Foreign Trust Structures for PRC Citizens
Although there is no estate tax in China, many Chinese high net worth individuals are using foreign trusts to structure their assets. Chinese investors owning or purchasing assets outside of China are exposed to inheritance laws and taxes in the jurisdictions where they purchase their assets. Trusts ensure that assets can be transferred to the intended beneficiaries with the least administrative and tax burden.
The Value of Foreign Trusts for PRC Citizens
An offshore trust is created when assets are transferred to a trustee. The trustee becomes the legal owner and is responsible for managing the assets and distributing them to the beneficiaries of the offshore trust (which could include the person or corporation that transferred the assets to the trustee) in accordance with the terms of the trust deed.
A trust is used to:
  • Preserve wealth against political, economic or family uncertainty.
  • Transfer wealth to heirs in a tax-efficient manner.
  • Plan an estate to maximize the benefits of their wealth for family members and others.
  • Transfer wealth to a person’s heirs in accordance with that person’s wishes and not in accordance with the laws of the country where they live.
  • Consolidate the ownership of assets owned throughout the world in one location.
  • Centralise reporting.
  • Minimise or eliminate estate taxes arising on the death of the settlor.
  • Provide asset protection in the case of lawsuits
Based on current tax laws and regulations in effect in China, a foreign trust should not be considered as a taxable entity in China. Income from the trust property of a foreign trust should not be subject to tax in China unless its trustees are considered as resident enterprises or have created a permanent establishment in China, or derive passive income from China.
To avoid adverse PRC tax implications, it is important that the trustee of a trust, protector companies and holding companies that hold the trust property, are entities incorporated outside China and that their effective management and control not be located in China.
Typical Foreign Trust Structure for PRC Citizens
In a typical foreign trust structure, the parties to the trust will have to consider several factors. Of paramount importance are the jurisdiction and the governing law of the trust. These will likely have impact on the rights and interests of parties to the trust, including tax implications, clarity and enforceability of their rights.
For purposes of this bulletin, we will use the trust regime in Singapore as an example. The trust regime in Singapore is regulated and professional trustees must be licensed and subject to regulatory oversight. Under Singapore trust laws, settlors can reserve to themselves the powers of investment. As a result, a client can still have an active role in managing the investments. Singapore trusts also allow the appointment of a protector (who can also be the client) who can supervise the activities of the trustees in certain areas. In certain civil jurisdictions, forced heirship is a common issue and this can be addressed under Singapore trust law, which has anti-forced heirship provisions. Additionally, Singapore has strict client confidentiality and banking secrecy laws.
Trusts where the settlor and beneficiaries are neither citizens of Singapore nor resident in Singapore can qualify as a foreign trust under Singapore tax law, which means that a wide range of trust income (including most types of income or gains from financial instruments) will be tax exempt in Singapore. Beneficiaries will not be taxed in Singapore upon the receipt of such exempt income.
Trust structure involving underlying entities established in other jurisdictions will also benefit from the extensive double taxation agreements that Singapore has entered into with other countries. As at the date of this bulletin, Singapore has signed and ratified sixty-nine DTAs.
A typical foreign trust structure is shown below:
What Amicorp can Do for You
As a global corporate and trust service provider, Amicorp can:
  • Set up entities in over 30 jurisdictions, and provide ongoing administration services.
  • Provide resident director and directorial services.
  • Set up trust structures and act as trustee.
  • Help with other corporate and trust services.
PRC Tax Implications on Foreign Trusts for PRC Citizens
Taxability of Contribution to Foreign Trusts
1) On the Contributor (i.e., the settlor of a trust)
Cash contribution by a PRC citizen or the foreign entity held by a PRC citizen will not trigger any PRC tax liability.
Non-cash contribution (usually shares in an overseas company or real estate in foreign jurisdictions) by a PRC citizen likely will not trigger PRC individual income tax liability, as PRC does not impose gift taxes on individuals. However, uncertainty will arise in case the PRC tax authority deems the contribution as a non bona fide commercial activity. Whether the same contribution by a foreign entity, which is held by a PRC citizen and owns the shares in the first-mentioned foreign company or the real estates, will trigger PRC corporate income tax liability depends on whether the foreign entity is regarded as a PRC tax resident enterprise. If so, then PRC corporate income tax liability may arise, which is to say, the contribution of shares or real estate will be regarded as being sold to the trustee at a fair market value. However, the contributed shares and real estate are not assets located in China, therefore there is no other tax liabilities arising.
Nevertheless, if contributed shares cause the direct or indirect transfer of shares in a PRC resident company, then according to PRC SAT Circular 698, the share transfer caused by the contribution needs to be reported to the PRC SAT, even though the contributor is a foreign and non-PRC resident entity. Whether such reporting will cause any tax liability is uncertain.
2) On Foreign Trusts
As a trust is a contractual arrangement and should not be viewed as an entity under PRC corporate income tax law. Therefore no tax liability will arise on the foreign trusts.
3) On Trustee of Foreign Trusts
The trustee of a foreign trust will usually be a professional trust company. The trustee rather than the trust itself will hold the assets contributed by the settlor.
Usually the trustee will not be subject to PRC corporate income tax for receiving the contribution, unless the contribution is from a PRC tax resident or the assets contributed are shares in a PRC resident company, which are still under controversy.
4) On the Beneficiaries
The beneficiaries will usually be individuals appointed by the settler. Under the current PRC tax regime, mere appointment of the beneficiaries will not cause PRC tax liabilities on such beneficiaries.
Taxability of Operation of the Foreign Trusts
1) On the Trust
Again, as the trust is only a contractual arrangement but not a taxable entity, there should be no PRC tax implication on the trust itself.
2) On the Trustee
The trustee or the underlying entity of the trust (which is usually set up and held by the trustee) will be subject to PRC corporate income tax under one of the following circumstances:
  • The trustee is regarded as a PRC tax resident (i.e., management and control in China).
  • The trustee is deemed to create a permanent establishment in China.
  • The trustee derives China-sourced incomes (e.g., dividends from holding and gains from transferring shares in a PRC resident company).
Otherwise, the trustee should not have PRC income tax liability.
3) On the Beneficiaries
Again, before the distribution of interest from the trust, the beneficiaries should not be subject to PRC taxes.
Taxability of Distribution of the Foreign Trusts
1) On the Trust and the Trustee
There should be neither PRC tax liability nor reporting obligation on the trust itself or the trustee for distributions to the beneficiaries.
2) On the Beneficiaries
Although still controversial, it is likely that the distribution received by the individual beneficiaries will be taxable in China and subject to 20% PRC individual income tax.
Taxability of Termination of the Foreign Trusts
1) On the Trust and the Trustee
There should be no PRC tax liability on the trust itself or the trustee, unless the trustee is a PRC tax resident, where the trustee may be subjected to PRC corporate income tax on its transfer of non-cash assets for no consideration.
2) On the Settlor and the Beneficiaries
Whether the settlor or the beneficiaries are taxable depends on whether they receive assets (usually for no consideration) from the trust. If they do, they are likely to be taxed.
Derk Scheltema
Amicorp Shanghai
Deqi Chen
Amicorp Shanghai
Boon Kheng Chew
Amicorp Singapore
Kit-wah Poon
Amicorp Hong Kong
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