TABLE OF CONTENTS
- 1 Introduction
- 1.1 Accounting for My Business in Asia
- 1.2 E-commerce structuring in Asia
- 1.3 Structuring Intellectual Property Ownership in Asia
- 1.4 Cross-border tax planning in Asia
- 1.5 Exchange of Information for Tax Purposes in Asia
- 1.6 Corporate governance for My Business in Asia
- 1.7 Shareholders Agreements for My Business in Asia
- 1.8 Estate Planning in Asia
- 1.9 Family Offices in Asia
Business that operate in Asia need to consider how best they should be structured to optimise their chances of success. Issues to be considered include the best way to structure the business from an efficient tax point of view, but at the same time taking into account the local practical operational conditions in the region. Successful businesses need to consider their business development strategy carefully, including their on-line presence and internet strategy across different countries with different cultures.
Asian based business may also trade with non-Asian jurisdictions and will need to understand and plan across many different areas in this respect. We raise here some of the important issues to be thought about, in addition to the practical local jurisdictional matters that we have covered on the country pages of this website.
Accounting for My Business in Asia
Businesses in Asia will need to take account of the local accounting, filing and audit requirements.
In addition, a group operating across the region will need to obtain financial information for the group in a timely and consistent manner.
An entrepreneur will realise the importance of up to date financial reporting in the management of the business. This is vital to understanding the financial health of the business, for managing cash flow requirements, as well as budgeting for the future. It may be obligatory to meet audit and regulatory filing requirements, or it may also be necessary for external parties such as investors, bankers, or suppliers.
An important consideration for e-commerce businesses is the integration between the e-commerce sales and inventory systems, the banking platform and the accounting software. We can assist you to coordinate the various service providers needed to put in place an efficient solution.
The efficient integration of the accounting system with the front end of the sales system can provide significant economies, and needs to be thought about at the implementation stage.
As the same time the entrepreneur should realise the importance of the bookkeeping for the part of the business activity which is not automated. The recording of the operating expenses will require the maintenance of supporting records and manual entry bookkeeping. We companies can assist you with this work.
E-commerce structuring in Asia
Asian markets, especially China, are nowadays driving growth in e-commerce worldwide. In 2015, e-commerce transactions in Asia-Pacific (including Eastern Asia, Southeast Asia, India and Australia) reached over US$870 billion, up 35% compared with 2014. Besides, Asian countries are pioneers in terms of m-commerce (i.e. sales made through mobile devices) and s-commerce (i.e. sales made through social media platforms).
Eastern Asia represents over 1.6 billion people and 8 countries (i.e. China, Hong Kong, Macao, Taiwan, Japan, North Korea, South Korea, and Mongolia), while Southeast Asia represents more than 620 million people and 11 countries (i.e. Indonesia, Malaysia, Singapore, Thailand, Vietnam, Brunei, Cambodia, Philippines, Laos, Burma, and East Timor). India itself accounts for 1.2 billion people. It represents a massive target of Internet users.
The area is far from being harmonized: Internet penetration rate, online sales’ volumes, online payment methods, differing internet regulations and language diversity across the region are all distinctive elements. Entering such a market is not an easy task. It has a youthful population which is mostly under 30, and an emerging middle-class with an increasing purchasing power. Many Asian start-ups are providing innovative products and services which stimulate competition. Logistic infrastructures (including delivery services) remain a key and strategic investments are being made in that respect. Southeast Asia’s integration under the Association of Southeast Asian Nation (“ASEAN”) Economic Community (“AEC”), shall progressively reduce border restrictions, and foster the emergence of major e-commerce players. E-commerce in Asia is becoming a must for brands with an international positioning.
Key trends in Asia include the following:
- Positioning strategies: To enter the Asian market, foreign investors need first to decide which positioning to adopt on the Internet. Selling a brand through existing platforms such as Tmall (China), Lazada (Southeast Asia), Snapdeal (India) or Rakuten (Japan), certainly eases the process. It enables immediate access to the market, ready-to-use facilities, and local payment methods. This is less accurate for luxury brands, which often prefer to set up their own local website, in order to differentiate themselves and not to be assimilated with mass-market sales. The strategy is more time-consuming and requires in-depth knowledge of the local market and practices.
- Omni channel sales: Choosing between offline and online sales is not any more the challenge. Both are complementary. Consumers may seek a product online but come to physical stores to try and buy it. Conversely, consumers may try a product offline and double check online or look for discounts before buying it. Providing customers with a consistent and coherent experience across all channels has become the real challenge. Integration is the key.
- M-commerce: Asian consumers are becoming more and more comfortable using their smartphones to research and purchase goods online. It makes it imperative for e-commerce players to implement m-commerce strategies. Mobile applications are also becoming a popular way to provide customers with complementary services and to foster loyalty programs, with targeted offers and discounts. However, the desktop should not be neglected, as many customers still prefer using their PC either because they enjoy a faster and more stable connection, or because they lack mobile payment methods.
