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OLN Ranked by Benchmark Litigation Asia-Pacific 2019

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OLN ranked “Recommended Firm of 2019” by Benchmark Litigation Asia-Pacific.

Congratulations to our following Practice Areas:

Commercial and Transactions – Tier 3

Family and Matrimonial – Tier 2

Private Client – Recommended

This year, Stephen Peaker has been ranked as Dispute Resolution Star in Family and Matrimonial.

Below is the Benchmark Analysis for our firm:

“Full-service law firm, Oldham Li & Nie is active in commercial and transactions disputes. However, it is particularly lauded for its work in family and matrimonial disputes. The firm’s family law department and probate and estate planning department are led by five partners. Stephen Peaker is a key figure in the family and matrimonial space.

Case highlights include acting on a divorce proceeding involving nearly 30 family trusts in various jurisdictions; acting for Jayjun, a Korean cosmetics brand, in a trademark litigation; and representing Melvin Waxman and Larry Waxman, minority shareholders of a Hong Kong company, in a shareholder dispute.”

About Benchmark Litigation

Benchmark Litigation, the definitive guide to the region’s leading dispute resolution firms and lawyers, was first published in 2008 covering the litigation and disputes markets in the United States and Canada and has broadened its coverage to include Asia – Pacific, Europe and Latin America – becoming a truly global guide.1

OLN Has Been Ranked as Employer of Choice by Asian Legal Business

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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.

Publication No. 295 of China National Intellectual Property Administration – Change of Official Seals and Formalities for Patent and Trademark Prosecutions

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On 18 February 2019, China National Intellectual Property Administration (“CNIPA”), formerly known as the State Intellectual Property Office of China (“SIPO”), announced that:

  • Patent Re-examination Board (“PRB”) will be absorbed by Patent Office effective from 1 April 2019; and
  • China Trademark Office of State Administration for Industry and Commerce (“CTMO”), Trademark Review and Adjudication Board (“TRAB”) and Corporation Center for Trademark Examination (“TECC”) will be combined into Trademark Office of China National Intellectual Property Administration (“TMO”) effective from 1 April 2019.

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.

Voluntary Arrangement among Beneficiaries on the Distribution of Estate might lead to Stamp duty implication according to a recent District Court decision of Wong Suet Foon Shirly v Collector of Stamp Revenue [2019] HKDC 268

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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.

Employee’s termination package: is it chargeable to salaries tax?

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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.

A. The facts in the Poon Cho-Ming case

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:

  1. The Taxpayer would receive severance payment which included the payment in lieu of discretionary bonus (“Discretionary Severance Payment”);
  2. The Taxpayer would be entitled to exercise the share options held by him, tranche A to C within three months from 20 July 2008 which was accelerated from the original vesting dates (“Share Option Gain”); and
  3. The Discretionary Severance Payment and Share Option Gain were part of the considerations paid in full and final settlement of all claims and rights of action taken by the Taxpayer against the Employer.

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.  

B. The relevant law and test for determining the taxability of termination payments

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”.

 C. Applying the Fuchs test to the Discretionary Severance Payment and Share Option Gain

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”.

D. The main takeaway

Not until the judgement is overturned by the Court of Final Appeal (which in our view is quite unlikely), the following remarks still hold: 

  1. Payments that were made in consideration of the employee agreeing to surrender his pre-existing rights under his employment contract and payments that were made as compensation for the loss of employment, given that none of them was made pursuant to any entitlement under the employment contract, were unlikely to be considered as “income from office or employment’ and thus were not taxable.
  1. A detailed analysis of the facts and evidence surrounding the termination payments would be made by the court and the BOR. As such, the employer and the taxpayer should be cautious at all stages starting from the drafting the employment contract to the drafting of the termination agreement, especially when answering any requisitions raised by the Inland Revenue Department (“IRD”).

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.

Forget the label, what is the true effect of your trust deeds?

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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.

Background of the Pugachev case

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:

  • Settlor: Mr. Pugachev
  • Trustee: New Zealand private trust company of which Mr. Patterson and his wife were directors
  • Protector: Mr. Pugachev
  • Beneficiaries: Mr. Pugachev, his wife and their children
  • All trust deeds were drafted by Mr. Patterson and the Trusts were governed by New Zealand law

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:

  1. Mr. Pugachev has retained the beneficial ownership of the assets as it is the “True Effect of the Trust”; and
  2. Even if it is not the “True Effect of the Trust” and hence Mr. Pugachev did not retain the beneficial ownership of the asset, the trust is a sham and is equally invalid.

The True Effect of the Trust

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.

The Trust is a sham

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.

Notes to take when setting up a trust

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: – 

  1. All the power, oversight and control given to any individual within the trust must be viewed individually and collectively within the trust;
  2. No excessive control over the trust should be reserved to the settlor or granted to the protector;
  3. Transfer assets to offshore location which is different from the settlor’s place of residence and its place of business;
  4. The protector should ideally not be a beneficiary of the trust;
  5. The trustees have to be truly independent; and
  6. All individuals should carry out the terms as stated in the trust deeds.

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.