www.pwc.com/jp/e/tax Outbound Investment Series: Investing in Greater China
Agenda Section I. Section II. Section III. Hong Kong China Taiwan 2015 Asia Pacific Real Estate Conference 2
Section I Hong Kong Tax Update Typical Structure for Investing in Hong Kong Real Estate Hong Kong REIT Extended Hong Kong Profits Tax Exemption for Offshore Funds 2015 Asia Pacific Real Estate Conference 3
Typical inbound investment holding structure Offshore Hong Kong Overseas Investor BVI Co1 BVI Co2 Property Company (HK / BVI) Hong Kong property The typical holding structures for real estate in Hong Kong would include the use of a property holding company set up either in Hong Kong or in an offshore jurisdiction (e.g. the BVI). Same Hong Kong profits tax treatment applies irrespective of the place of incorporation of the property holding company The BVI holding company is interposed between the property holding company and the overseas investor to facilitate future exit 2015 Asia Pacific Real Estate Conference 4
Major Hong Kong Taxes Acquisition & Holding of Hong Kong Real Estate Investments Transaction Type of taxes Taxation basis Acquisition of real property Stamp Duty Ad valorem stamp duty Up to 8.5% on higher of sales consideration or market value on transfer of residential and nonresidential properties (seller and purchaser are jointly liable, but normally payable by the purchaser) Buyer s Stamp Duty 15% on higher of sales consideration or market value on transfer of residential properties unless specifically exempted (payable by the purchaser) Special Stamp Duty 20%, 15%, 10% or Nil would apply on transfer of residential properties (seller and purchaser are jointly liable), depending on the length of the holding period of the seller Leasing of real property Stamp Duty Profits Tax Others 0.25% to 1% of average yearly rent, depending on length of the tenancy 16.5% on assessable profits Government Rates at 5% on rateable value Government Rent at 3% on rateable value 2015 Asia Pacific Real Estate Conference 5
Major Hong Kong Taxes on Exit Exit strategy Type of taxes Taxation basis Disposal of real property Disposal of HK SPV Stamp Duty Profits Tax Stamp Duty Profits Tax Ad valorem stamp duty Up to 8.5% on higher of sales consideration or market value on transfer of residential and nonresidential properties (seller and purchaser are jointly liable, but normally payable by the purchaser) Special Stamp Duty 20%, 15%, 10% or Nil would apply on transfer of residential properties (seller and purchaser are jointly liable), depending on the length of the holding period of the seller 16.5% on disposal gain unless the gain is a capital gain 0.2% (0.1% payable by each of the seller and purchaser) based on the transfer consideration or the market value of the shares, whichever is higher Nil where seller is not carrying on business in Hong Kong Disposal of BVI SPV Stamp Duty Profits Tax Nil Nil where seller is not carrying on business in Hong Kong 2015 Asia Pacific Real Estate Conference 6
Hong Kong REIT Unitholders Exiting investment in offshore property via HK REIT listing: Hong Kong REIT Manager Management fee Management services HK REIT SPV Trustee fee Holds assets of HK REIT on trust for Unitholders Trustee No tax leakages in Hong Kong in respect of offshore property income Treaty benefits under applicable Hong Kong double tax treaty with offshore jurisdiction Offshore Property Manager Offshore Property 2015 Asia Pacific Real Estate Conference 7
Private Equity Funds Hong Kong Tax Exposures Carrying on business in HK; Derive HK sourced income; and Income is revenue in nature. NO No HK profits tax exposure YES Income subject to HK profits tax unless exempted 2015 Asia Pacific Real Estate Conference 8
Extended Offshore Fund Tax Exemption In 2013/14 budget, the Hong Kong Financial Secretary committed to extend the profits tax exemption for offshore funds to include transactions in private companies which do not hold any Hong Kong properties nor carry out any business in Hong Kong Extended Offshore Fund Exemption has taken effect from 1 April 2015. 2015 Asia Pacific Real Estate Conference 9
Offshore fund exempt from Hong Kong profits tax SPV (HK or non-hk) EPC (Non-HK) Offshore Fund SPV (HK or non-hk) EPC (Non-HK) Profit tax exemption extended to cover: Offshore fund centrally managed and controlled outside Hong Kong Income from specified transaction including transactions in excepted private companies ( EPC ) and special purpose vehicles ( SPVs ) that fulfil the relevant conditions Transactions carried out via a specified person or undertaken by a qualifying fund Non-HK Property Non-HK Property 2015 Asia Pacific Real Estate Conference 10
Section II China Tax Update China s Action Against RE Exit Transaction via Indirect Equity Transfer China Fund Raising for Foreign RE Fund Managers 2015 Asia Pacific Real Estate Conference 11
China s Action Against Real Estate Exit Transaction via Indirect Equity Transfer Seller Offshore Holdco PRC Assets in PRC Establishment China Taxable Properties Resident enterprise 2015 Asia Pacific Real Estate Conference 12
