Private Wealth 2020

Last Updated August 12, 2020

China

Law and Practice

Authors



Yuanda China Law Offices currently numbers more than 40 lawyers, with two offices located in Shanghai and Beijing, and a strategic alliance with Winston & Strawn LLP, enabling it to leverage a network of over 1,000 lawyers across the USA, Europe and Asia. The firm represents high and ultra high net worth individuals and families with a particular focus on its clients’ objectives: trust arrangements, tax planning, matrimonial issues, generational wealth transfers, corporate advisory, financial legal guidance, and private charitable foundations, both within and outside of the PRC. Yuanda China Law offers a full spectrum of services, including advising on international, cross-border estate planning and investments to achieve tax savings for high net worth individuals; offering optimised asset management plans by making full use of the preferential trust laws in different jurisdictions; and managing family wealth, including wills, trusts, insurance, pre and postnuptial agreements.

China levies a wide range of taxes related to individuals and their estates, including the individual income tax, turnover tax (value-added tax), taxes on real estate (eg, land appreciation tax and real estate tax) and other taxes, such as a deed tax and stamp duty.

As exceptions, the transfer of certain assets to immediate family members and other qualified individuals could enjoy tax exempt status, both for inter vivos gifts and inheritances. Immediate family members include spouses, parents, children, grandparents, grandchildren and siblings. For example, a gift of real estate located in China from parents to children will be exempt from individual income tax, value-added tax and the land appreciation tax in China, while taxes for the non-exempted transfer of real estate may include an individual income tax of 20% on capital gains, a value-added tax of up to 5% on the transfer price, and a land appreciation tax of 30–60% on the value appreciation. Certain tax benefits are dependent on the type of real estate in question. For instance, transfer tax for ordinary residential property is lower than that for non-ordinary residential property (eg, villas).

There is no gift tax, estate tax or standalone capital gains tax in China. Gains on the sale of assets are considered as taxable income, subject to the individual income tax.

China does not currently levy an estate tax. Taxes on asset transfers have been quite stable without substantial change over the years. For example, individuals transferring real estate to immediate family members can be exempt from individual income tax and land appreciation tax for such transfers. 

It is also worth noting that China had taken steps to reform the individual income tax regime, and implemented the seventh amendment to the Individual Income Tax Law, which took effect from 1 January 2019. The new Individual Income Tax Law introduced general anti-avoidance rules for the first time, by reference to similar concepts currently adopted by the corporate income tax law, such as the arm’s-length requirement on related-party transactions and the “controlled foreign corporation” rule. So far, there have not yet been any published cases on tax adjustments for individuals under the new Individual Income Tax Law. However, in recent years, high-income individuals have gradually become the main target of tax collection and administration, as they seem to have become skilled at using overseas structures to avoid taxes. If the overseas structure lacks a reasonable business purpose to support it (eg, setting up pass-through companies in tax havens such as the Cayman Islands, which do not have a real business purpose and only exist to avoid taxes, especially China taxes), that structure is likely to be attacked by the new Individual Income Tax Law.

Due to the outbreak of COVID-19, China has granted certain temporary tax reliefs to encourage donations in cash or in kind by enterprises and individuals (eg, donations through qualified organisations, local government or directly to qualified hospitals can be fully deducted when calculating taxable income, as opposed to the traditional deduction cap of 30% of taxable income). So far, we have not yet seen proposals to increase government revenue in response to the economic uncertainty of COVID-19.

China is a member state of the Common Reporting Standard (CRS) and participated in the first automatic exchange of tax information for financial accounts in September 2018. By February 2020, China has exchanged financial account information automatically with more than 90 states/jurisdictions. 

Also, the new Individual Income Tax Law has established the identification number system for tax residents as part of the CRS implementation in China. Regardless of a high net worth individual’s nationality or residential status, so long as the individual is considered a Chinese tax resident by virtue of domicile or the duration of their stay in China, the information about the individual’s financial accounts located abroad will be exchanged with the Chinese tax authority. 