- Use of Social Medias: Social media marketing is vital in Asia. It enables customers to keep the community updated on their latest and future purchases and share their personal experience. Through social media, brands can get feedback on their recent and upcoming launches, while getting closer to consumers. In China particularly, the growing influence of WeChat makes it crucial for brands to adopt a WeChat account. Key Opinion Leaders also enable brands to communicate on their products with a different angle. One of the key difficulties of the strategy is to manage the massive flow of information exchanged through social media channels.
- Online payment methods: Credit cards’ penetration rate varies greatly among Asian countries, and mobile payment methods are not yet available everywhere. In China, Alipay and Tenpay have become very common, while in Australia, consumers tend to prefer BPAY, POLi, PayPal and PayMate. Meanwhile, many Asian customers still prefer cash upon delivery (including in India, Japan and emerging Southeast Asian countries). Foreign investors must address this issue before entering a targeted market, together with currency issues and exchange control policies. Not being able to provide consumers with local online payment systems can seriously affect sales’ potential.
- Logistics: Asian customers are getting used to fast deliveries and become less tolerant of delays. However, the poor infrastructure of many Southeast Asian countries sometimes deludes customers’ expectations. This is less the case in China, where infrastructure investments have been the priority of the government for a while. Besides infrastructure problems, many existing delivery companies were originally set-up for B2B deliveries and pain to adapt to B2C specificities, such as returns’ management, pre-calling, multiple delivery attempts and cash on delivery. In order to overcome those difficulties, some retailers decide to build their own logistical delivery fleet of vans and motorbikes.
As a general guideline, e-commerce players in Asia must continuously adapt their strategy in order to meet customers’ expectations and to distinguish themselves in an increasingly competitive market.
E-commerce businesses must consider the integration between the e-commerce sales and inventory systems, the banking platform and the accounting software. Read more on this topic here.
Due to the international nature of their business e-commerce business will also need to take into account the cross-border tax issues as discussed.
Structuring Intellectual Property Ownership in Asia
“Intellectual Property Rights” (“IPR”) commonly designate intangible property rights such as trademarks, patents, designs and copyrights. IPR affects a lot of different aspects of our daily lives, for example the brand-name fashion we buy, the pop songs we listen to, the movies we watch and the computer software we use.
The technical definitions of different aspects of IPR are common worldwide, and are clarified in more detail below. Each country in Asia and elsewhere will have its own internal laws and regulations governing IPR protection and registration and administration procedures. IPR may form a significant part of the value of any business, and enterprises operating in Asia must ensure that their valuable IPR are well secured in each country in which they operate.
A trademark designates any recognizable sign(s) used to indicate the origin of the goods and services and to distinguish such goods and services from those of another trader. Trademarks can consist of words, phrases, letters, numbers, shapes, logos, pictures, or a combination of such distinctive signs. A registered trademark confers upon its owner the exclusive legal right to use, license or sell products or render services within the territory of registration. Generally, trademarks can be protected without time restriction, as long as their owner continues using such trademarks for trading and keeps paying registration fees.
For registration purposes, a trademark shall be registered for specific categories of products and/or services. The international classification defined under the Nice Agreement (the “Nice Classification”) is most commonly used worldwide. It sets out 34 classes of goods and 11 classes of services, each of them comprising many sub-classes. Since trademarks are protected geographically, their owners shall in principle ensure registration in each country where they intend to do business. Applying in several jurisdiction can be time consuming and quite expensive. Alternatively, companies which intend to use their trademarks internationally can opt for (i) a Community Trademark (CTM), which allows the applicant to register a trademark throughout the European Union in one application, by paying just one fee, or (ii) International Registration, which can be done through the Madrid Protocol (including 86 countries), which enables the applicant to file a trademark in its home country and then extend the filing later to other jurisdictions throughout the world. The Madrid Protocol still requires payment of separate registration fees in each country. Nonetheless, it remains a smart and relatively inexpensive option. Applicants shall bear in mind that trademark protection remains national and that, even using a CTM or International Registration, each designated country will apply its own examination criteria.
A patent is a monopoly of use, awarded to the owner of a new and previously undisclosed invention. It grants the owner the right to exclude others from making, using or selling the invention without its permission. Patentable materials can include machines, manufactured articles, industrial processes, chemical compositions. Patents are critically important in ensuring that owners and investors obtain financial returns on their investments. Patents enjoy a territorial protection, and are only protected in the countries where they are legally registered. They have limited life duration. More often, patent protection is awarded for about 20 years. Such restriction aims at ensuring that others can access inventions, after a reasonable time enabling amortization of research and development costs.