China s Action Against Real Estate Exit Transaction via Indirect Equity Transfer (cont d) Introduce GAAR CIT law & detailed implementation rules(2008) Set guidelines on GAAR admin Implementation Measures of Special Tax Adjustments (trial) (Guoshuifa [2009] No.2) Guoshuihan [2009] No.698 Use GAAR to attack indirect equity transfers Comprehensive guidance on the GAAR implementation Administrative Measures on GAAR (trial) (SAT Order No.32) (SAT Public Notice [2015]No.7) - Voluntary filing - Penalty on non-compliance - WH obligation on buyer Redefine tax rules on indirect transfer 2015 Asia Pacific Real Estate Conference 13
PN #7 4 Unfavourable Tests to Deem Indirect Equity Transfer as Taxable Transaction in China 1. Over 75% of the value of the overseas Co derived from Properties in China 2. Over 90% of the non-cash assets of the overseas Co derived from Properties in China; or Over 90% of its income derived from China ALL tests are met considered as having no reasonable commercial purpose 3. The overseas HoldCo perform limited functions and undertake limited risks 4. The overseas tax payable for the indirect transfer < potential 10% China tax burden on direct transfer 2015 Asia Pacific Real Estate Conference 14
How to Survive in the PN #7 Attack! Treaty Platform cannot protect capital gain taxation on indirect transfer of China RE Cos Other ways to mitigate offshore exit tax challenge Invest through convertible bonds, redeemable preferred stocks, warrants, options etc. Post-IPO Exit Pre-sale dividend stripping Carve out from sales proceeds special items, e.g. non-china considerations, exceptional compensation 2015 Asia Pacific Real Estate Conference 15
China Fund Raising for Foreign RE Fund Managers - QDLP Scheme Shanghai pilot QDLP launched in 2012 Qianhai QDIE goes live in 2015 Qingdao QDLP rules launched in 2015 2015 Asia Pacific Real Estate Conference 16
China Fund Raising for Foreign RE Fund Managers - QDLP Scheme (Cont d) Offshore securities markets Overseas PRC Offshore FMC Master Fund Qualified RMB Feeder Fund FX conversion Qualified Domestic Limited Partners Onshore FMC Individuals Corporate partners Investment flow 2015 Asia Pacific Real Estate Conference 17
QDLP Latest Development Latest major developments 1. Expanded scope of investments 2. Flexibility on RMB fund structure 3. A qualified RMB fund can raise funds from domestic and/or overseas investors 4. Qualified RMB fund can invest in overseas and domestic markets 5. Relaxing limitation of investment quota 6. Less requirements on FMC set up Offshore FMC Overseas PRC Onshore FMC Domestic investors Contractual Arrangement Master Fund Qualified RMB Fund FX conversion LPs Portfolio company Portfolio company Portfolio company 2015 Asia Pacific Real Estate Conference 18
Section III Taiwan Real Estate Tax 2015 Asia Pacific Real Estate Conference 19
I. Recent Tax Reform on Real Estate Property Tax On June 5, 2015, the Income Tax Act was amended to implement the new real estate property tax: (1) To impose income tax on gains from sale of land (previously sale of land is only subject to land value incremental tax (LVIT), which is relatively low). (2) LVIT continues to apply on sale of land, but LVIT tax base can be deductible when assessing taxable gains from sale of land. (3) Income tax on sale of land & buildings: 17% for subsidiary structure 35%/45% for branch structure (4) Indirect transfer of Taiwan real estate will be subject to income tax of 35%/45%. 2015 Asia Pacific Real Estate Conference 20
II. Impacts of New Real Estate Property Tax on Inbound Investment Structure Impact on exit strategy: Transferring landrich* offshore SPV will be subject to 35%/45% tax Offshore Investor Offshore SPV ** Impact on Offshore HoldCo: Tax heaven has been the preferred HoldCo jurisdiction in a Taiwan branch structure. In the future, tax treaty country (e.g. Lux, NL) may be the preferred jurisdiction in a Taiwan subsidiary structure (see below). Taiwan Branch? Subsidiary? Real Property 2015 Asia Pacific Real Estate Conference Impact on Taiwan PropCo: Taiwan branch structure has been preferred due to no branch profits tax. Taiwan branch structure may no longer be preferred due to new real property tax: - 35%/45% income tax for branch structure - 17% income tax for subsidiary structure * Land-rich offshore SPV is considered to derive morn than 50% of its value from Taiwan real estate. ** Taiwan concluded 30 tax treaties, including with Japan on November 26, 2015 (effective date to be announced), and with China on August 25, 2015 (effective date to be announced). 21
III. Typical Outbound Investment Structure Commonly Seen Structure Recently Permissible Option Taiwan Offshore Insurance Companies Offshore SPV Real Property Taiwan Offshore Insurance Companies Local SPV Offshore SPV (optional) Real Property Taiwan insurance companies are now allowed to invest in overseas real estate via local SPV. Issues to be considered: - Foreign tax credit. - Applicability of tax treaties (e.g. new treaties with Luxembourg & China & Japan). - Place of effective management. - Insurance regulations. - Financing / FX. 2015 Asia Pacific Real Estate Conference 22
Appendix 1 Continue the conversation Presenter CVs 2015 Asia Pacific Real Estate Conference 23