Some local tax authorities in China (eg, provincial or municipal tax authorities) have, based on the information exchanged in China, already launched tax inquiries into wealthy individuals holding assets abroad, about the sources of their offshore income and the relevant tax positions and compliance status. Combined with the introduction of anti-avoidance rules, high net worth individuals could find the global tax environment becoming more transparent, which will make it increasingly difficult to conceal overseas assets, and the compliance risks thus caused are unlikely to be avoided.

It is a tradition in China for the older generation to pass their wealth on to the younger generation. Donations to charity have not yet become popular. Additionally, since the 1970s, China has gradually implemented the public policy of “Family Planning”, which meant each couple could only have one child over recent decades until the opening of the two-child policy in 2016. As there is only one child in most Chinese families, inheritance disputes have not become a common property concern.

Conflict of law might be a concern in international planning. Under the PRC conflict of law rules, if the decedent dies intestate, then the statutory succession rules will govern, and the laws of the habitual residence of the decedent at the time of death shall apply; however, for the statutory inheritance of immovable assets, the laws where the immovable assets are located shall apply. 

If the decedent dies with a will, then, for the essential validity of the will, the law of the testator’s nationality or the law of the testator’s habitual residence at the time of death shall apply. With respect to the format of wills, a will shall be valid if it is in compliance with any of the following laws:

  • the law of the testator's habitual residence at the time of their death or at the time the will was made;
  • the law of the testator’s nationality at the time of their death or at the time the will was made; or
  • the law of the place where the will was made.

Although China respects testamentary freedom, there are also provisions regarding forced heirship laws in the existing Succession Laws and the Succession Chapter of the Civil Code of the People’s Republic of China (Civil Code), to be effective on 1 January 2021 – ie, a necessary portion of an estate shall be reserved in a will for a successor who cannot work and does not have a source of income. 

China’s marital property regimes rely mainly on a legal property system supplemented by a contractual property system. As a default, marital property will be jointly owned by the spouses. A couple may opt out of the matrimonial property regime with a pre or postnuptial agreement, which shall respect social moral principles and not harm the common interests of society or disturb the social economic order. Where there is no agreement, the default rules of marital assets shall apply. A pre or postnuptial agreement shall follow the general principles of the Contract Law and not harm the common interests of the society.

One spouse is entitled to dispose of the marital assets based on the needs of daily life; otherwise the spouse should not transfer marital property without the consent of the other. During the marriage, if one party is found to have behaved in a manner that severely impaired their community property – such as concealing, transferring, selling off, destroying, or squandering the community property or forging their community debt – the other party may bring a lawsuit in the court to demand partition of the marital property.

In addition, if at the time of divorce a spouse conceals, transfers, sells off or destroys the marital property, or forges debts in an attempt to encroach upon the marital property, the breaching party may get less or no property when the marital property is partitioned. After the divorce, if the aggrieved party discovers the above breaching, it may bring a lawsuit in the court to demand re-partition of the marital property.

Upon the transfer of property, the transferee’s tax basis of the property usually corresponds to the transfer price, which is required to be at the fair market value. 

However, when the property is an inter vivos gift or an inheritance of real property to immediate family members, the transferee will be entitled to the original tax basis of the transferor for acquiring such real property. When the transferee further disposes of the real property, the original cost for acquiring the real property could still be deducted when calculating the taxable income of the transferee.

The transfer of assets to younger generations that are immediate family members of the transferor would usually be exempt from the main taxes in China. Currently, China does not levy a gift tax or an estate tax, so there is no special tax planning required for passing assets to younger generations.

Digital assets are any items of text or media that have been formatted into a binary source that includes the right to use it. According to this definition, digital assets can be roughly divided into the following categories:

  • online accounts;
  • virtual currency with a certain monetary value; and
  • digital documents, audible contents, motion pictures, and other relevant digital data that are currently in circulation. 

