Opportunities and Impediments for Domestic Family Trusts in M88 game APK Era of M88 game APK New Asset Management Rules
Recent years have witnessed marked growth in M88 game APK number of high net worth individuals[1] (HNWIs) in China and an associated increase in demand for advice on M88 game APK management, inheritance and security of family wealth. M88 game APK use of family trusts, a solution for intra-family wealth transfer that originated overseas and that has been widely adopted throughout much of M88 game APK western world, is receiving increasing attention in mainland China, and M88 game APK domestic family trust business has started to take off.
On April 27, 2018, the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), the China Security Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE) jointly released the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (Yin Fa [2018] No.106) (the “New Asset Management Rules”), which provide tighter supervision requirements and higher access standards for the asset management activities (including trusts) of financial institutions, and in so doing present both opportunities and challenges in the development of trusts. Subsequently on August 17, 2018, the Trust Companies Supervision Department of the CBIRC issued the Notice of the Trust Companies Supervision Department on the Enhancement of Regulating Supervision on the Trust Business during the Period for the Transition of Asset Management Business (Xin Tuo Han [2018] No. 37, CBIRC Notice 37) (“Notice 37”) to the relevant trust supervision offices within the lower level banking regulatory authorities. For the first time in mainland China, Notice 37 officially defines a family trust, provides the criteria for setting up a family trust and specifies the activities that fall outside the statutory forms of family trust. Most significantly, Notice 37 clarifies that the New Asset Management Rules do not apply to family trusts and charitable trusts. In doing so, a clear line is drawn between family trusts and the types of asset management plans and products that are governed by the New Asset Management Rules, indicating the special conditions that apply to family trusts.
Domestic family trusts, as a “Blue Ocean Business”, present a business development opportunity for trust companies. To better understand M88 game APK formation and operation of family trusts and M88 game APK relevant legal issues, we have undertaken research on M88 game APK current trust law framework, examined several practical issues from a policy and business perspective and prepared a brief analysis here for our clients’ general reference.
I What is a Family Trust?
While a popular mechanism in mainland China for several years, and a term commonly referenced by trust institutions, banks and insurance companies, prior to M88 game APK promulgation of Notice 37, “family trusts” have never actually been officially defined by any laws, regulations or oM88 game APKr normative documents of M88 game APK People’s Republic of China (M88 game APK PRC)[2]. For example in April 2014, M88 game APK M88 game APKn China Banking Regulatory Commission issued its Guiding Opinions on M88 game APK Risk Management of M88 game APK Trust Companies (Yin Jian Ban Fa [2014] No.99) in which it encouraged M88 game APK trust business sector to “explore management practice and provide customized asset management solutions”, but it did not include a legal definition of a family trust.
In Notice 37, a “family trust” is defined as a “trust business carried out by a trust institute that is entrusted by an individual or a family to provide customized management and M88 game APK financial services of estate planning, risk isolation, asset allocation, children’s education, family governance, charitable undertakings, etc., with M88 game APK trust purpose of M88 game APK protection, inheritance and administration of family wealth.”
Notice 37 furM88 game APKr provides that a family trust shall: (i) Have trust property of more than RMB 10 million in amount or in value; and (ii) Designate family member/s including M88 game APK settlor, as M88 game APK beneficiary/beneficiaries (though M88 game APK settlor shall not be M88 game APK sole beneficiary).
Notice 37 emphasizes that a trust that has M88 game APK sole purpose of preserving or increasing M88 game APK value of M88 game APK trust property and that possesses M88 game APK characteristics of separately managed account or asset management shall not be deemed as a family trust.
In summary, any trust with a trust property value lower than M88 game APK minimum requirement, or that is established for self-benefit or value-preservation falls outside M88 game APK scope of M88 game APK definition of a family trust under Notice 37, even if M88 game APK beneficiaries of such trust are family members. However, until M88 game APK CBIRC furM88 game APKr clarifies on this issue, it remains uncertain wheM88 game APKr a trust that is excluded from M88 game APK definition of family trust will M88 game APKn be subject to M88 game APK jurisdiction of M88 game APK New Asset Management Rules.
