OLN
This year OLN has been ranked as one of the three law firms in Hong Kong for the 2019 Employer of Choice, Asia’s Best Law Firms to Work For, by Asian Legal Business. The ALB Employer of Choice Rankings were compiled taking into account responses from more than 2500 private practice lawyers across Asia, ranging from managing partners to paralegals, as well as ALB’s market knowledge.
The ranking was recently published by ALB magazine April 2019 Asia Edition.
On 18 February 2019, China National Intellectual Property Administration (“CNIPA”), formerly known as the State Intellectual Property Office of China (“SIPO”), announced that:
Effective from 1 April 2019, the examination of patent and trademark matters shall be conducted in the name of CNIPA. The new official seal of CNIPA shall be put into use, so it will replace the previous seals of PRB, CTMO, TRAB and TECC.
For more details, please visit the CNIPA website at http://www.cnipa.gov.cn/zfgg/1135993.htm.
Note 1: The new/updated formality documents published on 1 March of 2019 are substantially the same as previous ones. The slight changes such as from CTMO/TRAB to CNIPA have not affected applicants’ execution so far.
Note 2: Given that the CTMO and TRAB have been incorporated into the CNIPA, the application and granting of trademarks, patents, layout designs of integrated circuits, and GIs is under the independent governance of the CNIPA. So after 1 April 2019, the CNIPA is the defendant/plaintiff in administrative lawsuits in relation to patent and trademark affirmation and authorization.
It is common ground that inheritance tax or estate duty has long been abolished in Hong Kong. The recent case of Wong Suet Foon Shirly v Collector of Stamp Revenue [2019] HKDC 268, however, sheds light on possible stamp duty liabilities under section 27(1) of the Stamp Duty Ordinance (Cap. 117) arising from the assignment of property from the deceased’s estate by way of an Assent to the children of the deceased.
Background
The Appellant in this case is one of the five surviving children of the deceased who died intestate in 20 February 2012. The five children are beneficiaries having equal shares in the deceased’s estate comprising a property under the Tenants Purchase Scheme (租者置其屋計劃) of the Hong Kong Housing Authority (“HKHA”), which restricts alienation. Having received erroneous advice from the HKHA that only two children can become the succeeding owners of the property, the surviving children mutually agreed that 3 of them would renounce their rights in connection with the property, leaving the Appellant and another sibling as the joint tenants of the property. This agreement was effected by a Deed of Family Arrangement dated 3 May 2014. Subject to this Deed, the Appellant, being also the administrator of the estate, executed an Assent on 16 October 2014, thereby vesting the property onto the Appellant herself and the sibling beneficiary.
The Deed was presented to the Inland Revenue Department (“IRD”) for adjudication of any stamp duty payable. An amount of HKD16,650 was assessed and paid. As for the Assent, IRD initially adjudicated that it was not chargeable with any duty. However, the appellant was later informed by a letter of IRD that both the Deed and the Assent were chargeable with stamp duty as conveyances on sale within the ambit of section 27(1) of the Stamp Duty Ordinance, as they “operate as voluntary disposition(s) inter vivos” to the extent that “the transfer(s) of the Property is in excess of the transferee’s entitlement in the estate in accordance with Intestates’ Estate Ordinance”. Consequently, IRD opined that stamp duty at Scale 1 rates (the higher rates) were payable unless the property concerned was a residential property and that the transferor and the transferee were closely related, in which case the lower rates of Scale 2 rates would apply.
The Appellant’s contentions
Dissatisfied with the assessment, the appellant appealed and contended that:- (1) the erroneous advice by HKHA caused the assignment of the property; (2) the transfer was between two close relatives and thereby Scale 2 rates should apply; (3) the transfer of the property under intestacy should be exempted from any stamp duty; and (4) it would be inappropriate to levy the Scale 1 rates stamp duty for the transfer of a property to the beneficiaries succeeding.
Issues before the court
Noting that after the appeal had commenced, IRD changed its stance by written submission that stamp duty would only be payable on the Assent but not the Deed. The issues before the court were:- whether the disclaiming of the 60% interest or entitlement to the property was a conveyance operating as a voluntary disposition attracting stamp duty; and second, if it was, whether Scale 1 or Scale 2 rates should be chargeable.