There are no specific rules on the inheritance of digital assets in China. Digital assets are considered as intangible assets, where general laws such as the General Rules of the Civil Law and Succession Law should apply. The Civil Code will replace the General Rules of the Civil Law and Succession Law after 1 January 2021.

In China, charitable funds and family trusts are more likely to be used for estate planning purposes. Since the promulgation of the Trust Law of the People’s Republic of China (Trust Law) in 2001, the trust industry has made substantial developments in China. However, the development of domestic family trusts is limited by trust registration problems, high tax, and other issues in the legal culture. In most cases, investment products were structured in the form of a trust by banks or investment companies. 

On 17 August 2018, the Trust Supervision and Administration Department of the China Banking and Insurance Regulatory Commission issued the Notice of the Trust Department on Strengthening Trust Supervision during the Transitional Period for Regulation of Asset Management Business (Xintuohan [2018] No 37), which defines the basic concept of the family trust business for the first time: “A family trust means that a trust company accepts an entrustment from an individual or household to provide customised affair management and financial services, such as property planning, risk isolation, asset allocation, child education, family governance and public welfare (charity) undertakings, for the main purposes of protection, inheritance and management of family wealth. The amount or value of family trust property shall not be less than CNY10 million, and beneficiaries shall include family members including settlors, but settlors shall not be the only beneficiaries. A trust business that merely pursues preservation and the increase of value of the trust property as its main purpose of the trust and has the nature of special-account wealth management and asset management is not considered within family trusts.” In addition, the Civil Code, to be effective on 1 January 2021, specifies that a natural person may establish testamentary trusts in accordance with law. There have been an increasing number of cases in which courts have recognised the legal validity of civil trusts in judicial practice.

Trusts are recognised and respected by the Trust Law of the People's Republic of China, where the term “trust” refers to a settlor entrusting property to a trustee based on confidence in that trustee, who carries out administration or disposition of such property in his or her own name in accordance with the wishes of the settlor for the benefit of the beneficiaries or for a specific purpose. 

A fiduciary of a foreign trust, foundation or similar entity, if a Chinese citizen, will be subject to the Chinese individual income tax on income from the foreign entity for rendering trust property management services. 

However, the Chinese beneficiary may not be subject to the Chinese individual income tax on the income from the distribution by a trust fund, since the income derived from trust distribution is not clearly categorised as taxable income under the current individual income tax law, and thus may be considered as non-taxable income. 

The above taxation in China will not be affected if a beneficiary or the donor of a trust, foundation or similar entity also serves as a fiduciary. Income received from the foreign trust needs to be classified depending on its nature, and any service income for the fiduciary would still be taxable.

There are no clear distinctions between revocable and irrevocable trusts in the existing trust law system, although the trust under the Trust Law of the People's Republic of China is more similar to the irrevocable trust in Western legal culture. 

According to the existing Trust Law, a settlor cannot change, terminate or revoke a trust optionally. However, where a trustee violates the intent of the trust when disposing of the trust property or causes losses to the trust property through breaching their duties or handling trust affairs in an inappropriate manner, the settlor has the right to apply to the court to revoke the trustee’s disposition. 

Where a trustee violates the intent of the trust when disposing of the trust property or there is gross negligence, the settlor has the right to dismiss the trustee from their position in accordance with the provisions of the trust documentation, or to apply to the court for the dismissal of the trustee.

After a trust has been established, the settlor may change the beneficiary or dispose of the benefits under a trust where one of the following situations has occurred:

  • the beneficiary commits a substantial tortious act against the settlor;
  • the beneficiary commits a substantial tortious act against other joint beneficiaries;
  • prior consent has been given by the beneficiary; or
  • other situations stipulated by the trust document.

Several popular methods and tools used for asset protection under the PRC laws are set out below.

LLC or LLP

Forming a limited liability company or limited liability partnership is one tool used for asset protection. The limited liability of such entities may generally provide protection for the family assets from the creditors of the business. However, in practice, it is necessary to pay attention to the separation of family assets and enterprise assets, so as to avoid commingling business and personal assets (eg, the business operation of the enterprise should not be conducted in the name of its shareholders). 

