the elite to fund other projects and through wealth redistribution.”
“With the common prosperity policy there is speculation that China is likely to push forward implementation of certain direct taxes, such as real estate and inheritance taxes (typically affecting the HNW and UHNW individuals) as these are easy ways to stop the wealth gap from expanding. The general sentiment is that implementing such direct taxes will help to regulate the distribution of wealth, and hence, is consistent with the country's current direction of tax reform. This will drive structures and compliance as well.”
“China is an aging population with slower growth in the decades to come. This will also mean that China will have to see some changes in the tax related areas to be more efficient in the distribution of the wealth among all the income buckets. But at the same time, China will need to find a balance between growth and challenges in order to keep its global competitiveness and continue to open up the financial markets including more liberalised wealth management. So, it's all a question of pace and differentiation. All in all, we see more opportunities coming out of these moves the government has been making, especially in wealth and estate structuring and more activity onshore.”
“Wealth disparity at a high point may lead to serious social unrest, something we seen happening in Hong Kong, for example. A vast and populous country like China will definitely look closely to wealth taxation to narrow the income disparity between the rich and the ordinary citizens. Keeping this income disparity balanced is key to peace and prosperity for all people of China for the long run. We therefore expect new taxes and there is a concomitant drive already towards more professional structuring amongst wealthy clients to improve their ability to handle their wealth today and to pass on their wealth for the future generations.”
Cross-border complexities require diverse expertise and a personal approach to reassure clients
Another expert agreed. “The cross-border nature of the structuring issues requires us all to appreciate where we can advise and where we need to tap into other expertise and knowledge,” they said. “I think we can all agree that the technical, the tax, the legal issues, the reporting, compliance issues are all extremely complex and important. So, taking a family's hand and guiding them through all that is extremely important; you have to get them over the starting line. Technical ability is vital, but so too the personal approach and the right team members.”
“Yes, I think that the panellists will agree with me that there's probably no single HNW family with family members from one jurisdiction only, I mean extended family,” another expert commented. “There are legal issues, but also complexity around how they make decisions. They then need to structure compliantly for their residence status, their tax status, their future plans, and so forth. So, I agree that they need to turn to a group of experts, be it wealth planners of the banks, or trustees, accountants, lawyers, tax lawyers. They need to holistic view and holistic solutions.”
Hong Kong remains a key jurisdiction for Chinese wealth, but clients should structure across several jurisdictions
A panellist observed that Hong Kong, from a tax and regulatory perspective, is still an attractive option in terms of residency, partly because for the mainland families most of their businesses have something to do with Hong Kong, and it is relatively easy for them to get a Hong Kong residence card, assuming that they are willing to be in Hong Kong and establish some ties in Hong Kong. “Having that residency gives them all the advantages in terms of tax, in terms of CRS, and compliance in general,” he said. But just like any other jurisdiction, no structure should focus on Hong Kong only. Hong Kong can be a key element, but they need a holistic view and overall structure for holding the family wealth.”
Expert Opinion – Katrina Leung, Associate Director, Trust Services, Trident Trust: “On the question of the role do Residency and Citizenship planning in the overall estate and legacy planning, we consider this plays a big part.”
Tax clarity is at the core of many Chinese clients’ objectives, with management control and the assets appropriately segregated
“Many families that we speak with from China are seeking tax clarity, and certainty in their affairs,” said another guest. “We see more and more clients becoming very aware of the possibilities of separating ownership from management and control issues. They see the advantages of possibly a trust, coupled with a family office structure, to help achieve that demarcation of ownership from management and control with the overall result of being able to prove to their home tax offices what their situation actually is. For example, they might be resident in China, with their entire asset pool in two locations, perhaps Hong Kong and Singapore, and managed and controlled from those locations.”
He added that with Hong Kong announcing that they might even give tax exemption benefits for family offices, there is the potential for optimising tax exposures in both Singapore and Hong Kong. “And if at the ownership level of the structuring, you're able to add a structure like a trust on top of your assets, a holding structure in terms of ownership, then you can achieve a long-term tax deferral benefit as well. In short, all these mechanisms work hand in hand. But to achieve that you need the best team of advisors, not a single view.”
