Beyond the tipping point China

Transcription

1 Beyond the tipping point China Private Wealth Forum

2 We are Andri Manatschal Private Wealth and Entrepreneurs Partner Sergey Bezborodov Private Wealth and Entrepreneurs Director Houlu Yang Private Wealth and Entrepreneurs Senior Manager Chinese Specialist Yunyi Duan Switzerland, Zürich Manager Transfer Pricing & Value Chain Daniela Honegger Switzerland, Zürich Manager, International Tax Services, Corporate Clients Member Asia Business Group Jiaye You Switzerland, Zürich Senior Manager Transaction Services Member Asia Business Group

3 Agenda Section Overview Page 1 Tax transparency vs. tax residency 5 2 CFC watch out! 13 3 Tax relocation complex issue 17 4 Currency transfer 21 5 Succession planning tools 26 3

4 China New Era China Capital and outbound investment RMB: appreciation/ depreciation? Currency transfer control& RMB Internalization Consitutation/ rule by law AEoI /FATCA Very active on BEPS Controlled Foreign Corporation (CFC) TIN and revision of tax leving law Inheritance tax and real estate tax 4

5 Section 1 Tax transparency vs. tax residency 5

6 Old case 1 result with tax transparency? Facts Translation completed in 2004 but tax authority reopened in 2013 Tax authority closed the case because Trust BVI Buyer If happened now AEoI Circular 7 buyer withheld Place of effective management Substance over form HK PRC company 6

7 How money is used? with tax transparency Company $ Use Payment Real estate, arts, yacht, jet, etc Tax issue? Yes! Payment-deemed dividends distribution, 20% IIT in China Use-transfer pricing issue 7

8 AEoI for PRC clients PRC clients Access/ Review CH bank Report information Information exchanged Name, address, date and place of birth Jurisdictions of residence Account number Tax identification number (TIN) Account balance or value as of the end of the calendar year Interest, dividends Proceeds from the sale of Financial Assets PRC tax authority Transmission CH tax authority 8

9 Client situation Time split works? 1 2 St. Kitts and Nevis Malta 3 4 Cyprus 9

10 Where China Stands? Double Tax Treaties: 101 jurisdictions Multilateral Agreement on Mutual Administrative Assistance in Tax Matters: * Signed in August 2013 and verified on 1 July 2015 Exchange of Information Agreements: Bahamas, BVI, Isle of Man, Guernsey, Jersey, Bermuda, Argentina, Cayman, San Marino, Liechtenstein* BEPS: AEOI: Commitment for 2018 Active involvement; eager to implement * Not yet in force 10

11 Worldwide taxation of individuals Initiative to enforce worldwide taxation on individuals Worldwide taxation in China if: 1. Domiciled in China habitually live in China because of household registration (Huji), family, economic interest; or 2. Non-domicile, but lives in China for a full year. Temporary leave (single leave less than 30 days or cumulatively 90 days in a calendar year) is not counted Old rule new issue 11

12 Tax developments at a glance CFC? Worldwide taxation? SAFE Registration; More identifiable? 25% CIT place of effective management BEPS and TP: Limitation of deduction on Interest/ royalty/ service fees (if Hold Co2 is non-resident) Offshore Hold Co 1 Offshore Hold Co 2 PRC company 3 10% CIT (if non-resident) Buyer 12

13 Section 2 CFC watch out! 13

14 CFC Shandong case May 2015 China Co 1 HK1 China Subs HK2 HK1 transferred HK2 No dividends distribution to China Co1 by HK1 China Co1 applied to treat HK1 as PRC resident enterprise (dividends exemption vs. taxability of capital gains) PRC tax authority treated HK1 as CFC, thus impose tax on deemed distribution of dividends NL Buyer 14

15 CFC for private clients CFC for PRC companies is effective 1 January 2008 but was not strictly enforced Chinese shareholder: PRC resident individual and company with more than 10 per cent of the voting shares and jointly hold more than 50 per cent of the total shares of the foreign corporation; New measures (SAT Public Notice 2014 No.38) brings additional guidance to implement CFC CFC tax Chinese resident entity Voting rights 10%* Directly or indirectly Actual dividends paid in future CFC rules might become applicable to individuals in the future, then: 1. No tax deferral 2. Full disclosure Offshore Co Effective tax rate 12.5% Profits 15