Prenuptial/Postnuptial Agreement

As a default marital property regime in China, marital property will be jointly owned by the husband and wife. However, a couple may opt out of their marital property regime with prenuptial and/or postnuptial agreements to protect the family business from divorce. 

Trust

Holding property in a trust is another form of asset protection. There are several variations of trusts; some provide current asset protection while some provide asset protection for the beneficiaries.

Gift, Will or Insurance

With a legally binding gift agreement, a will or an insurance policy, the children’s assets or inheritance can be protected from their future ex-spouses, their future mismanagement of money, or their future creditors.

Both ownership and management of the family business need to be carefully considered for family business succession. Some popular family business succession planning strategies are as follows:

  • ownership and management of the family business are passed on within the family (ie, the family continues to own and manage the business upon succession);
  • the family withdraws from the operation and management of the business but continues to own the business, leaving the management to professional managers outside of the family;
  • the family continues to manage the business, giving up all or part of the ownership of the business; and
  • the family quits the management and ownership of the business at the same time.

As inter vivos gifts and death bequests to immediate family members and other qualified individuals are likely to enjoy the relevant tax exemptions in China, tax is not currently the main driving force for individual clients’ succession planning. 

Transfers by individuals to other related parties are required to be conducted at arm’s length, unless a non-arm’s length transfer is recognised by the law as being for “legitimate reasons”. According to the relevant rules, an equity transfer by an individual to immediate family members or other qualified individuals is deemed to have a legitimate reason, and thus could be conducted at lower than the market price. However, an equity transfer to other parties would still need to be conducted at fair market value; if not, a price adjustment would be imposed by the tax authority for tax purposes.

Disputes are arising in relation to the partition of the community properties of spouses, particularly those involving real estate in major cities and equity interests in high-growth industries. Also, given that the first generation of wealth-makers in China has reached the age of transferring control of their assets to the younger generation, disputes could arise between the heirs, particularly in those families with multiple children. We are also seeing a growth in disputes over the probative force of several existing wills made by the testator, as a notarised will no longer carries more weight than any other type of will (this will be the case after the Civil Code becomes effective).

The mechanism for compensating aggrieved parties is compensation for actual losses plus limited amount of foreseeable losses for profits, unless a penalty clause is included otherwise in the contracts. The penalty is subject to adjustment to a reasonable amount if it is unduly high. The rationales behind such damages are the principle of fairness in contract law.

According to the Trust Law of the PRC, a trustee should comply with the provisions of the trust documentation and handle trust affairs for the greatest benefit of the beneficiaries.

In administering the trust property, the trustees must diligently fulfil their duties and carry out their obligation to administer the trust property honestly, faithfully, cautiously, and effectively.

According to the Trust Law, a trustee shall comply with the provisions of the trust documentation and handle trust affairs for the greatest benefit of the beneficiaries. If a trustee breaches its fiduciary duty or handles trust affairs in an inappropriate manner, debts owed to third parties or losses that the trustee suffered are to be borne by the trustee. However, if an employee of a trust company causes losses as a result of performing a work assignment, the trust company, as the employer, should always bear civil liabilities.

An exoneration or exculpatory clause may have effect, unless it relates to personal injuries sustained by the breaching party or to property losses sustained by the breaching party because of the breaching party's deliberate acts or its gross negligence.

The Trust Law requires a trustee to comply with the provisions of the trust documentation and to handle trust affairs for the greatest benefit of the beneficiaries.

A financial permit must be obtained from the government before the establishment of a trust company.

In the management and disposition of trust property, a trust company may invest, sell, deposit with another trust company, reverse repurchase, lease or loan the trust property, pursuant to provisions under the trust document. A trust company must not use sale and repurchase as a means for managing trust property.

Trusts can be authorised to hold active business and effectively run the business, according to a guidance issued by the China Banking and Insurance Regulatory Commission (previously known as the China Banking Regulatory Commission).