Decision of the Judge
The two issues were ruled in IRD’s favour. The judge ruled that the Assent constituted a conveyance operating as a voluntary disposition inter vivos within the meaning of s27(1) of the Stamp Duty Ordinance. First, the wording in clause 1 of the Assent clearly stated that it was to be used as an assignment. Secondly, a conveyance operates to assign all rights and interests including beneficial interests and the Assent gave effect to that in the present case, resulting in the Appellant and the sibling beneficiary acquiring the legal and beneficial interest in the property. Thirdly, the Assent must be a conveyance as it conveyed a substantial benefit on the Appellant and the sibling beneficiary in excess of their entitlement. As to the contention point of the erroneous advice of HKHA, the judge found that it had no bearing on the two issues for the fact that HKHA never restricted the number of assignees for properties under the Tenants Purchase Scheme. In light of the above, the judge came to the conclusion that the Assent was chargeable, and chargeable with the amount of HKD16,650.
Conclusion
Whether the appellant will appeal the Judge’s decision remains to be seen and as such, the court’s decision on the two issues is yet to be definitive. Nevertheless, this case serves as a cautionary tale for the possibility of tax liabilities in probate scenarios. Being mindful of that in estate planning avoids unwanted and unnecessary costs incurred from the transfer of estate properties to your loved ones.
OLN provides a full range of probate and trust and tax advisory services. If you have any questions regarding the above or on any tax issues, please contact one of the members of the tax advisory team.
Quite recently in Poon Cho-Ming, John vs Commissioner of Inland Revenue [2018] HKCA 297, the Court of Appeal held that Mr. Poon’s (“the Taxpayer”) entitlement to the termination package was not “from his office or employment” and thus was not taxable. Previously, in Fuchs v CIR (2011) 14 HKCFAR 74 and Mrs. Murad and Others v CIR HCIA 1/2009, the courts held that the relevant taxpayers’ entitlements to the termination payments were “from [their] office or employment” and were consequently chargeable to salaries tax.
Despite of the differences in findings and outcomes, the courts when assessing the taxability of the termination payments had consistently adopted a “substance over form” approach in which they looked at the purpose and nature of the termination payments notwithstanding the labels of such payments.
The Taxpayer served, among other important roles, as the Group CFO and executive director of a company (“the Employer”). On 18 July 2008, the chairman of the board informed the Taxpayer of his immediate termination of employment and wished both parties could come to terms to avoid adverse publicity. The chairman also mentioned that the Taxpayer would be given payment in lieu of notice and for accrued and unused annual leave upon his termination. As to the unvested share options held by the Taxpayer, the chairman might consider them but there was no mention of the discretionary bonus.
The Taxpayer was aggrieved by the Employer’s decision and, after seeking legal advice, informed the chairman that he would either take this matter to the hands of the shareholders to create negative shareholder reaction or file a claim to the court to attract unwarranted media’s attention (“the Two Actions”). The Taxpayer, however, at that time failed to consider that he was obliged under his service agreement to resign at the request of the Employer upon his termination of employment. Nonetheless, the Taxpayer’s intention to challenge the Employer in respect of his directorship with his Two Actions was not disputed.
Finally, on 20 July 2008, the Taxpayer and the Employer signed a separation agreement and the Taxpayer’s employment was terminated on the same date (“the Separation Agreement”). The Separation Agreement contained the following material provisions:
Various sums under the Separation Agreement were later chargeable to salaries tax which prompted the Taxpayer to challenge their taxability in the Inland Revenue Board of Review (“BOR”). By the time the case reached the Court of Appeal, only the taxability of the Discretionary Severance Payment and Share Option Gain remained to be an issue.
Section 8(1) of the Inland Revenue Ordinance (Cap. 112) provides that “income from office or employment” is chargeable to salaries tax and such income is defined in the following section 9 to include any salary, leave pay, bonus, gratuity and gain realized by the exercise of share options obtained by the taxpayer as an employee etc. Sections 8(1) and 9 apply to all payments including payments given on termination of employment.
Even though section 9 defines the types of payments that would fall under the meaning of “income from office or employment”, labelling the payments otherwise than types specified under section 9 would not render such payments non-taxable. The test as set out in Fuchs v CIR (2011) 14 HKCFAR 74 stipulated that the court should look at the substance of the bargain for the payments, inter alia, the nature and purpose of the payments before deciding on whether the payments were “income from office or employment”.