16 Chinese CFC rule planning ideas Whitelist: U.S., U.K, France, Germany, Japan, Italy, Canada, Australia, India, South Africa, New Zealand and Norway. Active business exemption. If a CFC mainly derives income through active business activities, the imputation of tax rules would not apply. However, active business is not defined yet. Low profit exemption. If the annual profit of the CFC is not more than RMB 5 million, the imputation of tax rule would not apply. Trust/ foundation to avoid CFC? Change of PRC shareholders residency 16

17 Section 3 Tax relocation complex issue 17

18 Tax relocation substance St. Kitts and Nevis Is a hat enough? Malta Cyprus 18

19 Relocation Change of tax residence PRC Domestic Law Habitually liveis a legal concept, not similar to place of actual living Place of habitual abode in China if an individual has to return back to China after study, work, family visit, tourism, etc. No further clarification, no court/tax cases Tax Treaty Watch out Resident of a Contracting State - liable to tax because of domicile, residence Tie-breaker rule: permanent home, centre of vital interests, habitual abode, national, MAP. Problematic treaties: China- U.S. Issues: Double/ multiple taxation? Can one get rid of PRC domicile: household registration (huji), family residence, economic interest? 19

20 Tax relocation no easy task 2-3 years IIT has CFC AEoI 2018 Foreign passport- get rid of PRC passport FDI control on some industries Founder remains in China+ gift to other members/ trust BVI $ 20

21 Section 4 Currency transfer 21

22 Foreign Exchange Control for Individuals (from ) Foreign currency purchase or settlement via a bank s branch located in China is generally subject to an annual quota US$50, 000 or equivalent. US$50, 000 PRC >US$50, 000 Easy transfer Difficult to transfer Current Account Items Additional document to substantiate the authenticity but doable Capital Account items No rules were issued for outbound investment directly by individuals and in practice non-doable before SAFE Huifa 2014 No. 37 Circular 37 opens a door! Business-related costs the individual must also have business registration, foreign exchange account Non-business-related costs e.g., donation, alimony, inheritance income, royalty, service fee, salary, proceeds from foreign investment, etc. 22

23 China Outbound Investment Approval Simplified in National Development and Reform Commission (NDRC) NDRC approval has been removed except for limited specified sensitive industries/countries Approval has been turned into recordal/registration Investment amount over US$300 million registration with NDRC Investment amount less than US$300 million registration with NDRC s provincial subordinates Chinese Investor 2 Ministry of Commerce (MOFCOM) MOFCOM approval has been removed except for limited specified sensitive industries/ countries NDRC approval/ registration is no longer a precondition for MOFCOM approval/ registration 3 State Administration of Foreign Exchange (SAFE) SAFE registration is much simplified Individuals can make SAFE registration 23

24 Hypothetical case currency transfers with tax transparency A way of currency transfer before AEoI If happened now? PRC Sale for 50; on paper HK Or nominee Sale for 100; in substance Sale for 100; on paper Buyer (domestic or foreign) 24

25 Harvest Fund Special Quota PRC Foreign bank account Quota US$1 billion with comfort letters from State Administration of Foreign Exchange (SAFE) and China Securities Regulatory Commission (CSRC) separately Harvest Fund CNY SAFE + No cap of US$50, 000 No outbound investment procedure No restriction on the purpose of investment but need justifications Custodian Bank Trail program, experimental Legal basis is debatable Handling fee 1-1.5% 25

26 Section 5 Succession planning tools 26

27 Private investment company (PIC) PIC Can a PRC individual set up a foreign PIC? (outbound investment, project basis vs. private wealth planning) Exposed to PRC authorities (SAFE registration) CFC Double taxation (tax at PIC and PRC individuals) Place of effective management Succession of shares Asset protection Assets 27

28 Trust or Foundation PRC Pros Succession planning (key purpose) High degree of asset protection Separation of legal and economic ownership Protector InvestCo Trust HoldCo Trustee Cons Difficult to ensure that trust is setup and managed as discretionary and irrevocable Settlor cannot exercise effective control Perception issues (legal personality) Liquid Assets Business Assets 28

29 Thank you for your attention. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it All rights reserved. In this document, refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.