Generally, foreigners who enter China must hold a valid visa, such as a diplomatic visa, a courtesy visa, an official visa or an ordinary visa. However, visas shall not be issued to the following:

  • foreigners who are deported or repatriated from China, if the banned period for disembarkation has not expired;
  • foreigners with severe mental disorders, infectious tuberculosis or any other contagious diseases that may cause significant harm to public health;
  • foreigners who may harm the national security and interests of China, disrupt public order or engage in other illegal criminal activities;
  • foreigners who commit fraud in the visa application process or are unable to secure against the expenses required for their stay in China; or
  • foreigners who are unable to submit the relevant materials required by the visa issuing authorities.

In addition, visas will not be issued if the visa issuing authorities deem that visa issuance is not advisable.

China also has a transit visa option available in certain cities, where a visa can be issued on arrival if the applicant has an outbound ticket to a third country (not the country from which they arrived).

China offers a number of visas for entry to China, including tourism, business, work and family visit. The business visa would be appropriate for attending business conferences, meetings to discuss business deals, visiting factories, discussing potential investments, etc. To work in China, an employment visa would be the proper visa.

In addition, China allows non-Chinese nationals to apply for permanent residence in China through investments or family relationships, or based on special talents or contributions. The requirements differ for each category.

Foreign or stateless people willing to abide by the constitution and laws of China can apply for Chinese nationality if they have Chinese relatives or are settled in China, or for other proper reasons.

China does not recognise dual nationality. 

COVID-19

In view of the rapid spread of COVID-19 across the world, China has decided to temporarily suspend the entry into China by foreign nationals holding visas or residence permits still valid to the time of the announcement issued on 26 March 2020, effective from midnight on 28 March 2020. Entry by foreign nationals with APEC Business Travel Cards will be suspended as well. Policies including port visas, the 24/72/144-hour visa-free transit policy, the Hainan 30-day visa-free policy, the 15-day visa-free policy specified for foreign cruise tour groups through Shanghai Port, the Guangdong 144-hour visa-free policy specified for foreign tour groups from Hong Kong or Macao SAR, and the Guangxi 15-day visa-free policy specified for foreign tour groups of ASEAN countries will also be temporarily suspended. Entry with diplomatic, service, courtesy or C visas will not be affected. Foreign nationals coming to China for necessary economic, trade, scientific or technological activities or out of emergency humanitarian needs may apply for visas at Chinese embassies or consulates. Entry by foreign nationals with visas issued after the announcement dated 26 March 2020 will not be affected. At the time of writing (16 June 2020), the announcement remained in force.

Opinions on Strengthening the Administration of Permanent Residence Services for Foreigners was released on 18 February 2016 to strengthen the administration of permanent residence services for foreigners, showing a positive attitude to attracting qualified foreigners to be resident in China, even though there is currently no specific programme for expeditious citizenship in China.

China has placed great importance on the protection of minors, with the Law of the People's Republic of China on the Protection of Minors being issued to protect the rights and interests of minors. The Law of the People's Republic of China on the Protection of Disabled Persons protects the legitimate rights of adults with disabilities.

Currently, if a trust is established via a will, then reservation of a necessary portion of an estate shall be made for a minor or a disabled adult who cannot work and does not have a source of income.

A court proceeding is not required when appointing a guardian. Where the parents of a ward act as his or her guardians, they may appoint the guardians of the ward by will. The guardian of a ward may be decided by agreement between and among persons with guardianship, pursuant to the law. If there are disputes on the determination of a guardian, the neighbourhood committee or other authorised organisations shall appoint a guardian; if the parties do not agree with the appointment, they may apply to a people's court to appoint a guardian. The parties may also directly apply to a people's court to appoint a guardian.

In some statutory circumstances, upon the application of an individual or organisation concerned, the people's court may disqualify a guardian, take necessary measures for temporary guardianship, and appoint another guardian under the principle of benefiting the ward to the greatest extent.