Presenter CVs [Photo here] KK So Asia Pacific Real Estate Tax Leader TEL: +852 2289 3789 E-mail: kk.so@hk.pwc.com KK is s Asia Pacific Real Estate Tax Leader. In Hong Kong / China, KK leads a tax advisory group which specialises in real estate, infrastructure and construction. KK joined Hong Kong in 1985, transferred to Melbourne, Australia in 1988 and returned to Hong Kong in 1992. Over the years, KK has accumulated extensive experience in providing advice on real estate and infrastructure projects, including structuring real estate and infrastructure funds and joint ventures, advising on funding structures and structured finance products, structuring local and cross-border real estate and infrastructure acquisition, performing due diligence reviews, reviewing financial models, providing assistance in large scale tax audits, conducting tax depreciation reviews, and advising on stamp duty and other transfer tax issues. KK s clients include global, regional and country specific real estate / infrastructure funds, private equity funds, pension funds, insurance companies, sovereign wealth funds, REITs, publicly listed property groups, family offices and other investors. KK has advised various clients on the implementation of their global real estate investment strategies, covering a variety of real estate investment opportunities in major cities in the US, Europe and Asia Pacific. KK is a member of Urban Land Institute s North Asia Executive Committee. He also represents in Asia Pacific Real Estate Association and ANREV. He is a frequent speaker on real estate and asset management related subjects. KK is a member of the Hong Kong Institute of Certified Public Accountants and a Deputy Chairman of its Taxation Faculty Executive Committee. He is also an associate of the Institute of Chartered Accountants in Australia and New Zealand and a fellow of the Association of Chartered Certified Accountants in the UK. KK graduated from the Chinese University of Hong Kong with an MBA degree. 2015 Asia Pacific Real Estate Conference 24
Presenter CVs [Photo here] Matthew Wong Tax partner TEL: +86-21 - 2323-3052 E-mail: matthew.mf.wong@cn.pwc.com Matthew Wong is a partner and the practice leader of the China Financial Services Tax Group of PricewaterhouseCoopers. Matthew manages all major financial services clients in Shanghai and specializes in advising foreign financial services sectors on China Tax and Investment. He has over 28 years of tax experience, 23 years of which is in China tax gained in Shanghai, Beijing and Guangzhou. The Shanghai Municipal Tax Bureau appointed Matthew as one of the 18 members of its external supervising committee for the periods 1996 to 1998. He served as the chairman of the tax committee of Amcham-Shanghai in 2000. In 2001, Matthew was also appointed as one of the 18 external advisors for the Shanghai Waigaoqiao government on policy development for the Free Trade Zone in China. Matthew was voted as a top tax advisor in China in the surveys conducted by the International Tax Review in 2001 and 2002. He is also appointed as one of the members of International Advisory and Consultative Committee of Wuxi New District in 2006 and 2007. Matthew currently serves as the Deputy Chairman of the Steering Committee of ACCA Shanghai Branch and is also a committee member of the Financial Services Focus Group of British Chamber of commerce in Shanghai. He holds a masters degree in business administration from the Chinese University of Hong Kong. He is also a member of the Chinese Institute of Certified Public Accountants (CICPA), ACCA and HKICPA. 2015 Asia Pacific Real Estate Conference 25
Presenter CVs [Photo here] Richard Watanabe Financial Services Leader / Deputy Tax Leader TEL: +886-2 - 27296704 E-mail: richard.watanabe@tw.pwc.com Richard Watanabe holds several leadership positions at Taiwan including Deputy Tax Leader, Financial Services Leader, and a member of the Leadership Team, the management body of Taiwan. In addition, he is Tax Markets Leader for s Asia Pacific regional practice. Prior to these positions, Richard has also served as a member of the Board of Partners of CaTSH, the governance body of combined firms in China, Taiwan, Singapore and Hong Kong. Before joining Taiwan, he served as Asia Pacific Tax Manager, Lehman Brothers Asia Headquarters based in Tokyo, and as a Senior Tax Consultant at Australia. Richard has been involved in many complex cross border transactions including mergers & acquisitions, group reorganization, financial services/banking transactions. He is recognized one of key international tax advisors in Taiwan by International Tax Review and World Tax for many years. As an academician, Richard is an Adjunct Associate Professor at the Graduate School of Accounting, the National Chengchi University lecturing International Tax Law since 2002. Richard holds Bachelor of Business degree from Queensland University of Technology, Australia, Master of Jurisprudence (Dean's List) (International Trade Law) and Doctor of Legal Science (Financial Services Law) from Bond University, Australia. He is member of Washington Board of CPAs, U.S., and the Institute of Chartered Accountants in Australia. Richard is fluent in Chinese Mandarin, Japanese, English and Taiwanese. 2015 Asia Pacific Real Estate Conference 26
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