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Hong Kong
therefore a transfer of only USD1.00 could
Estate duty: avoiding trigger the provisions. For example if you
provide USD1 for share capital in an
offshore company that could be sufficient to
a transfer of property trigger the controlled company rules
(assuming the other conditions are met).
There is no time period specified. The
By Christian Stewart, Head of Wealth Advisory, transfer of property may have occurred
10,15 or 20 years ago - which needs to be
Asia Pacific, JP Morgan Private Bank, Hong Kong considered.
In the Ordinance, there is no concept
of excluding fair market value transactions
or bona fide commercial dealings with a
controlled company. The example was given
ffshore companies are typically that holds Hong Kong situs property at the above of subscribing USD1 for an issue of
O an integral part of an international
structure and one of the functions
they serve (apart from the
provision of a layer of legitimate
confidentiality and to make administration
date of death of the deceased. Second, the
company must be a “controlled company”1.
Third, there must have been a “transfer of
property” to the controlled company (and
most advisors would assume that this means
a share. If you sell an asset to a controlled
company this will still amount to a transfer
of property (the asset the subject of the sale)
to the controlled company; the fact the
company pays for the asset (so that the net
easier) is the avoidance of estate taxes on a a transfer of property to the controlled asset position of the company may not alter)
global portfolio of investments. There is an company by the deceased2). Fourth, benefits does not appear to be relevant. There is a
exception to this estate tax protection, must have accrued to the deceased from Departmental Interpretation and Practice
however, and that arises in relation to Hong the controlled company within the three- Note issued by the Estate Duty Office
Kong situs investments. year period prior to the date of death. which, while not having the force of law,
For the purposes of this article we can attempts to set out guidelines for taxpayers
The controlled company rules simply assume that a company (whether on when, in practice, the Estate Duty Office
The Hong Kong Estate Duty Ordinance Hong Kong incorporated or incorporated would enforce the controlled company rules.
(the “Ordinance”) operates to impose estate offshore) will be a controlled company if it This Practice Note informally introduces
duty on the Hong Kong situs property that has one individual as a shareholder; or if its exceptions for commercial transactions3.
passes on a person’s death, or that is deemed sole shareholder is the trustee of a family
to pass on their death. The Ordinance does trust; or if it has a number of family Associated operations
not make a distinction between persons members as the shareholders. Consider an individual who settles
who are Hong Kong resident or domiciled USD1,000 outside of Hong Kong to
and those who are not. A transfer of property constitute a family trust (whether it is
Can you avoid Hong Kong estate duty by The intention of this article is to focus on revocable or irrevocable does not matter).
setting up an offshore company to own those the concept of a “transfer of property” and The trustee then uses part of that initial
investments? Would you then be able to to attempt to answer the question of trust fund to form an offshore investment
argue that what you own when you pass whether you can avoid the controlled holding company for the trust. Even
away (or the property owned by the trustees company rules if you can avoid making a assuming that the trustee has, under the
of the revocable trust that you established) “transfer of property” to the controlled terms of the trust instrument, the power
are the non Hong Kong situs shares in this company? and the responsibility for forming the
offshore company and therefore there is The first thing to note is that, even investment holding company (so that it was
no estate duty liability? without looking too far into the Ordinance, not directed in its actions), has there been
Unfortunately Hong Kong’s “controlled it soon becomes clear that it is not that easy a “transfer of property” to the investment
company rules” are designed to pierce the to avoid making a “transfer of property” to holding company by the individual?
corporate veil (for estate duty purposes) in a controlled company. Consider the Most likely there will have been a
these circumstances, ie the shareholders of following points. transfer of property in the above example by
the offshore company are deemed to own There is nothing in the Ordinance that way of “associated operations” from the
the underlying Hong Kong situs limits this to Hong Kong property. The individual as settlor of the trust to the
investments. controlled company provisions might company. The property used to fund the
Traditionally it is assumed that the therefore become operative if you made a share capital or to pay the incorporation
controlled company rules will apply once transfer of non-Hong Kong situs property to costs of the company will have come from
the following four conditions have been the controlled company. the initial trust fund (which in turn will have
satisfied. First, there must be a company There is no de minimus amount, come from the settlor).