China has promulgated the Law on Protection of the Rights and Interests of the Elderly, and has established social security systems such as basic pension insurance and basic medical insurance to protect the rights of the elderly and citizens who need medical assistance. Where an individual participating in basic pension insurance has made cumulative contributions for 15 years when he or she attains statutory retirement age, he or she may collect a basic pension fund on a monthly basis.

According to the Marriage Law and the Civil Code, children born out of wedlock enjoy the same rights as children born in wedlock, including the right to inherit. The biological father or mother who does not directly bring up a child born out of wedlock shall bear his or her portion of the child's living and educational expenses until the child can live independently. 

Lawfully adopted children are protected by the Civil Code and enjoy the same rights as birth children, including the right to inherit. The rights and obligations in the relationship between an adopted child and his or her natural parents shall terminate with the establishment of his or her adoption. 

According to the Succession Chapter of the Civil Code, at the time of the partitioning of the estate, reservation shall be made for the share of an unborn child. However, if the baby is stillborn, the share reserved shall be dealt with in accordance with statutory succession. 

China does not recognise surrogacy, but surrogate children’s legitimate rights and interests should be protected by law based on the principle of fairness.

Same-sex marriages are not protected by the current Marriage Law or the forthcoming Civil Code, according to which freedom of marriage applies to the relationship between a man and a woman. In general, same-sex couples may agree on the ownership of property by signing agreements, such as gift agreements, property sharing agreements, legacy support agreements, etc. In addition, one party with full capacity for civil conduct may determine his or her guardian via a written contract in prior consultation with his or her companion who is willing to act as his or her guardian, which enables one partner to appoint the other partner as the guardian.

Charitable giving by individuals and corporations through qualified charitable social organisations or local governments could be deducted for income tax purposes, subject to the relevant deduction caps. For individuals, the deduction cap is 30% of the taxable income, while for corporations the cap is 12% of the annual taxable profits. In addition, qualified donations during the outbreak of COVID-19 can be fully deducted, not capped with the above limitations. 

Under the current charity legal framework in China, charitable trusts and philanthropic foundations are most commonly used for charitable planning, which is consistent with foreign practice.

Philanthropic Foundations

A philanthropic foundation is a non-profit legal person established in accordance with the law, for the purposes of engaging in public welfare undertakings using property donated by natural persons, legal persons or other organisations. The philanthropic foundation is good at raising funds, managing and operating charitable projects, and obtaining tax incentives for donors, etc. However, there are limitations to the flexibility of charitable asset management, preservation and appreciation, and asset retention and utilisation. 

Charitable Trusts

A charitable trust refers to the activity whereby a principal, for the purpose of charity, entrusts his or her property to a trustee in accordance with the law, who manages and disposes of the property and carries out charitable activities in their own name, according to the willingness of the principal. As a contrast to the philanthropic foundation, the charitable trust has advantages in terms of charity asset management, value preservation, and greater flexibility in the retention and use of assets. However, at the current stage, trust companies are generally considered to lack practical experience in charitable operation.

Yuanda China Law Offices

28th Floor Jin Mao Building
88 Century Boulevard
Shanghai Pudong New Area
P.R.China 200121

+84 21 6105 0500

+86 21 6105 0501

RChen@yuandawinston.com www.yuandawinston.com
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Trends and Developments


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Dentons China has a trusts, estates and wealth preservation (TEWP) group of more than 200 lawyers, providing families and ultra-high net worth individuals with competitive wealth management legal services, including trust planning, tax planning, top-level structural design, family (enterprise) governance, etc. The team benefits from Dentons’ global network, which includes offices in America, Canada and Singapore. It is known for its advanced family wealth management notions and mature legal service model. Dentons China has the ability to provide overall solutions and also to execute both in mainland China and overseas.

The New Trend of Legal Service in China’s Wealth Management

The development of the market in legal services for wealth management in China is quite remarkable, and it has become a field with great attention paid to it. After a series of events in 2020, the developments in this area will be even more promising in the future.