Chinese clients have a close eye on tax and other developments and pressures in Asia
Nevertheless, Chinese clients are watchful of pressures on government finances, fearful, for example, of perhaps a new wealth tax in Singapore or elsewhere. “We aim to pre-empt some of these clients’ issues and concerns and stay ahead of the curve, and to have solutions on offer or in place that address some of these potential concerns,” he explained. “Singapore did not announce a wealth tax in its recent budget, but it could still be on the radar.”
Expert Opinion - John Shoemaker, Registered Foreign Lawyer, Butler Snow: “The Singapore family office industry is a large beneficiary of the continuing maturation of the China Individual Income Tax and trust regulation regimes.”
Expert Opinion – Katrina Leung, Associate Director, Trust Services, Trident Trust: “Interpreting the major and somewhat unforeseen changes in China in 2021, and the implications for China’s wealthy private clients, most professionals in the industry expect more instability to come. While the instability can be very daunting it means future-proofing and prospective planning is important. Clients need a close eye on flexibility and the close guidance of experienced professionals.”
Life insurance solutions are increasingly valuable for optimised wealth structuring
Insurance for any country that has a hefty inheritance tax or wealth tax will remain very useful, a guest reported. “Clients from China are getting used to the fact that taxes will remain high in China for the foreseeable future, and potentially future taxes, such as estate duty taxes, could also be introduced there. And more clients from China are getting exposed to assets in the US, UK, and realise that despite using structures such as trusts, there is no way around gains and estate taxes for example on high-value UK real estate.
He advised that nuances on tax rules and trusts mean that PRC and indeed Taiwanese clients need to careful advice on life solutions and associated structures. Whether trusts are revocable or irrevocable structures, they could, he warned, be caught by the Controlled Foreign Company (CFC) rules.
“You have to look ultimately at the ownership of these policies such as PPLI and VUL policies,” he said. “If these are really held by offshore companies, then you might have CFC issues, and also if you structure these policies as being held by individual tax residents from PRC or Taiwan, then individual income tax exposure from holding these insurance solutions will still have to be addressed. In short, there is no simple solution for these currently.”
Having diversified residences and jurisdictions are also a key part of the planning protocol, but this is not a solution, it is only part of the solution
A banker explained that residency status and the implementation of CRS in China mean that more clients today understand that just having a passport in Malta, or perhaps in the Caribbean, while useful, do not necessarily achieve the right tax residency status for themselves or perhaps key family members.
“We see families planning programmes to enhance the residency status of key members in the family,” he reported. “This is not random, as they are choosing countries like Hong Kong, like Singapore, or perhaps increasingly Dubai as well. Chinese clients are more aware of these potential options out there and leveraging their advisors for optimal advice.”
Expert Opinion – Katrina Leung, Associate Director, Trust Services, Trident Trust: “To establish robust structures across multiple jurisdictions if the Mainland China clients and/or their families are more globally diversified, as they so often are means the advisory community must pull together. Knowing and working closely with the right experts is so important. Know what you know, but more importantly know what you don’t know to spot issues and be proactive to navigate with confidence but also with measured approach where uncertainty is unavoidable.”
The days of tax avoidance are well and truly over for those wanting to base themselves or their assets in well-organised and well-regulated countries
“The goal is not zero tax,” this same banker added. “Tax avoidance is simply not possible with banking laws and regulations as they are. There is increasing pressure from the global minimum corporate tax rate, for more concise definitions of income and gains. But people can look for tax minimisation and efficiency, for clarity and certainty. I agree the US can be an excellent area to move assets to or to move a business operation to, but you need to know going into it that there will be some disclosure; you can't hide illegality. And you're going to be facing a minimal tax rate, not a zero tax rate.”
A lawyer agreed with those comments, noting that there are still PRC clients today who start the conversations on the assumption that zero tax is possible. “There is a need for education and for them to understand that even for some jurisdictions that have territorial tax regimes, like Singapore and Hong Kong, do not expect to pay no tax overall. And there is no simple structure, no cheap structure that can achieve all the objectives given the current trends and complexities.”
Could China introduce an Indonesia-style tax amnesty to draw offshore funds back home? Possibly yes, but there is no evidence as yet…
A lawyer reported that although for many years PRC clients wanted to move funds offshore, a good number are now ready to move funds back onshore, even though they might now incur the 20% individual income tax. “My goal is not just to help clients to save tax, but to meet their overview, private needs, including the younger generations, who see China as offering great potential for making more money.”