Since patents enjoy a territorial protection, they shall in principle be registered in each country where their owner intends to protect their use. Meanwhile, at the early stage of the process, it might be difficult to anticipate in which countries business opportunities will arise. Conducting simultaneous filing in all countries that are of potential interest can be complicated and costly. Alternatively, inventors can choose to file an application under one of the following international treaty: (i) the Patent Cooperation Treaty (“PCT”), (ii) the Paris Convention, or (iii) the European Patent Convention (“EPC”). Both procedures enable applicants to file a single application in their home country, while preserving their rights in other countries. However, protection remains national and each designated country will apply its own regulation in examining the patent application. Besides, applicants extending their patent application in other countries are entitled to claim the filing date of their first application (the “priority date”) as the effective date of their later applications. The delay for claiming such priority date lets applicants perform market researches, seek funding, and turn their idea into a commercial product. Each of the PCT, Paris Convention and EPC presents specific features and we highly recommend inventors to seek professional advice.
An industrial design designates features of shape, configuration, pattern, or ornamental aspects of useful objects. Such aspects may include two-dimensional elements (i.e. lines, designs, colors) or three-dimensional elements (i.e. the shape of the object), but shall not solely be dictated by the function for which the related object is intended. Designs can be registered for a wide range of products, including computers, telephones, CD-players, textiles, jewelry and watches. Registered designs protect only the appearance of products. The function for which products are intended may be protected by a patent or copyrights. Designs enjoy a territorial protection, and need to be registered in every country where their owner is willing to use them. Designs are protected for a limited duration, which generally ranges between 20 to 25 years.
Since many commercial articles are sold and/or manufactured internationally, registration of designs in multiple jurisdictions is generally desirable. In order to avoid the complexity and costs of simultaneous national applications, applicants can choose to enjoy the provisions of the Hague System for International Registration of Industrial Designs (the “Hague System”). It allows applicants to file a single application in their home country, while designating other countries where protection is sought. However, protection remains national and each designated country will apply its own regulation in examining the application and granting design protection.
Copyrights grant the author of an original work, exclusive rights to use, license or sell such work. Copyrights apply to a wide range of creative, intellectual or artistic works, such as songs, books, movies, and other works of Art. Copyrights do not protect ideas and information themselves. They can only protect the form or manner in which the latter are expressed. Protection of copyrights generally lasts the lifetime of the author plus an additional period of 50 to 100 years. Once the term of copyrights has expired, the copyrighted works enter the public domain and can be freely used or exploited by anyone.
In principle, copyrights enjoy a territorial protection, and are only protected in the countries where they are registered. However, certain countries (including all the signatories of the Berne Convention) consider that a copyright exists the moment a work is “fixed”, rather than requiring registration. Authors shall therefore check which system is in force in the territory where they intend to enjoy protection of their work.
Cross-border tax planning in Asia
The structuring of businesses with Asian and international operations needs to take into account cross-border tax planning issues to aviod unnecessary “tax-leakage”.
The structure adopted should balance the requirements to reduce the overall rate of direct (corporation taxes) and indirect (GST, VAT, TVA, import duties etc) taxes paid by the group, with a realistic and practical operational set up, along with the need to make a fair contribution to society through the payment of tax.
This may also need to take account of a long-term aim of allowing the sale of the business to third party investors with minimal tax impact, as well as the manner in which the business is financed.
Depending on the nature of the activities each group will have different areas of tax risk which should be reviewed and addressed.
Issues such as Transfer Pricing for Intercompany Transactions, Marketing Service Agreements and Distribution agreements, Permanent Establishment, and Thin-Capitalization Rules will need to be reviewed based on the local country legislation, as well as considering the application of any relevant country specific Double-Tax Treaties. Local Anti-Avoidance rules and Controlled Foreign Corporation (“CFC”) legislation in Asia and elsewhere will need to be taken into account.
Businesses will often try to avoid a taxable presence or minimise assets/risks and maximise deductions in high tax jurisdictions, and maximise assets, functions and risks in countries with low tax regimes, taking advantage of low or no withholding taxes, preferential tax regimes, or even hybrid mismatches.
E-commerce businesses in Asia in particular, by the nature of their internet based activities, may be able to take advantage of these possibilities, although any presence whatsoever in the country of distribution (even local marketing) will need to be carefully planned depending on the specific legislation in the country where the final custmer is based.
These matters however are precisely the issues that the OECD is trying to deal with in its Base Erosion and Profit Shifting project. It will be more and more important that there is “substance” in any jurisdiction used for tax optimization.
Base Erosion and Profit Shifting (BEPS) OECD/G20
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs). The aim of the project is to bring to an end the practice of BEPS by international corporations.
The BEPS Action Plan endorsed by the G20 in July 2013 identified 15 key areas to be addressed.
The final BEPS package, which includes and consolidates the 2014 interim reports has been developed and agreed in just two years and covers the following Actions.
- Action 1: Addressing the Tax Challenges of the Digital Economy
- Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
- Action 3: Designing Effective Controlled Foreign Company Rules
- Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
- Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
- Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
- Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
- Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation
- Action 11: Measuring and Monitoring BEPS
- Action 12: Mandatory Disclosure Rules
- Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
- Action 14: Making Dispute Resolution Mechanisms More Effective
- Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
With the adoption of the BEPS package it is intended that OECD and G20 countries, as well as developing countries that participated in its development, will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occur. These principles are starting to be adopted at differing speeds across Asia.