Factors affecting the development of the legal service market in wealth management

First, the major impact of COVID-19 has been worldwide and is still not fully contained. The COVID-19 pandemic makes more people realise not only the risks to, and the importance of, health, but also the insignificance of human beings in front of nature and the fragility of life. The outbreak of COVID-19 has been felt deeply and made many people realise that it is necessary to manage and arrange wealth as soon as possible.

With the outbreak of COVID-19, regional conflicts, conflicts between major powers and the conflict between the East and the West have been aggravated and amplified; leading to great uncertainties in the global political environment. This has led to the greatest concern in nearly 40 years over the security of individuals and wealth, which has profound implications for wealth management and legal services in that field.

Meanwhile, the world economy has entered a very disappointing phase, and there is no sign of more certain growth in the short term, which directly affects the security and the value of wealth for high net worth individuals and families. Owing to the uncertainty of economy, and people's worry that such uncertainty may exist for a long time, wealth management thinking has undergone significant changes and adjustments.

Most importantly, the Civil Code of the People's Republic of China has been promulgated and will come into effect on 1 January 2021, which will have a long-term impact. In this civil code, there are momentous changes in property, marriage, family, guardianship, inheritance and other regulations, which will inevitably exert a long-term impact on legal services in wealth management.

For these reasons, the market in legal services for wealth management in China will usher in some major changes. In addition, with the development of the market in recent years, legal regulations, techniques and tools, as well as market demand, have all become more mature.

There are several changes in the area of wealth management legal services in the future that are well worth watching and looking out for.

Equity family trusts will become a market focus

The family trusts previously developed in China were basically trusts based on cash assets and other financial assets. An equity family trust refers to a family trust whose underlying assets are the equity of a family enterprise and the operating assets held through that family enterprise. Equity family trusts can be used as the core instrument for the overall solution of family (enterprise) wealth management, and it is of irreplaceable value for both wealth management institutions and family (enterprises).

Most of the core assets of high net worth families around the world are still operating assets, and financial assets or real estate usually exist for a long time in the form of operating assets of family enterprises. Therefore, the equity family trust is definitely aimed at the core assets of high net worth families and it can more fully realise the family's demands for protection, management and inheritance of wealth.

Thanks to the promotion of family trust culture in China in the past ten years, high net worth families in China have an increasingly deep understanding of family trusts. Besides, many Chinese families have already fully appreciated the value of equity family trust abroad and have certain demands for transferring domestic or cross-border operating assets into an equity family trust. At present, the domestic demand for equity family trusts has not yet exploded, mainly due to trust institutions' incomplete understanding and grasp of family trusts and insufficient development of such businesses. In addition, there are also other negative factors will affect domestic equity family trust demand, such as the cost of transferring the assets into a trust.

With the symbolic exploration of equity charitable trusts, the establishment of equity family trusts among domestic listed companies with different scenarios, and the increasing uncertainty of the economic environment, it is an inevitable and unstoppable trend that more and more high net worth families in China will choose to set up equity family trusts. Currently, Dentons has been helping some Chinese trust institutions to build and improve their equity family trust systems.

At the same time, we believe that the equity family trust in China will be carried out with three typical scenarios including holding the enterprise’s equity with the trust as top structure, holding assets for generations and supporting continuous entrepreneurship.

The development of a natural person as trustee is a very important field

Having a natural person as trustee is not forbidden by any laws in China. However, the market has been dominated by commercial trust institutions for a long time, therefore the practice of using a natural person as trustee of a trust in China is very rare.

Accompanied by the development of trust culture, the recognition of testamentary trust to a certain extent in Chinese court cases, and the further confirmation of testamentary trust established by natural persons in Article 1133 of the Civil Code of the People's Republic of China, testamentary trust will be greatly promoted.

A question therefore needs to be clarified: is the trustee of a natural person’s testamentary trust another natural person or a trust institution? From multiple perspectives, such as convenience and cost, natural persons as trustees may be a better choice for a testamentary trust, which has no legal obstacles and is more in line with the essence of trust. In addition, trust registration in Chinese law can be solved through notarial offices. That is to say, the testamentary trust with natural person as trustee is completely feasible in law and practice.