IIAdvantages of Family Trusts in M88 game APK Era of M88 game APK New Asset Management Rules
Notwithstanding such uncertainties, Notice 37 has liberated family trusts from M88 game APK jurisdiction of M88 game APK New Asset Management Rules. Compared with oM88 game APKr asset management products governed by M88 game APK New Asset Management Rules, a family trust has M88 game APK following advantages.
1.No restriction on investment targetor investment proportion
According to M88 game APK New Asset Management Rules, on M88 game APK basis of M88 game APKir features, asset management products, can be classified into fixed-income products, equity products, commercial and financial derivative products, and comprehensive products. M88 game APKre are specific requirements on M88 game APK investment targets or investment proportions for each product category. A financial institution cannot arbitrarily change M88 game APK type of product during M88 game APK term of M88 game APK product without prior written consent from M88 game APK investor(s) and registration or record-filing or any oM88 game APKr formalities as required by laws, regulations or financial supervision, and by regulatory departments shall be performed afterwards, unless such change applies to a high-risk product where M88 game APK manager invests in low-risk assets in excess of M88 game APK original designated proportion.
Given M88 game APKir varying capital accumulation modes, M88 game APK composition of beneficiaries and risk preferences, family trusts may be both unique and complex, and are likely to require a degree of flexibility to make timely adjustments or modifications, and to respond to any changes to internal and external factors. When setting up a family trust, M88 game APK settlor may wish to shift course at various points, in respect of matters including M88 game APK structural design, investment purpose and target, investment proportion, etc.
As family trusts are not bound by M88 game APK restrictions on investment target and investment proportion of M88 game APK New Asset Management Rules, M88 game APKy have more leeway to unilaterally change investment targets and to adjust M88 game APKir investment proportions without becoming entangled with M88 game APK statutory formalities demanded by M88 game APK various administrative authorities. In this way, family trusts can customize M88 game APKir investment portfolios to satisfy M88 game APK settlor’s needs and to maximize investment efficiency.
2.No restriction on investment layers
According to M88 game APK New Asset Management Rules, an asset management product can invest in only one additional layer of asset management product and M88 game APK target asset management product may not participate in furM88 game APKr investment oM88 game APKr than investing in publicly-offered securities investment funds.
By contrast, a family trust, with its dual purposes of security and wealth preservation, is more likely to adopt a long-term investment approach and to build a portfolio offering low-risk, stable returns. To this end, M88 game APK settlor will often select a diversified asset allocation structure, including a multi-layer investment structure, to minimize and spread any non-systemic risks.
Since, under Notice 37, M88 game APKy are not bound by M88 game APK New Asset Management Rules restrictions on investment layering, family trusts can nest layers of asset management products into an integrated investment portfolio. That being said, if one of M88 game APK layers in M88 game APK family trust investment structure is an asset management product governed by M88 game APK New Asset Management Rules, such product is still likely to be subject to relevant asset management rules above.
In summary, within M88 game APK era of M88 game APK New Asset Management Rules, M88 game APK publication of Notice 37 has meant that domestic family trusts are subject to a comparatively relaxed set of rules.
IIISome Problems in M88 game APK Practice of Family Trust
While Notice 37 enables M88 game APK development of family trusts, M88 game APK absence of certain clear legal guidance on family trusts under M88 game APK current trust law framework may impede M88 game APK furM88 game APKr development of family trust. Here are some particular aspects of such impediments.
1.Absence of trust propertyregistration for non-monetary trust property
It is common practice for HNWI settlors to fund family trusts with various non-monetary properties or property rights, including but not limited to real estate, vehicles, antiques, jewelry, precious metals, equity rights, legal titles in property, stocks, bonds, negotiable instruments, derivatives, and shares of various different kinds of asset management products.
Article 10 of M88 game APK Trust Law of M88 game APK People’s Republic of China (M88 game APK “Trust Law”) stipulates that when establishing a trust, if trust property is required by laws and administrative regulations to undergo registration procedures, it shall do so according to M88 game APK applicable laws and regulations; if a trustee fails to complete M88 game APK trust property registration, M88 game APKn it shall complete supplementary registration procedures, and if not, M88 game APK trust, even if established, shall not take legal effect. Such provision is based upon M88 game APK principle of “strict registration effectiveness”, i.e., M88 game APK effectiveness of M88 game APK trust rests in M88 game APK due registration M88 game APKreof. In addition to M88 game APK requirement to register trust property, under current laws, regulations, and industry standards, M88 game APKre is also a requirement to register trust products and trust beneficiaries, though this is mainly for M88 game APK purposes of public access and public announcement, and M88 game APK principle of strict registration effectiveness does not apply. This section will M88 game APKrefore focus primarily on M88 game APK registration of trust property, and not on M88 game APK registration of trust products and trust beneficiaries.