Existing businesses already established in Asia will need to take account of these developments, analyse any impacts on their operations, and may need to think about restructuring their activities.
For more details see OECD BEPS
Exchange of Information for Tax Purposes in Asia
Tax and regulatory compliance – FATCA, GATCA, CRS and more…
In Asia and elsewhere holding companies, treasury companies, Trusts, Foundations, low-tax and “offshore” companies can provide useful tools for asset protection, succession planning and in some circumstances tax efficient planning.
A raft of new regulatory initiatives is expected to make the use of such entities more transparent in the country of residence (or even nationality) of the related parties. Individuals need to rapidly understand the implications of such legislation in all jurisdictions concerned and ensure that their tax planning is compliant in their home country. This will be relevant for individuals and businesses based in Asia.
As you will read below the regulations are complex. The cost-effectiveness of these data collection methods is disputable. The technical language used is often confusing, and their interpretation is still unclear in some circumstances. However despite that:
Automatic Exchange of Information on Tax Matters is coming soon.
This memorandum summarizes some of these important developments to help you better understand your personal situation. However each individual situation requires a detailed analysis of the personal circumstances, and the relevant legislation to understand the full implications.
We recommend individuals should review their affairs to ensure that their personal tax matters are in order, taking into consideration the implications of these new initiatives. This could also be the opportunity to make changes to existing structures to take account of changes in family circumstance and available tax and estate planning opportunities.
U.S. Foreign Account Tax Compliance Act (“FATCA”) [i]
As you will probably already be aware tax regulation adopted in the USA is already impacting all entities identified as Foreign Financial Institutions (“FI”) as from July 1st, 2014.
In short, FATCA mainly requires FIs to automatically exchange information on certain US taxpayers (“specified US persons”) with the U.S. Tax authority (“IRS”). Information to be reported mainly relates to investments in financial assets made by specified U.S. persons with an FI, either directly if the financial assets (shares, bonds, loans…) are held through a bank, an insurance company, an investment fund or another FI, or indirectly through investment into passive entities qualifying as Non-Financial Foreign Entity (“passive NFFE”).
When this legislation started out as part of the US HIRE Act, it was intended mainly to obtain information from various forms of foreign investment entities. Through various interpretations of the legislation the position has evolved so that many private asset holding entities, including trusts, foundations and offshore companies are also included.
Subsequent legislation adopted by the UK, its dependent territories, the EU and the OECD has been based largely word for word on FATCA. FATCA was written by the IRS based on definitions in the US Tax Code, and specifically adapted for the US taxation system.
Due to political pressure for a quick implementation process adequate time has unfortunately not been given by the legislators to resolve some of the areas of uncertainty inherent in FATCA before adopting the new texts. At the same time some of the definitions, which are more relevant to the US tax system, have not been removed.
In February 2014, the Organisation for Economic Co-operation and Development (OECD) presented a common global standard for the automatic exchange of tax information between countries. The standard is officially called the Automatic Exchange of Information (AEOI), and was originally referred to as “GATCA”, or Global FATCA (the Foreign Account Tax Compliance Act), but is now more commonly called The Common Reporting Standard (CRS). We provide more detail about the application of CRS below, as it will have an effect almost worldwide.
At the same time the UK moved forward with implementing similar FATCA styled agreements which provide for automatic exchange of information about UK residents with ‘reportable accounts’ in the UK’s Crown Dependencies and Overseas Territories. The UK tax authorities will start getting data about trusts and bank accounts held by UK residents in those countries by no later than 30 September 2016 for calendar years 2014 and 2015. Later periods will be reported under CRS which will supersede UK FATCA.
In the EU the CRS initiative will be implemented through a Council Directive on Administrative Cooperation (‘DAC’). Subject to implementation in each EU member country information will be exchanged between EU countries from 2017, with respect to account information for 2016.
The foundation for the CRS was laid in October 2014 when the international community took a significant step to increase international cooperation to reduce global tax evasion with the implementation of automatic exchange of information by 2017.
There are some fundamental differences between FATCA and CRS, however the main objective is the same – the automatic exchange of “account” information between participating jurisdictions.
Differences to FATCA
CRS is wider than FATCA in that:
CRS reporting is based on the residence of the account holder, whereas FATCA was based on nationality. Residence is a much harder concept to determine precisely, and CRS provides limited guidance on this complex issue;
Under CRS there is no de minimis threshold for pre-existing individual accounts with different procedures applying to higher value and lower value accounts.
There is no standard reporting template for CRS, unlike the W8 Forms using for FATCA classification.
Under FATCA FIs register on the IRS portal to receive a Global Intermediary Identification Number (GIIN). There is no such facility under CRS as there is no requirement for FIs to register, which will make it difficult to identify reporting and non-reporting financial institutions easily.
The reporting obligations for accounts and entities will depend on many factors, depending on the nature of the account, the reporting entity, and the implementation of the relevant jurisdiction legislation. Reporting financial institutions may include, but are not limited to, banks, brokers, collective investment vehicles, custodians, trustees and insurance companies.