He said that as yet there is now clarity on potential inheritance or estate taxes in China, or even a tax amnesty.
However, he said the authorities are clamping down on hidden returns, for example those who make significant money through online sales through WeChat, Tok-Tok and so forth. “The authorities are expediting the Golden Tax System, which is designed to identify tax evasion cases,” he reported, “and clients are getting caught up in these. The taxes might already have existed, but the inspections and tighter oversight are new.”
Another guest concurred, noting that everybody is becoming quite sensitive to different regulatory strong-arm measures and more vigorous enforcement in the PRC domestically.
Are there major advantages for PRC HNWIs and UHNWIs to become Hong Kong residents?
A lawyer answered by noting that Hong Kong has a territorial tax system. This means for a company that is managed by Hong Kong, being a Hong Kong tax resident, first of all, it has a low corporate tax rate, and second if the income is from offshore, there's no Hong Kong tax. “And with many double tax treaties, the withholding tax can be mitigated,” he reported. “At the personal level, Hong Kong has the top tax rates for personal income taxes of only 17% and it's an incremental tax rate. There is also no capital gains tax, and no tax on interest payments.”
He added that if someone sets up trust structures in Hong Kong and is a resident there, distributions from the trusts are often tax free, and remarked that Hong Kong is very friendly on tax compared with many other jurisdictions. it is ideal in terms of tax.
Hong Kong is more closely in line with the types of family office incentives offered by Singapore
An expert noted that after consulting the asset management industry, the government will be tabling certain amendments to the tax code in Hong Kong, with the eventual result that family offices which are managed by single family offices in Hong Kong will also enjoy attractive tax concessions from the financial year 2022-2023 onwards. “I think this may bring the Hong Kong and Singapore single family office tax treatments into a more level playing field,” he commented.
He noted however that while Hong Kong requires a number of years for residency, in Singapore this is possible immediately if the client brings enough assets, around SGD200 million, under the Global Investor Programme managed by the Singapore Economic Development Board.
“I think both jurisdictions are appealing to different families for different reasons, and we do hear families actually setting up family offices in both jurisdictions, and there are advantages to each.”
Deregistration is an important part of establish alternative residence in other jurisdictions
A lawyer noted that simply have another residence status or passport outside China is not necessarily enough. “Imagine a HNW client who has moved their family offshore to the US, but they are not deregistered. You need to technically go through every step to support the position you're taking. You can’t try to hang on and play both sides, for example to not be subject to PRC taxes but you want to have certain benefits of being from the PRC. You need to support every step with documentation to prove your status to inquisitive tax authorities all over.”
Another lawyer concurred, noting that the PRC ‘hukou’ must be deregistered, and the client must report and complete a settlement of all their PRC tax obligations to properly and permanently reside in another country or jurisdiction. “It is the same with the US, so anyone wanting to abandon their US residency or nationality has to go through all the documentary and tax and other legal procedures.”
Embarking on smart structuring requires starting clients with a straightforward and open conversation
“In general, there is an overall trend towards sophistication and more awareness of the key issues, and this has really accelerated over the last few years,” they reported. “To advance matters, we need to understand where they are on the learning curve, to be patient and understand their concerns and objectives. We need to align the technical solutions with their personal lives and priorities.”
They added that the solutions must also be forward-focused and flexible. “We have to tease out this information, to figure out their ultimate plans, where they see themselves in 5-10 years and beyond. No family can truly lay out all of these details for you, but the more you can get the better for all. And recognise that plans change, even by the end of year one, so structures that look good at the outset might need to be addressed and adapted as time goes by, and families evolve and the needs and hopes of those family members change.”
Philanthropy is a growing need for the wealthier PRC clients
The final comment went to a guest who reported that Common Prosperity had served to also highlight the growing inclination amongst some of the wealthier PRC clients. “Their priorities are coming more into focus and evolving,” they observed. “And again, planning today and solutions today need to be continuously monitored and updated to take into account changing needs, changing objectives amongst the different generations, and changing global and local regulations. Global families have complex cross border and other issues, and we need to be there for them along the way.”