Viewpoint... The structure of offshore trusts: a case study of Longfor Family Trust.
Published:
2024-08-07
As one of the important tools for wealth protection and cross-generational transmission, trust has developed quite well in common law countries and offshore financial hubs, and many family businesses regard it as the preferred mechanism for the smooth transfer of equity. Within the framework of China's current trust regulations, attempts to build a local equity civil trust system still face many challenges and restrictions, which has prompted many entrepreneurs to prefer offshore family trusts as an alternative.
As one of the important tools for wealth protection and cross-generational transmission, trust has developed quite well in common law countries and offshore financial hubs, and many family businesses regard it as the preferred mechanism for the smooth transfer of equity. Within the framework of China's current trust regulations, attempts to build a local equity civil trust system still face many challenges and restrictions, which has prompted many entrepreneurs to prefer offshore family trusts as an alternative.
Compared with domestic family trusts, offshore trusts show a series of significant advantages: it provides a stricter privacy protection mechanism, and the security line of assets is stronger; at the same time, the offshore trust market provides clients with a wider range of Trustee selection space, as well as more favorable tax planning conditions, these are important factors to attract entrepreneurs. However, it is worth noting that the structure design of offshore trust is more complicated, and its establishment conditions are correspondingly more stringent, and the requirements for professional knowledge and resources are higher. This article takes the Tsai family trust of Longhu Real Estate as the case analysis object, and expounds the internal structure and operation logic of this high-end wealth management tool, aiming to open a window of knowledge to the offshore trust world for readers.
In 2009, Longhu Real Estate was listed on the main board of the Hong Kong Stock Exchange; in November 2012, Wu Yajun, chairman of the board of directors of Longhu Real Estate and the richest woman in China, divorced. The company's market value was as high as HK $76.4 billion, and the case split property was as high as HK $57.7 billion. Together, the two indirectly hold nearly 80% of the shares of the listed company. However, thanks to the fact that Wu Yajun and her husband Cai Kui put their shares in the company into an offshore family trust before the listing, the divorce did not have a substantial impact on Longhu Real Estate's market value and company operations.
In the red-chip listing structure, a Cayman holding company can achieve the purpose of overseas listing. The reason why up to 7 layers of structure are built is that these layers of offshore companies can play different roles and ultimately achieve more Advanced functions.
Let's analyze layer by layer:
1. Tier 1: Domestic entities
Chongqing Longhu Enterprise Development Co., Ltd. is the domestic holding company of Longhu Real Estate, which directly or indirectly controls the subsidiaries and real estate projects of Longhu Real Estate all over the country. Chongqing Longhu Enterprise Development Co., Ltd. is 8.7 percent owned by Chengdu Zhaojiang Enterprise Management Co., Ltd. and the remaining 91.3 percent is held by Hong Kong company Jiaxun Development.
2. Level 2: Hong Kong Company
The main purpose of this layer architecture is to obtain tax benefits. In the overall structure, only the first tier of domestic entities are companies that conduct physical operations and generate profits, so the main consideration of the second tier of companies adjacent to domestic entities is that this tier of companies has the lowest tax burden in the dividend distribution process, as well as unrestricted distribution to the next tier.
According to Article 4 of the the People's Republic of China Enterprise Income Tax Law, the applicable tax rate for non-resident enterprises to obtain income derived from China is 20%. Hong Kong, as a region that has signed a bilateral tax treaty with the mainland, according to Article 10 of the Arrangement between the Mainland and the Hong Kong Special Administrative Region on Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, when a mainland company pays dividends to a Hong Kong company, the tax levied is 10% of the total amount of dividends, provided that certain conditions are met (I. e. the beneficial owner is a company that directly owns at least 25% of the capital of the company paying the dividend), dividend dividends distributed from domestic entities can enjoy a preferential tax rate of 5%, and the tax levied is 5% of the total amount of dividends. Therefore, if the domestic entity is held directly by a BVI company, the withholding income tax rate on dividends is 10% because the BVI has no tax treaty with China.
In addition, Hong Kong does not tax non-locally sourced income, which means that Hong Kong companies do not incur additional tax costs when dividends from domestic companies are distributed to Hong Kong companies. At the same time, the absence of foreign exchange controls in Hong Kong allows the dividends received by Hong Kong companies to be redistributed smoothly and without hindrance. Therefore, Hong Kong has not only become an important springboard for domestic investment by Longfor and other enterprises, but many foreign investors have also chosen to invest in China through Hong Kong. As Hong Kong has bilateral tax agreements with many countries and regions, there is no need to pay tax again when dividends are remitted from Hong Kong companies to offshore companies.
Moreover, since foreign investment requires notarization of foreign shareholders (many countries have been exempted from consular certification after China's accession to the Convention on the Abolishing of the Requirements for Certification of Foreign Public Document), the use of Hong Kong companies as shareholders can save a lot of money on notarization costs and time costs.
