China has an established trusts law and Chinese law trusts are regularly used as a collective investment vehicle by investors seeking to pool funds together for investment. However, due to constraints of Chinese law, Chinese investors are not afforded the same level of flexibility around trust creation in China as we see in other parts of the world.
Chinese trusts are limited to holding cash-based assets and cannot hold real estate or company shares. With real estate playing a major part in many investors' portfolios, and with successful Chinese entrepreneurs thinking ahead to initial public offerings in respect of their companies, it is no surprise that Chinese investors look beyond domestic trusts to meet their wealth structuring needs.
Additionally, for Chinese investors considering their philanthropic goals, whilst charitable trusts are permitted in China, they are rarely used in practice, with the result that the breadth of knowledge and expertise in charitable structures are not as prevalent in China as in other jurisdictions.
Countries across the globe seek to offer both commercial and charitable wealth structuring solutions to international investors, with onshore jurisdictions, New York, London and Shanghai topping the rankings for finance centres worldwide. However, it is the key offshore jurisdictions, Jersey, the British Virgin Islands, Cayman Islands and Guernsey, that have stood out when it comes to understanding the importance of having legislation and wealth structuring options that are flexible and easy to understand, so as to best serve the needs of international investors.
Some of the standout features of these key offshore jurisdictions include:
- Freedom of asset classes
Subject to very few limitations, offshore trusts can hold all classes of assets, including cash based assets, real estate and company shares. It is common practice for offshore trusts to hold shares in multiple companies that, in turn, hold the underlying assets of the trusts. This is beneficial for Chinese investors who have assets across the globe, allowing individual assets to be held in the most appropriate vehicle and located in the most appropriate jurisdiction for that asset, whilst allowing common administration and ownership at the top of the structure.
- The ability to preserve a level of control
The key offshore jurisdictions recognise that it is important to investors, particularly to Chinese investors, to have the ability to preserve a level of control over the ongoing operation of their wealth structures.
The laws of the key offshore jurisdictions provide for this in a number of ways, such as
- The ability for investors to reserve powers in relation to trust structures is enshrined in statute;
- Standard trust deeds include provisions relieving trustees from a duty to interfere with underlying companies, allowing investors to operate the companies free from external influence;
- Private trust companies, which are exempt from certain regulatory requirements, can be established to allow investors to play a key role in the trusteeship of their trusts.
- Freedom of testation
Assets held in offshore trusts will not form part of the investors' estate and will not be subject to the Chinese statutory succession rules, giving the investor the freedom to direct who shall ultimately benefit from the assets.
The key offshore jurisdictions also offer protection from foreign judgments in respect of the trust assets, under what is commonly referred to as "firewall" provisions. This should serve to protect assets held in such offshore trusts from China's limited forced heirship claims by dependents who are deemed to be otherwise unable to support themselves.
- Tax Neutrality
Generally, provided all beneficiaries of an offshore trust are not resident in the country in which it has been established, the trust will not be subject to income, capital gains, corporation, inheritance, wealth or gift tax in the relevant offshore jurisdiction.
This tax neutral position allows Chinese investors to secure the benefits of offshore trusts without imposing any additional tax costs to the investor.
There are no public filing requirements in the offshore jurisdiction and there is no public register of trusts. Trust documents do not need to be filed with any public authorities (although certain beneficial ownership information needs to be disclosed), so they remain confidential documents. This allows clients to maintain a high level of confidentiality in respect of their personal and business matters.
- Charitable Structures
The offshore jurisdictions offer a number of options for investors seeking to deliver on their philanthropic goals, including:
- Charitable discretionary trusts;
- Charitable purpose trusts; and
- Charitable foundations.
The legislation in the key offshore jurisdictions is so flexible that investors may adopt a combined approach, permitting both charitable and non-charitable beneficiaries or purposes, as the case may be, within the one structure.
This flexibility, together with experienced advisors in the area, makes the key offshore jurisdictions a popular choice for Chinese investors establishing charitable structures.
Overall, Chinese trusts provide a structuring solution to Chinese investors seeking to make a collective investment with other individuals. Whilst China does have its own trust law, the law is still in its infancy as compared with the key offshore jurisdictions. Therefore, when it comes to considering longer-term succession and wealth planning in respect of other investments, and when hoping to give effect to philanthropic goals, the wealth structuring solutions offered by Jersey, the British Virgin Islands, Cayman Islands and Guernsey may better meet a Chinese investor's needs.