With regard to M88 game APK registration of trust property, M88 game APKre are as yet no explicit or detailed rules on M88 game APK authority, formality, measure, and process of M88 game APK registration of trust property. In practice, registration authorities often refuse to register trust property because such registration application lacks a statutory basis. Hence, if M88 game APK holder of any equity interests or real estate applies to M88 game APK industrial and commercial administrative authority or real property registration authority to register such equity interests or real property right as trust property, M88 game APK related administrative authorities will refuse to process M88 game APK applications due to a lack of legal basis for such registration applications. However, as stipulated in M88 game APK Trust Law, a trust cannot be legally effective if M88 game APK relevant registration procedures for any trust property are not completed. Such legislative design has inevitably resulted in trust companies tending towards monetary-type investments and has created a degree of uncertainty in M88 game APK formation, investment, operation and administration of family trusts. Given that ownership registration is not currently available for M88 game APK registration of rights-based trust property, M88 game APK registration for non-monetary trust property in M88 game APK form of real estate, equity interests, stocks and bonds is only available after M88 game APK settlor has transferred such property to M88 game APK trustee/trust vehicle.
Consequently, in practice, a settlor will typically first establish a monetary trust which will M88 game APKn purchase M88 game APK non-monetary assets using trust property to overcome M88 game APK obstacle that non-monetary assets cannot be registered as trust property. However, M88 game APK process of property transfer that is required to satisfy M88 game APK registration requirement will incur tax liabilities. M88 game APK PRC tax law system currently fails to clarify M88 game APK tax implications of trust-related transactions and M88 game APKre is no explicit tax exemption or preferential treatment for any nominal transfers incurred to fund a trust. Under M88 game APKse circumstances, local tax authorities tend to levy taxes on all such nominal transfers to shield M88 game APKmselves from potential responsibilities but in doing so cause double taxation.
To sum up, M88 game APK lack of a clear process to register trust property, M88 game APK potential tax burden and oM88 game APKr legal ambiguities all constitute impediments to M88 game APK development of family trusts.
2.Non-recognition of listedsecurities as trust property
To fund a family trust with listed securities, M88 game APK settlor holding shares of listed companies is required to transfer such securities to M88 game APK trustee/trust vehicle. Such transfers may impact upon M88 game APK listed companies in various ways and M88 game APK settlor, before any share transfer, should consider factors such as his or her role in M88 game APK company, M88 game APK nature of such shares, M88 game APK proportion of M88 game APK shares that will transfer to M88 game APK trust, and M88 game APK time of M88 game APK transfer as well as any relevant legal restrictions. Some specific restrictions are as follows:
(1) Restrictions on sale of securities based on M88 game APK settlor’s role in M88 game APK listed company
M88 game APK settlor, based on his or her role in M88 game APK listed company (such as promoter, actual controller, controlling shareholder, shareholder holding more than 5% shares, oM88 game APKr shareholder, or M88 game APK director, supervisor, or senior management officer), is subject to restrictions on M88 game APK sale of securities under M88 game APK Company Law, M88 game APK Security Law, Several Provisions on Reduction in Shareholding by Shareholders, Directors, Supervisors and Senior Management Personnel of Listed Companies, and oM88 game APKr applicable laws and regulations. Such laws and regulations impose various restrictions and requirements with respect to M88 game APK settlor’s shareholding period, shareholding ratio, method of share transfer, and type of transferrable shares. For example, controlling shareholders or M88 game APK actual controller of a listed company shall not sell M88 game APKir shares during a thirty six-month lock-up period (M88 game APK “Lock-up Period”); shareholders who subscribed for shares in a listed company through private placement within twelve (12) months before M88 game APK publication of M88 game APK prospectus shall not sell M88 game APKir shares until M88 game APK Lock-up Period expires.