The Fuchs case further provided that (1) payments specified under the contract of employment and (2) payments in return of the person acting as or being an employee, or as a reward for his services past, present or future were both classified as “income from office or employment”.
The Court of Appeal held that both the Discretionary Severance Payment and Share Option Gain were not payments “from the employment”. It is because the Taxpayer was not entitled to such sum under his service agreement and the purpose of such payments was for the Taxpayer to agree to give up on taking the Two Actions and to resign from his office peacefully.
In relation to the Discretionary Severance Payment, the Taxpayer‘s right to discretionary bonus stemmed from his service agreement, however, the decision-making procedure which was required for the board to make decisions as to the bonus had not even commenced yet. As such, the Discretionary Severance Payment was an “entirely arbitrary amount”. The COA also considered that attention should be placed to the actual facts surrounding the Discretionary Severance Payment at that relevant time and it was irrelevant that the Taxpayer would have had to pay tax if he had received the discretionary bonus.
Separately, even though the board had a discretion under the Grant Letters of the share options to the Taxpayer to accelerate the vesting dates of share options that fell within the notice period, the vesting date of tranche C of the share option did not fall within the notice period at that time. The number of share options with accelerated vesting was therefore decided “arbitrarily”.
Not until the judgement is overturned by the Court of Final Appeal (which in our view is quite unlikely), the following remarks still hold:
Issues relating to the taxability of the termination payments are technical and merely relying on the labels of the termination payments is not going to achieve the intended purpose. OLN offers a range of related services to assist our clients, including drafting of the employment contract and the termination agreement, advising on the negotiation of the termination payments and handling any requisitions raised by the IRD. If you are interested in our services or have any issues regarding the above, please contact any member of our employment law and tax advisory team.
It is common for settlors to try retaining a degree of control over their settled assets. After all, it is only human nature wanting to keep an eye on your wealth.
However, in order to enjoy the benefits of a trust, the trust needs to withhold scrutiny. In this article, we shall look at the recent landmark case of Mr. Pugachev to understand more of the Court’s considerations.
Prior to Mr. Pugachev’s case, in Clayton v Clayton [2016], the New Zealand Supreme Court asserted that a finding of the trust as a sham or to be illusory would both invalidate a trust. Following that, the English High Court in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] held that an analysis of the true effect of the trust deeds is needed in order to determine whether the trust is illusory or, in more general terms, succeeds in divesting the beneficial ownership of the assets from the settlor.
The case centers on Mr. Sergei Pugachev, a Russian entrepreneur and the founder of MezhProm Bank (the “Bank”) which was once a leading private bank in Russia but collapsed following the financial crisis and finally declared bankrupt in 2010.
From 2011-2013, Mr. Pugachev set up five discretionary New Zealand trusts (the “Trusts”). Although the Trusts were not identical, they shared the features below:
In 2014, proceedings were brought against Mr. Pugachev in London to enforce the judgement given in Moscow where Mr. Pugachev allegedly embezzled the Bank leading to its downfall. The English Court has since issued numerous orders and in this latest judgment, the claimants alleged that Mr. Pugachev has retained beneficial ownership of the assets in the Trusts and sought orders requiring the assets be vested in them or the Court appointed receiver.
The Court granted the said orders by reason of the following:
The Court held that when analyzing the True Effect of the Trust, it is entitled to construe the trust instruments as a whole and involves considerations such as who exercises the power and to whom the benefit of the power is given to and whether the individual is taking up several roles within the Trust. The relevant analysis is explained in detail below.
When answering the question of whether Mr. Pugachev has retained beneficial ownership of the Trust, the Court needs to make a finding whether Mr. Pugachev’s extensive power given to him as the protector of the Trust is “fiduciary” or “personal” in nature. The power is “fiduciary” if the power must be exercised in the interest of the beneficiaries as a whole and “personal” if he can exercise the power for his own selfish interest. Mr. Pugachev might be regarded to have divested himself successfully of the beneficial ownership of the trust assets if the power is found to be “fiduciary”.
Mr. Pugachev’s wide-ranging power which includes vetoing any distribution made by the trustee to the beneficiaries and removing the trustees as he wishes can be “fiduciary” if Mr. Pugachev is not one of the class of discretionary beneficiaries and he is only performing a “watchdog” role. However, that is not the case and Mr. Pugachev can theoretically use this power to force the trustee to make distribution for his sole benefit as a beneficiary and remove the trustees that did not follow his instructions. Thus, the power attached to Mr. Pugachev’s role as the protector is not “fiduciary” and the True Effect of the Trust is for Mr. Pugachev to retain beneficial ownership of the assets.
