Recent international initiatives have been putting pressure on the more traditional Offshore Finance Centres (OFCs) with a resultant interest in Asian centres such as Singapore and Hong Kong. There are, however, other interesting developments within Asia occurring at the same time.
The use of Hong Kong and Singapore holding companies
In the first part of this article we mentioned the use of Hong Kong and Singapore as jurisdictions from which to base trust administration and as banking centres. We are also seeing cases where European high net worth individuals have been advised by their European lawyers or tax advisers to use a Hong Kong or a Singapore incorporated company as a holding vehicle for European (or other Asian) investments, where instead, in the past, they would have been using a company established in one of the traditional OFCs. However, when it comes to using a Hong Kong or Singapore incorporated company to hold foreign investments, some structuring will be required to avoid a charge to Hong Kong or Singapore estate duty arising on the value of the shares, which value will of course reflect the value of the underlying foreign assets. There is no exemption offered from the estate duty charge just because the asset holding company only holds foreign assets.
In terms of operating companies, as opposed to holding companies, Hong Kong and Singapore incorporated companies will also have their attractions, although avoiding a charge to the local estate duty on the shares in such a company will still need to be considered. In the right circumstances it is possible to use a well-regulated and reputable Hong Kong or Singapore incorporated company in the same way that one might have previously used a British Virgin Island’s International Business Company.
Brunei as a new Asian OFC
The news that Brunei Darussalam has now put out its shingle as a new OFC comes as somewhat of a surprise at this turbulent time for traditional OFCs. It is understood that this move has been on the drawing board for some time, however, and certainly well before the OECD’s 1998 report on Harmful Tax Competition.
Brunei is located on the northwestern coast of Borneo and is close to the Island of Labuan. Brunei is an Islamic state but with a common law legal system. It is also understood that Brunei can be expected to focus on trying to develop itself as an Islamic finance centre. No doubt people will watch its progress closely and comparisons will be made with Labuan.
The Macau OFC
If one new Asian entrant into the OFC game was not surprising enough, Macau is another jurisdiction to venture into the world of offshore business. Macau promulgated its Offshore Law in October 1999. There are provisions under the Offshore Law for the recognition of trusts and for the conduct of trust administration out of Macau.
The Macau Offshore Law, in so far as it makes reference to offshore trusts, will be interesting as an example of a civil law jurisdiction giving recognition to trusts. It may yet prove to be of interest to private clients who themselves come from a civil law jurisdiction, although at this point it remains to be seen if Macau will be successful in developing an offshore industry.
The People’s Republic of China
The PRC itself seems to be a developing area of interest for private banking and trustee services. China tax advisers based in Hong Kong are starting to do more and more structuring work, some of it involving trusts, for high net worth mainlanders. There is talk of a trust law, an estate duty and gift tax being promulgated in the PRC within the next two years. The logic, therefore, is to put structures in place before the introduction of such laws in the hope that planning done prior to their implementation will be outside their scope.
Obviously, one challenge in working with PRC clients is verifying the source of a person’s wealth and satisfying the banker’s KYC requirements. This difficulty might, however, be overcome if the wealth is generated in the form of a successful IPO. The other thought is that expatriate staff who are planning to move to the PRC on a long term basis should have in place an offshore structure to keep their earnings out of the PRC tax net.
The OFC that strives to adopt “best new practices”
The OECD is pressuring the OFCs to become more transparent, to keep records of beneficial ownership and to exchange information with taxation, criminal and other regulatory authorities. As the more reputable of the traditional OFCs adopt new legislation to bring themselves up to these new international norms of accepted behaviour (or enter into commitments to do so), there is a possibility it may become more difficult in practice to use these reputable jurisdictions for traditionally conservative Asian clients.
Many clients in Asia are very concerned about confidentiality of their affairs, even to the extent of being paranoid about it. Sometimes this is out of concern to avoid kidnapping and blackmailing if one is seen as having substantial wealth. Other times, there may be no apparent rational reason behind the concern. That is not to say that the client is involved in tax evasion, money laundering or other illegal activities; they just want iron clad confidentiality.
Depending on how matters develop in the brave new offshore world, the more transparent a jurisdiction becomes, the less traditional Asian business it may be able to keep or to acquire. Trustee companies with the ability to offer a selection of different trust jurisdictions will likely be better able to attract new Asian business than trustee companies that only offer one or two places of trust administration.
Christian Stewart, partner, Tax & Legal Support, PricewaterhouseCoopers. Email: [email protected].