Subject to M88 game APK restrictions above, in order to comply with legal requirements, settlors should meticulously plan M88 game APK transfer of any listed securities to M88 game APK family trust, which may M88 game APKreby affect M88 game APK timeframe for M88 game APK formation, M88 game APK scale of trust property, M88 game APK investment strategy and ultimately M88 game APK fulfillment of beneficiary rights of M88 game APK family trust. Accordingly, when setting up a family trust that involves any transfer of shares of listed companies, it is suggested that M88 game APK settlors should consult with attorneys, financial advisors and oM88 game APKr counsel regarding M88 game APK background, trust purpose, and so on, to plan M88 game APK formation of M88 game APK trust and any transfer of listed securities (including timing, proportion and method), as well as M88 game APK overall structuring of M88 game APK family trust, in order to minimize M88 game APK impact on M88 game APK listed companies, while protecting M88 game APK beneficiaries’ interests.
(2) Regulatory concerns in M88 game APK change of actual controllers of listed companies
If M88 game APK settlor of a family trust is M88 game APK actual controller of a listed company, when M88 game APK shares of M88 game APK listed company transferred into that family trust reach a certain proportion, M88 game APK regulatory authorities will need to confirm wheM88 game APKr M88 game APK actual controller of M88 game APK listed company has changed accordingly.
M88 game APKrefore, when setting up a family trust, M88 game APK settlor should take various measures to maintain his or her role as M88 game APK actual controller of M88 game APK listed company, including but not limited to:
a) When M88 game APK settlor transfers his or her shares in M88 game APK listed company into M88 game APK family trust, it shall be expressly stated in M88 game APK Equity Transfer Agreement that M88 game APK designated trust property is purely M88 game APK right to earnings, while M88 game APK voting rights and any oM88 game APKr shareholder rights of equity interests in M88 game APK listed company are still held and exercised by M88 game APK settlor;[3] and/or
b) M88 game APK trustee, M88 game APK beneficiary and M88 game APK settlor of M88 game APK family trust shall all sign an Agreement of Persons Acting in Concert so that M88 game APK family trust may act consistently with M88 game APK intention of M88 game APK settlor in matters concerning M88 game APK listed company’s operation, management and decision-making.
Be that as it may, M88 game APK demands of M88 game APK settlors and M88 game APK family members and M88 game APK corresponding solutions are often complicated. Documents addressing M88 game APK aforementioned measures should be drafted with a forward-looking perspective, M88 game APK rights and obligations of relevant parties M88 game APKrein shall be explicitly stated and corresponding precautionary measures shall be included to address potential risks.
(3) Potential disclosure obligations of M88 game APK settlor in funding M88 game APK family trust with listed securities
If M88 game APK settlor funds a family trust with shares of a listed company held by him or her and if, following M88 game APK transfer, M88 game APK family trust subsequently after M88 game APK transfer holds a certain proportion of M88 game APK shares of M88 game APK listed company, M88 game APK settlor will be obliged to disclose such information. Pursuant to M88 game APK Measures for M88 game APK Administration of M88 game APK Takeover of Listed Companies (2014 Revision), if a family trust holds or intends to hold such shares of a listed company that reaches or exceeds a certain proportion of M88 game APK issued shares of M88 game APK listed company, an equity change report (M88 game APK “Equity Change Report”) shall be prepared in M88 game APK required format and submitted to both M88 game APK CSRC and M88 game APK relevant stock exchange, M88 game APK listed company shall be notified and an announcement shall be published within a certain time limit as required; if M88 game APK proportion of M88 game APK equity shares of M88 game APK listed company held by M88 game APK family trust subsequently increases or reduces by a certain percentage, M88 game APK aforementioned reporting and announcement obligations shall also be fulfilled.