FEBRUARY 2004 www.offshoreinvestment.com 29
Hong Kong
Section 3(3) of the Ordinance provides We are looking at the statutory concept of had no scope to operate in light of such an
that: “A person shall be deemed to have “associated operations” and not implied express statutory code. Not so it appears.
made a transfer of property to a company if general anti avoidance principles5. The so Arrowtown logically suggests that
the property came to be included in the called Pong Case established that operations advisers who are seeking to avoid the express
resources of the company by the effect of a can be “associated operations” for estate provisions of the controlled company rules
disposition made by him or with his consent duty purposes even if they are not pre clearly also need to consider the implied
or of any associated operations of which ordained and even if there is a substantial general anti avoidance principles.
such a disposition formed one.” time lapse involved6. Hence “associated www.jpmorgan.com
In section 3(1) “disposition” is defined as operations” could in some respects be a
including “any trust, covenant, agreement or much wider concept than that of implied Archive link: “Coming to terms with
arrangement, whether made by a single general anti avoidance principles. Hong Kong’s estate duty” - September
operation or by associated operations, and 2002, Issue 109
also, in relation to shares in or debentures General anti avoidance principles (or “is section
of a company, the extinguishment or any 35 a discrete code?”) ENDNOTES
alteration of rights attaching thereto, The main provision imposing the
1 There is no requirement that the deceased
whether effected by a single operation or by controlled company charge is section 35(1)
must have had control of the company,
associated operations.” of the Ordinance. In fact the controlled
hence the name controlled company is in
What needs to be considered is the company provisions range from sections 34
fact quite misleading.
definition of “associated operations” (also through to 45 of the Ordinance. As has been
to be found in section 3(1) ) because this noted above, by incorporating the concept
2 In their Interpretation and Practice Note
definition substantially expands the concept of “associated operations” the controlled
on the controlled company rules, the Estate
of “disposition”. The concept of associated company provisions are already quite wide
Duty Office state the view that the
operations should allow for the tracing of ranging in their express scope. Does this
controlled company rules could be invoked
property in order to ascertain if a person rule out any room for the Estate Duty Office
even if it is not the deceased who made the
has made a transfer of property to a to seek to apply implied general anti
transfer of property to the controlled
controlled company. avoidance principles based on case law if a
company. Without attempting to address
Consider the following example. An way can be found to avoid the express
this view here, it will be seen from this
individual settled a family trust over ten wording of the controlled company
article that even if the transfer of property
years ago. The trust fund has been invested provisions (ie, if you can find a “loophole” in
must be made by the deceased, it is quite
in various ways and the trustee directly holds the controlled company rules themselves)?
hard to avoid this requirement.
some Hong Kong listed stocks. It is then In Pong the Court of Final Appeal in
decided to wind up the trust structure and Hong Kong held that the statutory concept
3 The problem with this is that it leaves a lot
to start over again (for example because the of associated operations certainly did not
of discretion to the Estate Duty Office to
settlor and the beneficiaries have decided rule out the possible application of general
decide whether or not they think a
they want to change trustee company and anti avoidance principles in relation to estate
practical approach should be taken as
the proposed new incoming trustee prefers duty matters.
opposed to a strict technical approach.
to have its standard form trust instrument Quite recently there was a Hong Kong
adopted). The intention therefore is to pass stamp duty case called the Arrowtown
4 If the original settlor is a beneficiary the
the trust assets back to the original settlor4 Case7, in which the Court of Final Appeal
original trust most likely has not provided
who can then start again. With a view to relied on general anti avoidance principles
any estate duty protection. The typical
trying to mitigate any three year gifting risk, to strike down a stamp duty mitigation
approach to Hong Kong estate duty
the proposal is that the current trustee will scheme that was intended to make clever
planning involves irrevocably excluding the
first incorporate a new offshore holding use of section 45 of the Hong Kong Stamp
settlor of the trust.
company, will transfer the portfolio Duty Ordinance (an exemption for transfers
investments to that new holding company; between associated bodies corporate, which
5 Implied general anti avoidance principles
and will instead distribute the shares in the is essentially the same provision as section
refers to the Ramsay Doctrine; WT Ramsay
offshore holding company to the settlor 42 of the UK Finance Act 1930, as
Ltd v IRC [1982] AC 300.
(who can then settle those shares onto a amended).
new trust). Section 45 of the Stamp Duty Ordinance
6 Shiu Wing Ltd v Commissioner of Estate
Does the fact that you have a ten year contains its own express anti avoidance rules,
Duty (2000) 3 HKCFAR 215.
time lapse and that the creation of the which the scheme in Arrowtown on the face
investment holding company was never pre of it appeared to circumvent. It also seems
7 The Collector of Stamp Revenue v
ordained mean that you have no controlled likely that most professional advisers in Hong
Arrowtown Assets Limited 4 December
company exposure in this scenario? Kong would have assumed that implied
2003.
Unfortunately this can not be concluded. general anti avoidance principles would have
30 www.offshoreinvestment.com FEBRUARY 2004