The first matter to determine is whether or not the entity or the account is a reportable account within the scope of any applicable CRS agreement?
Countries are intending to sign up to the CRS Agreements at differing paces.
Legislation will need to be adopted in each jurisdiction to allow the AEOI to take place, and it will be adopted with slightly differing versions across the globe to take account of local circumstances. CRS allows jurisdictions a small amount of flexibility with respect to some definitions, for example that of a “Controlling Person of a Trust” for Passive NFEs.
Bilateral Agreements will then need to be put in place to enable the procedures to be finalised. There will be a need to address confidentiality, data protection and procedural issues between states. Political and commercial interests will also dictate the timing of these agreements, some of which might also be made dependent on the simultaneous negotiation of Comprehensive Double Taxation Agreements (DTAs).
There will be different reporting timeframes adopted in each of these agreements.
Around 100 countries are already signatories or are committed to implementing and applying this Standard. [ii]
For the 50 “early adopters” (as at 9.05.2017), Automatic Exchange of Financial Account Information will commence from 2017 on an annual basis between participating countries in respect to their tax residents. The first AEI of 2017 will relate to all account information of 1 January 2016. The reporting will be made via the local country tax office, which will in turn transmit the data in bulk to the resident’s home country tax office. An updated list can be found here.
Asia countries are mostly found in the list of “Late adopter countries”.
Early adopter countries – undertaking first AEI by 2017 in respect of 2016 information
Anguilla, Argentina, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands, United Kingdom
Late adopter countries – undertaking first AEI by 2018 in respect of 2017 information
Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Barbados, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Curaçao, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Niue, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Trinidad and Tobago, Turkey, United Arab Emirates, Uruguay, Vanuatu
Who will be affected?
Reporting involves individuals who own or “control accounts” in financial institutions either directly or through companies, trusts, foundations and in certain cases insurance policies.
Financial institutions have already started to request information to identify the relevant reportable accounts held by persons or entities. They will need to update and amend existing client due diligence and new client on-boarding procedures by 2016.
In the case of a trust (and Entities equivalent to trusts), the term Controlling Persons is explicitly defined under CRS to include the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust. If the settlor, trustee, protector, or beneficiary is an Entity, the Reporting Financial Institution must identify the Controlling Persons in relation to that Entity. It will be relevant whether or not a beneficiary has a fixed interest in the trust assets or not. For discretionary trusts it may also be relevant whether or not a beneficiary has received a distribution or not. A person who qualifies as a Controlling Person in several instances (ie. both as settlor and beneficiary of a trust) will be reported as account holder more than once and treated as having two accounts with that trust.
There will be different reporting depending on whether a Trust is an FI or not. This may also affect which entity will be the reporting party. The jurisdiction of the reporting party will dictate the timing of the first information exchange.
What is the type of the entity?
It will be necessary to undertake a classification of all entities to determine what is their status under CRS, UK FATCA or DAC. The analysis will be required for all entities in a group. The classification will determine what information is reported and when.
The most relevant entity types are the Financial Institution, and the Non-Financial Entity (NFE). In general terms an FI is a Depository Institution (eg. banks), a Custodial Institution (eg custodial bank, broker), an Investment Entity (an Entity investing and trading financial assets) or Specified Insurance companies. An entity whose assets are managed by an FI may also be considered to be an FI itself as a result.
A trust can be an FI, but that will depend on whether the trustee is an FI or not, and whether assets are managed professionally.
An NFE is essentially any Entity that is not a Financial Institution. NFEs are then split into Passive NFEs or Active NFEs.
A Passive NFE is an NFE that is not an Active NFE. The definition of Active NFE essentially excludes Entities that primarily receive passive income or primarily[iii] hold assets that produce passive income (such as dividends, interest, rents etc.). Trading companies will generally be Active NFEs.
Account information will not be reported for Active NFEs.
Account information to be reported
In summary the following details will be exchanged between tax authorities in relation to reportable accounts:
Name, address, date of birth, National Insurance number (and name and address of entity, if relevant).
Account number and details of financial institution.
Annually, the account balance or value, the total gross amount of funds paid or credited to the account (ie income) and the aggregate of any sale or redemption of assets.
Closure of an account held by a reportable person.
Challenging areas under CRS
There are various details of CRS reporting which are still unclear, and where the reporting may result in irrelevant information being reported to tax departments. We identify some of these below:
- It is likely that the same balances may be reported more than once for the same individual, and also may be reported in to more than one jurisdiction unnecessarily;
- Information will be reported to tax offices, where that information might not normally be available under local tax legislation. For example CRS ignores the distinction between “domicile” and residence;
- The definition of trustees as professional asset managers or custodians, and their subsequent classification as FIs is debatable;
- How should reporting be undertaken when beneficiaries comprise a discretionary class?
- How should settlor’s interests be reported in the case of irrevocable settlements, if at all?
- How should entities holding non-financial assets, such as real estate, artwork, or yachts be classified?
