Part 1: The offshore trust industry in Asia

In this two-part article, Christian Stewart, partner, Tax & Legal Support, PricewaterhouseCoopers highlights some of the issues facing the private trust industry in Asia today as we start into the new millennium.

A new age for Hong Kong and Singapore

In general terms, the trustee companies and other financial institutions that are involved in this industry in Asia tend to be based in either Hong Kong or Singapore (or in both of these places). From one of these bases, trust marketing officers and/or private bankers will fly to other Asian destinations such as Taiwan, Indonesia, the Philippines and Thailand in the search for new high net worth private client business. In this context, a high net worth individual would be someone who can invest surplus financial assets of not less than $1-5 million with an institution.

Subject to certain well-known local exceptions, the trend in the past for the large financial institutions has been to source business in Asia, but to ensure that trust structures have been administered in the more traditional offshore centers such as the Channel Islands, Bermuda or one of the Caribbean islands. This picture now seems to be changing.

It is not the intention to describe or comment in this article on the various international reports and initiatives that have been circulating recently concerning the more traditional tax haven jurisdictions or, as they are now called, the offshore finance centers (OFCs). Whatever the final outcome of the OECD’s debate on “harmful tax competition” will be, a consequence of these international initiatives has been a noticeable increase in interest in both Hong Kong and Singapore as alternatives to the traditional offshore jurisdictions.

The straightforward explanation for this new interest is that Singapore and Hong Kong have, in general terms, not been blacklisted in any of the recent international reports. Hong Kong and Singapore are not equated with being tax haven jurisdictions. Nevertheless, these two common law jurisdictions do offer the possibility of an exemption from taxation for foreign sourced profits along with access to sophisticated banking and other financial services.

Trust administration from Hong Kong or Singapore

Over the last 12 to 18 months we have been asked to give advice to a number of institutional clients on the use of Hong Kong and Singapore as jurisdictions from which to base trustee operations, or to provide a comparison of these two centers. It is understood that a number of leading financial institutions have established or decided to establish trustee operations in Singapore.

It is suspected that Hong Kong might be missing out on the lion’s share of this new trust administration business, perhaps because people fear that it is still too exposed to China (although the same thing might be said about Singapore’s proximity to Indonesia), or more likely due to Hong Kong rentals and the costs of doing business in Hong Kong. There is also no special tax concession for trust business conducted from Hong Kong. That is not to say, however, that the tax position to the trustee company is unattractive.

Notwithstanding that there is no special tax concession to attract trust administration business, Hong Kong is nevertheless a very sensible choice for a trust jurisdiction or a base from which to provide trust administration. Factors favouring Hong Kong include its common law background, a very competent judiciary who are experienced in trust matters, the availability of experienced professionals and persons to administer trusts and a sourced-based taxation system which does not tax income, dividends or capital gains. Hong Kong’s Trustee Ordinance is closely based on the 1925 UK Trustee Act. In terms of winning domestic business, however, Hong Kong is a very competitive market.

Placing funds on deposit

The interest in Hong Kong and Singapore extends further than just trusts, however. We are also seeing European clients - perhaps clients that have previously had money on deposit in Switzerland or Liechtenstein - who want to deposit funds confidentially in Singapore or Hong Kong. Some commentators have even suggested that there has been a recent flow of funds to Shanghai.

For these foreign investors it is of course necessary to keep in mind that both Hong Kong and Singapore have estate duties that are imposed on local assets. Unfortunately, when it comes to a comparison of the estate duty rules of these two centers, Singapore must come up as the winner, and therefore should attract more funds on deposit.

Hong Kong estate duty is imposed on the Hong Kong situs assets that pass on the death of a person. The threshold is currently set at HK$7.5 million ($961,699). There is no exemption from Hong Kong estate duty for money on deposit with a Hong Kong financial institution, even if the depositor is a non-resident or non-domiciled person. Singapore, on the other hand, has a specific exemption from Singapore estate duty for investments in the Asian Currency Units of approved banks, and certain other financial assets, for non-domiciled and non-resident investors.

It is clearly time that the Hong Kong government introduced an exemption for deposits and other financial assets with Hong Kong financial institutions, even if these exemptions have to be restricted to foreign investors (although it would help keep funds on deposit in Hong Kong if such an exemption applied equally to Hong Kong domiciled individuals).

Hong Kong’s money laundering laws

Hong Kong has two pieces of legislation which deal with money laundering: the Drug Trafficking (Recovery of Proceeds) Ordinance and the Organized and Serious Crimes Ordinance. These two Ordinances provide for, amongst other things, the tracing, restraining and confiscation of proceeds derived from drug trafficking, organized crimes or specified offences, as well as the criminalisation of dealing with the proceeds of drug trafficking or other indictable offences. There is currently a Bill to amend both of these Ordinances which if passed would significantly tighten up Hong Kong’s anti money laundering provisions.

Christian Stewart, partner, Tax & Legal Support, PricewaterhouseCoopers. Email: [email protected]