3. Level 3: BVI Company
The reason for adding another layer of BVI companies under the listed entity is that it facilitates multi-business expansion and tax savings. If the listed company wants to expand new business in more fields in the future, it can set up another BVI company under the listed company. The operating entities of different businesses are independent of each other and do not interfere with each other, which not only reduces the potential risks between businesses, but also facilitates the sale or divestiture of business, thus avoiding possible adverse effects on listed companies.
In addition, if a listed company plans to sell part of its equity in a Hong Kong company, the indirect transfer of equity in a BVI company using a Cayman company has a significant tax advantage over the direct sale of equity in a Hong Kong company. Under Hong Kong tax law, both parties to a direct transfer of shares of a Hong Kong company are required to pay stamp duty at 0.13 per cent of the transaction price or market value (whichever is higher), for a combined tax rate of 0.26 per cent.
4. Tier 4: Cayman Corporation (Public Company)
Compared to other offshore registries, the Cayman (The British Cayman lslands) company law is well developed to meet the requirements of listing regulation and is tax-exempt. Due to the relatively low transparency of BVI companies (mainly reflected in the confidentiality of shareholder information, no need to submit annual audit reports, and the non-public nature of company accounts, annual reports and other information), it is restricted in some overseas capital markets and cannot be listed smoothly. Taking the Hong Kong Stock Exchange as an example, its listing rules clearly state that companies incorporated in the four jurisdictions of Hong Kong, inland China, the Cayman Islands and Bermuda are eligible to apply for listing. However, for overseas companies incorporated in other "admitted jurisdictions" to be listed on the Hong Kong Stock Exchange, they must demonstrate that their level of shareholder protection is at least comparable to the relevant standards in Hong Kong in order to be eligible for listing approval.
5. Tier 5: Offshore Holding Companies
The main purpose of this layer of architecture is to increase the flexibility of equity disposal. Since the fifth tier is located between the substantial shareholders (in this case, the trust structure) and the listed company, the establishment of this tier of holding companies can facilitate the disposal of the shares of the listed company by the substantial shareholders. Compared with the direct disposal of the equity of the listed company, the reduction or transfer of the shares of the listed company can be completed through the company at this level, thus avoiding the restriction on the lock-up period for the shareholders of the listed company. In addition, in practice, different categories of shareholders, such as founding shareholders, executives and core employees, and institutional investors, often hold shares of listed companies through their respective BVI companies, so that these different categories of shareholders can handle their shares without the cooperation of other shareholders and can be done alone.
6. Layers 6-7: Trust Structure
The shares of BVI, a Tier 5 offshore holding, were given to Silver Sea and Silver Land, two separate subsidiaries of HSBC International Trust. At the legal level, the equity of the two BVI companies is now held by the two trust entities, rather than originally belonging to Wu Yajun and Cai Kui. This explains why after the divorce of Wu and Cai in 2012, as the absolute controlling shareholder of the listed company, their personal marriage changes did not have a significant impact on the company's stock price.
In addition, this level also involves BVI companies with a smaller shareholding, which also put their equity into trust management, respectively for Longfor executives and employees. This arrangement actually reflects the implementation of the equity incentive plan in Longfor's top-level structure.
Before Longhu Real Estate went public, Wu Yajun and Cai Kui first registered and established Precious Full International Limited in the British Virgin Islands (BVI). Charm Talent International Limited and Fit All Investment Limited three companies as the main bodies holding shares in the company on behalf of Cai Kui, Wu Yajun and the employee stock ownership plan respectively. Secondly, Longhu Properties (Cayman) Limited was incorporated in the Cayman Islands as the subject (actually a shell company) to be listed in Hong Kong. Longhu Real Estate (Cayman) Co., Ltd. has an overseas holding company, Longfor Investment Co.Ltd, to acquire a 100 per cent stake in Hong Kong's Jiaxun Development Company. Hong Kong Jiaxun Company holds a 91.3 per cent stake in Chongqing Longhu Enterprise Development Co., Ltd., a domestic operating entity. At this point, Longhu Real Estate red-chip listing structure completed. With HSBC International Trust Co., Ltd. as the trustee, Wu Family Trust, Cai Family Trust and Employee Stock Ownership Trust were set up respectively. Wu Yajun and Cai Kui injected their respective shares of Charm Talent and Precious Full into Sliver Sea Assets Limited and Sliver land Assets Limited, BVI wholly-owned subsidiaries set up by HSBC International Trust, respectively. At this point, the trust structure is completed.
In the case of Longfor, we get a glimpse of the role of offshore trusts in family wealth planning. Offshore trust is not only an asset management tool, but also a powerful tool to provide long-term and stable planning for families. Especially in the complex financial environment, the offshore trust system has become the first choice of many families because of its high flexibility and personalized customization, which can meet the different needs of different families in asset preservation, value-added, inheritance and tax avoidance. It is foreseeable that in the future, more Chinese people will choose to leave the case trust in the family wealth planning, create more value and wealth for the family, and truly achieve three generations of wealth and everlasting foundation.
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