- How will this vast accumulation of data that will be collected worldwide be protected against leaks, and who will be liable for any damages caused in the case of such a leak?
- What will be the liability of FIs in the case of erroneous reporting?
- What should I do?
- To the extent that this is possible with the current state of the legislation and guidance, you should understand the reporting that will be made, to whom, and when;
- Verify with the relevant Financial Institution what information is held on file, how they have identified and classified the relevant reportable persons and Controlling Persons, and what account balances will be reported prior to reporting taking place;
- Take advice to ensure affairs are in order, so that when information is exchanged this will not cause any difficulty;
- There are many reasons for holding assets outside your home jurisdiction, whether for commercial reasons, for asset protection, or succession planning. Review these structures to determine whether they are still relevant and whether any changes are necessary to take into account changing circumstances;
Consider the use of Voluntary Disclosure Schemes where appropriate.
For more information on this subject you should note that the OECD has now launched its portal on the automatic exchange of information. The portal includes information about the automatic exchange of information (‘AEOI’), the Common Reporting Standard (‘CRS’), implementation and monitoring. Further information, such as implementation by individual jurisdictions, will be added in due course.
You will also find a update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance here
In May 2017 as part of its ongoing efforts to maintain the integrity of the OECD Common Reporting Standard (CRS), the OECD launched a disclosure facility on the Automatic Exchange Portal which allows interested parties to report potential schemes to circumvent the CRS. Also a further important step to implement the CRS was taken, with an additional 500 bilateral automatic exchange relationships being established between over 60 jurisdictions committed to exchanging information automatically pursuant to the CRS, starting in 2017.
Originally published November, 2015 with subsequent updates
Certain RBA International companies may provide tax and estate planning advice, and are available to assist individuals and their families in structuring and administering their assets in a tax efficient manner in compliance with international regulations.
Any further inquiry, please contact us.
[i] # – Originally discussed in a series of articles on the RBA International news website.
[ii] NOTE: The USA is not a participating country on CRS but they have indicated that they will be undertaking automatic information exchanges pursuant to FATCA from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions to do so. The Model 1A IGAs entered into by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions.
[iii] Specifically if less than 50 percent of the NFE’s gross income for the preceding calendar year or other appropriate reporting period is Passive income and less than 50 percent of assets held by the NFFE during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of Passive income”.
Corporate governance for My Business in Asia
WHAT IS CORPORATE GOVERNANCE?
The Organization for Economic Co-operation & Development defined corporate governance in year 2004 as:
“Corporate governance involves a set of relationships between a Company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across and economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth”.
The main purpose of corporate governance is therefore to provide a system of policies and procedures that enable shareholders, as the investors of the company, to monitor those parties within a company who control the resources owned by investors.
The primary objective of good corporate governance is to contribute to improve corporate performance and accountability in creating long-term shareholder value. The ultimate goal of corporate governance is to ensure that an organization is run in an efficient and sustainable manner. This requires a functioning board and management that can monitor and manage the existing and future risks of the organization.
The problem of separation of ownership and control
The problem of separation of ownership and control is attributable to the fact that the owners of the company are not involved in its management. In a private company the problem is not very serious since the major shareholders of the private company usually act as directors of the company. The problem of separation is more common for listed company.
The problem of agency costs is located at the heart of agency theory and it is created by the paradox of separation and control. The different objectives of the owners (shareholders) and the management (directors) are said to be maximization of profit for the former and maximization of self-interest for the latter. The shareholders wish to maximize the shares’ value whereas the management seeks to obtain the high remuneration. Under this situation, agency costs may be created, for example the monitoring cost, bonding cost and inflated compensation for directors.
Directors Duties and Shareholders Agreements
Directors should clearly understand their duties for targeting good corporate governance. These may be the subject of legislation, case law, and applicable codes of conduct. The may also be governed by rules adopted voluntarily by the company, or set down by group policies, or also be the subject of restrictions in shareholders agreements.
Businesses in Asia should understand the local legislation applicable, and adopt suitable group good governance policies policies.
Shareholders Agreements in Asia
One of the most common causes of business failure consists in shareholders’ disputes. It is particularly true when doing business in Asia, where foreign investors will often face cultural differences, local commercial practices and specific legal requirements. Unless pre-determined mechanisms have been settled for their resolution, such disputes can severely affect the viability of any business. Shareholders agreements can help reducing uncertainties and ensuring a fair outcome to potential disagreements.
Legally speaking, a shareholders agreement is a contract concluded between the founders of a company, in order to (i) define their respective rights and responsibilities, and (ii) organize the management of the said company. It is not intended to govern the complete day-to-day operations of a business, but instead addresses certain key issues in that respect. Investors shall bear in mind that shareholders agreements can organize the management of the company they invested in, as well as the management of their underlying subsidiary. This is a useful tool when the company laws and regulations of the country of such subsidiary allow less flexibility in terms of shareholders arrangements (see for instance Shareholders Relationships in China).