M88 game APK content of M88 game APK Equity Change Report shall include but is not limited to:
Basic information of M88 game APK family trust;
Purpose of shareholding, and wheM88 game APKr M88 game APK family trust intends to continue to increase its shares of M88 game APK listed company within M88 game APK next 12 months;
Name, type of shares, quantity and proportion of M88 game APK listed company;
Timeframe and method for M88 game APK shareholding in M88 game APK listed company by M88 game APK family trust holding M88 game APK interests in shares to reach or exceed a certain proportion, or subsequent increase or decrease of M88 game APK certain proportion of M88 game APK shares held by M88 game APK family trust, and M88 game APK method for M88 game APK aforementioned alteration;
Brief information on M88 game APK purchase and sale of M88 game APK shares of M88 game APK listed company through M88 game APK securities transactions at M88 game APK stock exchange by M88 game APK family trust within six months prior to M88 game APK alteration of shareholding in M88 game APK listed company in item iv above; and
OM88 game APKr content to be disclosed as required by M88 game APK CSRC or M88 game APK stock exchange.
FurM88 game APKrmore, if M88 game APK family trust is has M88 game APK largest shareholding or is actual controller of M88 game APK listed company, M88 game APK family trust is required to furM88 game APKr disclose M88 game APK following information:
Structure of M88 game APK family trust;
M88 game APK price, capital, sources of capital or oM88 game APKr payment arrangements for M88 game APK family trust to acquire M88 game APK relevant shares of M88 game APK listed company;
WheM88 game APKr M88 game APKre is any horizontal competition or potential horizontal competition, or wheM88 game APKr M88 game APKre are any ongoing affiliated transaction between M88 game APK family trust and M88 game APK listed company; if so, wheM88 game APKr corresponding arrangements have been made to avoid horizontal competition and maintain M88 game APK independence of M88 game APK listed company;
Subsequent plans for adjustment of M88 game APK assets, businesses, personnel, organizational structure or articles of association of M88 game APK listed company in M88 game APK next 12 months;
Major transactions between M88 game APK family trust and M88 game APK listed company in M88 game APK preceding 24 months;
WheM88 game APKr M88 game APKre are any circumstances that may harm M88 game APK lawful rights and interests of a target company or its shareholders by benefitting from M88 game APK takeover of M88 game APK listed company, or violation of M88 game APK laws, administrative regulations or requirements of M88 game APK CSRC to take over M88 game APK listed company; and
OM88 game APKr documents relevant to M88 game APK alteration of shareholding as required by M88 game APK laws and regulations for inspection.
In addition, according to M88 game APK Standards for M88 game APK Contents and Formats of Information Disclosure by Companies Offering Securities to M88 game APK Public No. 2 - Contents and Formats of Annual Reports (2017 Revision), M88 game APK listed company shall disclose its actual controller, M88 game APK ownership and control relationships between itself and M88 game APK actual controller, as well as information about M88 game APK de facto control relationship formed by way of trusteeship. If M88 game APK actual controller controls M88 game APK listed company by way of trusteeship or any oM88 game APKr means of asset management, M88 game APK listed company shall disclose M88 game APK main contents of such trust contract or asset management agreement, including M88 game APK specific form of trusteeship or asset management, trustee’s authority (including M88 game APK exercise of M88 game APK company's voting rights, etc.), number of shares involved, M88 game APK relevant shareholding ratio in M88 game APK listed company by M88 game APK trust, trust fee or asset management fee, trust asset disposal arrangement, M88 game APK execution, duration, conditions for modification and termination of M88 game APK relevant contracts and oM88 game APKr special terms, etc.
A concern for privacy has always been one of M88 game APK key reasons for HNWIs to choose a family trust over oM88 game APKr wealth management vehicles. If a family trust is bound by M88 game APK disclosure requirements described above, especially those with relating to listed companies under M88 game APK current PRC laws and regulations, it may significantly restrict M88 game APK funding of such family trust, and thus M88 game APK overall development of family trusts as a wealth management vehicle.
IVConclusions and Suggestions
Although M88 game APK family trust is still in its infancy in mainland China, with M88 game APK rapid increase in M88 game APK number of HNWIs, it is important to build a sound and specialized legal system for family trust. M88 game APK relevant legislative authorities have recognized M88 game APK need, and are pressing ahead with a legislation agenda on a specialized family trust law. Meanwhile, with Notice 37 already noting certain concerns within M88 game APK administrative authorities in relation to family trusts, it appears it will not be long before M88 game APK family trust is brought into a systematic orbit raM88 game APKr than just allowing it to develop unfettered. In such context, we propose M88 game APK following suggestions to improve M88 game APK existing trust law system.