Since the trustee of a testamentary trust can be a natural person, it is also feasible in law and practice for the trustee of a living family trust to be a natural person. This, in fact, should not be disputed.

It can be seen that a large number of middle class and general high net worth individuals with assets in relatively simple forms are likely to choose the natural person as trustee of a trust out of consideration of cost and convenience, which will be a significant trend in the future. In this field of legal service, lawyers will play a greater role and provide value.

The development of natural persons being the trustees of a family trust will change the general pattern of China's wealth management market. Trusts where natural persons are the trustees – based on many advantages such as trust, efficiency and cost – will truly activate the wealth management market and completely change the applications of legal techniques and legal tools in wealth management. This will become the basic wealth management tool for people above the middle class.

Cross-border wealth allocation will remain a focus of concern

In situations of uncertainty, cross-border wealth allocation will always remain a wise choice, and this has not changed in recent years.

Moreover, judging from current market trends, many Chinese high net worth people have maintained cross-border wealth allocation structures, and there is a very important trend for more and more high net worth families to build family top structures in mid-shore countries or regions such as Singapore and Hong Kong (China). This results in a double top structure both inside and outside mainland China being built by high net worth families. In this process, the value of legal services will receive greater attention.

Some Chinese families are increasingly rational about the different values of onshore, mid-shore and offshore wealth management, and are equipped to make the best choice with the support of professional institutions.

Overall solutions of wealth management will become the core competence of professional institutions

The overall solutions for wealth management are a growing focus for high net worth individuals and families, representing the most outstanding opportunity for legal professionals to win clients’ trust.

We note that institutions with greater advantages in structured wealth management tools, such as family trusts, will receive more attention, and institutions with genuine cross-border service capabilities will undoubtedly do better in satisfying the demands of the market.

Services in the field of wealth management, corporate structuring and financial investment cannot be separated in many cases, and this is, in a real sense, the overall solution for high net worth individuals and families. That is why many legal service agencies are paying more attention to family offices.

There is no doubt that the protection, management and inheritance of family wealth require a relatively definite environment, but it is the opposite situation at the present time. Faced with uncertainties, high net worth individuals and families will make more choices and attempts, and will undoubtedly put forward more and stricter requirements for legal services in wealth management. At this time, it is often the best opportunity for some legal service institutions to form a leading advantage in this field.

Dentons China

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No 9 Dongdaqiao Road
Chaoyang District
Beijing, China

+86 10 5813 7799

+86 10 5813 7788

Trusts_Estates_China@dentons.cn www.dentons.com
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Law and Practice

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Yuanda China Law Offices currently numbers more than 40 lawyers, with two offices located in Shanghai and Beijing, and a strategic alliance with Winston & Strawn LLP, enabling it to leverage a network of over 1,000 lawyers across the USA, Europe and Asia. The firm represents high and ultra high net worth individuals and families with a particular focus on its clients’ objectives: trust arrangements, tax planning, matrimonial issues, generational wealth transfers, corporate advisory, financial legal guidance, and private charitable foundations, both within and outside of the PRC. Yuanda China Law offers a full spectrum of services, including advising on international, cross-border estate planning and investments to achieve tax savings for high net worth individuals; offering optimised asset management plans by making full use of the preferential trust laws in different jurisdictions; and managing family wealth, including wills, trusts, insurance, pre and postnuptial agreements.

Trends and Development

Authors



Dentons China has a trusts, estates and wealth preservation (TEWP) group of more than 200 lawyers, providing families and ultra-high net worth individuals with competitive wealth management legal services, including trust planning, tax planning, top-level structural design, family (enterprise) governance, etc. The team benefits from Dentons’ global network, which includes offices in America, Canada and Singapore. It is known for its advanced family wealth management notions and mature legal service model. Dentons China has the ability to provide overall solutions and also to execute both in mainland China and overseas.

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