Shareholders agreements supplement the articles of association of a company. They shall comply with their mandatory provisions (as required by any given company law), but can freely adjust their non-mandatory provisions. Their content can rely on the framework of a memorandum of understanding or letter of intention (if any), which would have been adopted by the parties at an earlier stage of their cooperation project.
There is no standard shareholder agreement and such a contract will need to be tailored to the circumstances and the parties involved. For instance, founding shareholders who have no plan to issue additional share capital will pursue different goals than founding shareholders willing to raise successive rounds of funding to grow their business. Besides, shareholders’ agreements can be unanimous (i.e. agreed upon by all the shareholders of a company) or reserved to a smaller group of key stakeholders (which is often the case when different categories of shares distinguish between active and passive investors). Last but not least, arrangements adopted in shareholders agreements shall comply with the legal requirements of any given jurisdiction. These might vary substantially from one jurisdiction to another, and it is not recommended to use the same template of agreement for different countries.
Some of the key issues to be addressed in a shareholders’ agreement include the following:
Issuance of new shares and anti-dilution rights
Unless prevented from doing so by specific provisions, majority shareholders can generally (legally) decide to dilute minority shareholders by issuing additional shares in the company. This reduces subsequently the shareholdings and powers of these minority shareholders. Anti-dilution rights (also referred to as pre-emptive rights) reduce the efficiency of such a “trick”, by requiring the company to offer any newly issued shares to existing shareholders first, in proportion with their existing shareholdings.
Transfer of existing shares and exit options
Many provisions can be adopted in order to prevent the transfer of shares to undesirable third parties (including competitors). In most cases, shareholders agreements require share transfers to be approved by the company and grant existing shareholders an option to purchase the transferrable shares. Meanwhile, restrictions on transfers generally do not apply if the beneficiary is a wholly controlled affiliate, a shareholder’s family member or to a trust. Some common restrictions on share transfers include the following:
Right of first refusal
A right of first refusal offers existing shareholders the opportunity to purchase the shares of any shareholder wishing to sell theirs to a third party (at the same price and under the same conditions as those offered by that contemplated third party). Before selling their shares, the transferring shareholder shall first offer them to the other existing shareholders. If no existing shareholder accepts such offer, the transferring shareholder may transfer their shares to the designated third party, within a prescribed time-frame.
A tag-along option grants the minority shareholders the right to request a joint purchase of their shares by the third party acquiring all or a substantial part of the shares of the majority shareholders. In such case, the majority shareholders shall ensure that the shares of the minority shareholders who raised their tag-along right, will be purchased by the designated third party, under the same terms and conditions as those originally agreed with the majority shareholders. This option enables minority shareholders to leave the company if they don’t want to stay without the exiting majority shareholders or if they don’t want to cooperate with the new substantial stakeholder entering the company.
A drag-along option enables the majority shareholders to force the minority shareholders to leave the company, if they receive a bona fide offer from a third party to purchase the company, which they wish to accept. The drag-along option allows the majority shareholders to sell 100% of the company, free of any minority shareholders.
Management of the company
Board of directors
Usually, a majority of shareholders (51%) can appoint and remove directors from the board. Such power allows effective control of the company. It may not be fair to minority shareholders, especially if they hold a substantial shareholding (up to 49%). Instead, shareholders agreements can grant minority shareholders the right to appoint a director, which enables them to keep some control over the company’s governance. Many other arrangements can be adopted in a shareholders agreement (within the mandatory limits of the company law and articles of association) and include: board composition, notice provisions, quorum requirement, conduct of board meetings, directors’ appointment and removal, appointment of an observer who will attend board meetings without any voting power (often required by an investor who invested substantially in the company), etc.
More often, the mandatory provisions of any company law require the approval of shareholders on essential decisions, which by nature affect or change the original company set-up. It generally includes decisions dealing with capital increase or decrease, change of registered address, change of denomination, liquidation, etc. However, legal requirements are basic and shareholders may decide which strategic decisions shall be taken by the board and by the shareholders. A detailed list can be adopted in a shareholders agreement. Besides, shareholders can also decide to require a special majority (e.g. 75%) for essential decisions, going beyond any mandatory legal requirement.
Business partners often share common and/or complementary skills, which originally justified their collaboration through the incorporation of a company. But what happens when such partners split-up or want to develop parallel activities? Shareholders agreements can provide non-competition and non-solicitation clauses, which define in advance the limits under which such shareholders may carry competitive activities.
Sometimes, disagreements between shareholders lead to deadlock situations, where the company is unable to make any decision. It may seriously affect its ongoing business. In order to prevent such deadlocks, shareholders agreements can provide exit strategies, upon which one or more shareholders can be forced to buy out others. In such case, independent expertise or a pre-determined formula is often adopted to determine the value of the shares of the exiting shareholder(s).
Shareholders agreements can include many other provisions, such as dividend policy, information reporting, employees incentive schemes, share vesting, management of a subsidiary, protection of intellectual property rights, competent jurisdiction in case of litigation, etc. The assistance of an experienced legal counsel, qualified in the targeted jurisdiction, is highly recommended to ensure fair protection of the intentions and interest of all shareholders.