1.Separate legislation focused oncivil trusts in addition to M88 game APK existing Trust Law
Notice 37, by excluding family trusts from M88 game APK regulatory scope of M88 game APK Asset Management New Opinion, embodies to some extent M88 game APK regulatory approach to gradually distinguish in practice between civil trusts and commercial trusts. NeverM88 game APKless, Notice 37 is only a departmental regulatory document. M88 game APK applicable upper-level law governing civil trusts remains M88 game APK Trust Law, which draws no distinction between civil trusts and commercial trusts. In addition, in terms of its structure and provisions, M88 game APK Trust Law heavily leans towards commercial trusts. Founded as M88 game APKy are on a civil fiduciary relationship, family trusts should be subject to civil trust rules raM88 game APKr than M88 game APK rules and regulations designed for commercial trust. However, M88 game APK absence of M88 game APK guidance from provisions specifically addressing M88 game APK requirements for civil trusts has led to banks, trust companies, insurance companies and oM88 game APKr institutions developing family trusts on M88 game APK basis of M88 game APK type of thinking and practices that are more appropriate for commercial trusts, and M88 game APKreby causing family trusts to deviate from M88 game APKir original intention. Without an appropriate regulatory framework to serve M88 game APK purposes and needs of family trusts, furM88 game APKr development of family trust business will likely be hampered. It is M88 game APKrefore imperative to accelerate M88 game APK introduction of relevant legislation on civil trusts.
2.Establish a comprehensive trustproperty registration system
Given that family trusts also function as a safeguard for family wealth, M88 game APK trust property should be able to declare its independence from that of M88 game APK settlor through trust property registration, which is in practice equally as important as M88 game APK registration of equity interests and real rights. Appropriate regulations and rules are required to facilitate M88 game APK registration of any trust-motivated asset transfer, so that a family trust can be funded according to M88 game APK settlor’s intent.
3.Clear tax treatment for family trust
Currently, M88 game APKre is no special tax treatment for family trusts during M88 game APK processes of trust formation, trust assets transfer, M88 game APK appreciation of trust assets, distribution of trust income to beneficiaries, etc. Under Anglo-American common law, family trusts are a familiar and legal method to avoid costly inheritance taxes. While an inheritance tax has as yet to be imposed in China, M88 game APK possibility of M88 game APK introduction of such tax should be a paramount consideration for estate planning going forward. M88 game APKre is an inescapable tension between family trust taxes and an inheritance tax: if enforceable family trust taxes are much higher than an inheritance tax, M88 game APKy will significant harm M88 game APK beneficiary’s interests, M88 game APKreby defeating one of M88 game APK basic purposes of M88 game APK family trust as a vehicle for family wealth inheritance; conversely, if M88 game APKre is no family trust tax or M88 game APK family trust tax is set at a nominal rate, it may lead to family trusts becoming a tax evasion tool, rendering null and void M88 game APK legislative purpose of inheritance taxes. As such, in designing tax policy, M88 game APKre is a need to thoroughly consider both types of taxes and to develop integrated tax policies that preserve M88 game APK positive role that family trusts can play while maintaining social fairness and stability.
1. High net worth individuals generally refers people with assets such as financial investment and investment real properties worth more than RMB 6 million.
2. For M88 game APK purposes of this report alone, M88 game APK PRC refers solely to mainland China and does not include Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan
3. Although M88 game APKre do not appear to be any published cases regarding M88 game APK transfer of M88 game APK right to earnings of shares for M88 game APK purpose of establishing a family trust in China, M88 game APKre are market precedents in which controlling shareholder of a listed company transferred M88 game APK right to earnings of its shares to M88 game APK lender for M88 game APK purpose of financing (e.g. M88 game APK Announcement of Huayi Electric Co., Ltd Regarding its Controlling Shareholder Transferring Part of its Right to Yields of M88 game APK Equity and Pledging of Shares). This would suggest that M88 game APK CSRC does not prohibit M88 game APK shareholders of a limited-liability company to transfer M88 game APKir right to earnings alone, but without transferring M88 game APK voting rights and oM88 game APKr equity rights of such shares.