As mentioned above, even if that is not the True Effect of the Trust, the Court is prepared to declare the trust as a sham and will make the orders regardless.
A trust might be declared as a sham if the parties to the trust deeds have a common intention of creating a false impression of the rights and obligations as appeared in the trust documents. In this case, based on the extensive power given to Mr. Pugachev as a protector, the Court held that Mr. Pugachev’s intention of the Trusts “was not to cede control of his assets to someone else” and this intention is shared with all other individuals within the Trusts, especially the trustees who took instructions from Mr. Pugachev from time to time.
Bearing in mind that a trust is only valid and can withstand attack from creditors only if, when viewed objectively, the trust constituted a true divestiture of the assets, it is still possible and common to devise mechanism to retain certain control over the assets. However, after taking the lesson from Mr. Pugachev, the following should be kept in mind when doing so: –
OLN provides a full range of probate-and-estate-planning-related services. If you have any questions regarding the above or any other private asset management issues, please contact one of the members of our Probate and Estate Planning team.
Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.
After rounds of consultation, the Securities and Futures Commission’s (the “SFC”) Guidelines on Online Distribution and Advisory Platforms (the “Guidelines”) and the related revisions to the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”) will soon come into effect. The effective date was initially set to be on 6 April 2019 but the SFC has declared a 3-month extension to 6 July 2019 (the “Effective Date”). While the Guidelines is a response to the growing number of online advisory and distribution platforms for investment products operated by licensed or registered persons/corporations (“Online Platforms”) targeting individual customers, the revised Code of Conduct will have a wider effect in that it will cover both online and offline activities.
Under the existing procedures, licensed or registered persons/corporations did not have to decide whether an investment product is suitable for a client in the case of an “execution-only” order, a term to denote that the order is made out of the request by the client not resulting from any solicitation or recommendation of a licensed or registered person/corporation. Since it was assumed that a client is aware of the risks involved or is willing to take on the risks anyway before proceeding with an execution-only order, it was thought that such orders required less protection comparing with solicited orders. However, in view of the increasing trend of consumers transacting a wide range of high-risk investment products on Online Platforms without involving any human element on the sale side, SFC has given up this long-held laxer approach towards execution-only orders.
To tackle the problem, the SFC has coined a term called “complex product” which essentially covers all non-plain vanilla investment products, whether exchange-traded or not. From the Effective Date, even for execution-only orders, Online Platforms will have to decide whether an investment product is a complex product, and if yes whether that product is suitable for a particular customer. If an Online Platform finds that a complex product is not suitable for a particular client, it will have to cease proceeding that order. The only exception seems to be that Online Platforms will not need to ensure complex products which are also derivative products traded on an exchange in Hong Kong or in a specified jurisdiction are suitable for a client where there has been no solicitation or recommendation. However, Online Platforms will still need to assess a client’s knowledge of derivatives and understand his net worth under these circumstances according to the old rules.
Furthermore, to enable clients to make an informed decision before buying a complex product, Online Platforms will have to provide the minimum prescribed information on the key nature, features and risks of such products. Online Platforms will also need to ensure that there are prominent and clear warning statements to clients with regard to such products.
The above requirements will apply to individual professional and retail investors.
For Online Platforms which provide execution-only services and continue to sell complex products, the regulatory changes mean that they will need to adjust their suitability framework. Firstly, Online Platforms will need to conduct extensive product due diligence on all products (especially overseas ETFs) that can be sold via their platforms to decide whether they are complex products and understand their features and risks. Secondly, Online Platforms will need to decide whether the product ordered is nevertheless a qualified exchange-traded derivative product so that they are exempted from the suitability obligation. When receiving an order for a complex product that is not a qualified exchange-traded derivative product, Online Platforms will then need to ensure that the product ordered matches the client’s risk profile and other specific circumstances by assessing whether there is any risk mis-match, tenor mis-match, concentration risk, etc., before execution.
In conclusion, licensed or registered persons/corporations may need to rethink their relevant policies and procedures for suitability framework to take into account the latest requirements, which will also apply to offline selling activities from the Effective Date.
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