Estate Planning in Asia
Estate Planning, also called Succession Planning, is as important in Asia as anywhere else. The rules in many Asian jurisdictions may be more complex than you expect, and it is vital that you understand how they will affect you and your assets in the event of death or disability.
Many entrepreneurs don’t give priority to the structuring of the personal ownership of their business, preferring to concentrate on growing the business itself. This may lead to some very inconvenient and unexpected results such as frozen business assets, the inability to manage the business, and high death duties, as well as the impossibility to transfer the ownership to the next generation in the manner wished.
The nature of the assets (movable or immovable property), their location and applicable law, your marriage regime, and your estate wishes all need to be taken into account, based on international private law considerations.
RBA can assist clients to understand the estate planning issues surrounding their assets and the implications for its transmission. We can help by determining the law applicable to an estate, depending on nationality and residence issues and on the location of assets, and explaining the related wealth transfer, and succession rules, comparing civil law vs common law rules, or Sharia Law rules and managing the local forced heirship rules to increase the likelihood that your assets are distributed the way you want in the case of death or incapacity.
You might also need to think about what arrangements are made for the guardianship and maintenance of minor children in the event of your death or disability.
A well implemented estate plan will help reduce estate/inheritance taxes, and reduce the complications and costs of probate. It will ensure the provision of liquidity needed for estate settlement expenses at a minimum cost. Wills, trust and foundations, and life insurance are all part of the estate planning “toolkit”.
In 2015 new EU succession rules (Regulation (EU) No 650/2012 or the “Regulation”) entered into force, which scope affects every person (EU national or otherwise) owning assets in a European country.
From now on, international successions subject to these rules can be governed either by (i) the law of the last habitual residence of the deceased, or (ii) the national law of the deceased, if the latter unequivocally expressed such choice before his death.
The Regulation simplifies the current situation: a given succession can now be treated coherently, by one single court applying one single law. Citizens owning European assets should be aware of this reform and its practical implications, so that they can organise their international succession.
Family Offices in Asia
What is a Family Office?
A family office is an entity set up to manage and oversee the wealth management affairs of High Net Worth Individuals and their families.
Typically, family offices act as a multi-disciplinary organization offering tailored expert services centered around tax and financial planning, trusts and estate planning, investment management, risk management, accounting and compliance issues. Increasingly, many also focus on governance, philanthropy, family legacy and succession planning, and personal family needs with concierge and lifestyle services.
The role of the Family Office is to integrate and coordinate all of the wealth affairs of a family and act as a gatekeeper to the family.
Traditionally family offices were Single Family Offices (SFO), with dedicated staff serving the needs of one single family, with their origin dating back from European land-owning families and the Industrial Revolution. The Rockefellers were one of the first family offices created by ultra-wealthy American families with other legendary affluent families such as the Mellons, Pitcairns following suit that became the foundation for many of the larger U.S. family offices.
The decision to set up a family office stems from the need for a more centralized, dedicated organization to the wealth management affairs of a family offering a high level of control and privacy and total alignment with the family’s values, goals and interests. A SFO also contributes to foster better communication among family members and create a boundary between the family business and the business of the family.
There is no one family office and no “one size fits all” model. Each structure is catered to the family’s specific needs with some focusing more on the investment function, others more on the administrative and compliance matters or legacy building with a strong focus on wealth transfer, family education and philanthropy. The first step in determining the family’s wealth management needs is to identify the services that most apply to their circumstances and the cost to administer or outsource these services.
SFOs vs. MFOs
Given the costs of running a SFO with an average asset size of USD100m required to set up a SFO, the Multi-Family Office (MFO) concept has become increasingly popular to include a wider range of wealthy families with the benefit of consolidating cost due to the fact that the infrastructure, staff and technology are already in place and shared between several families. MFOs may also offer off-market co-investment opportunities to their family clients.
The MFO model has become an important alternative to the SFO model with an average number of 80 families being served, offering similar services as SFOs for a fraction of the cost with a wider array of services including fiduciary services, tax preparation, concierge services, property management, and art collections management as they have the ability to scale expertise, make their operating model more cost effective and attract top-tier talent.
Family offices in Asia
With Hong Kong and Singapore’s growth as offshore centres for private wealth and an attractive tax regime, both jurisdictions have witnessed an increase in the number of overseas wealthy individuals looking to relocate to Hong Kong and Singapore to set-up a structure to manage their wealth backed up by local specialists and experts in law firms and trust companies to support their activity. Estimates show that there might be as many as 200 family offices in Asia currently with 75% that were started since 2000, compared to about 1,000 in Europe and 3,000 in the U.S.
Driven by the region’s economic expansion, the number of wealthy individuals is expected to rise substantially. In addition, with an overwhelming majority of family wealth in Asia that remains concentrated in the hands of first-generation wealth creators and a major wealth transfer expected within the next decade, these factors will undoubtedly support the trend to set up family office structures.
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