Few, if any, would challenge the proposition that the United Kingdom has long been the preferred emigration destination for Hong Kong people due to Hong Kong’s rich British historical and cultural heritage stemming from the 150 years of colonial rule. If you have ever set foot on Hong Kong soil, it is not difficult to gauge Hong Kong’s affinity to the UK, with British influence to date still being pervasive at many levels of the society: from the intangibles such as the common law legal system, to the tangibles such as the landmark architectures or simply the coffee shop at the corner of the street carrying British flair; the shadow of Britain remains omnipresent in Hong Kong. Further reinforcing this British bond, recently, some politicians in the UK have urged the British government to pass laws to recognize BNO passport holders  as UK citizens. This may come as good news for those who intend to migrate to the UK due to the citizenship rights they could potentially be afforded, if this effectuates. In this third article of the series, we set our eyes on the pre-migration tax planning with respect to emigration to the United Kingdom. The first two articles, which focus on the United States and Australia respectively, can be accessed via the links (https://oln-law.com/tax-emigration-from-hong-kong-the-importance-of-pre-migration-tax-planning) and (https://oln-law.com/emigration-from-hong-kong-to-australia-the-importance-of-pre-migration-tax-planning-2).

How to become a UK citizen 101

Under UK’s current immigration policy, the usual first step for a foreign person to ultimately obtain the UK citizenship is to obtain a residence visa underpinned by a point-based system from one of the qualifying visa categories, such as: Tier 1 (General), Tier 2 (General), Work permit, Tier 1 (Investor), Tier 1 (Entrepreneur), Ancestry visa etc. In the normal course of events, after five years of residing in the UK (depending on the type of visa)  by virtue of holding one of the qualifying visas and having satisfied other requirements such as The Knowledge of Language and Life Requirement for Settlement (KOLL), such person is entitled to apply for Indefinite Leave to Remain (the “IRL”). After the IRL, the person will need to reside in the UK for 12 months before the person may formally apply for  UK citizenship.

In addition to the aforementioned, in July 2020, the Secretary of State for the Home Department has announced that the UK will create a bespoke immigration route for British Nationals (Overseas) from Hong Kong (“BN(O)”).  This new Hong Kong BN(O) visa policy, when fully implemented, will allow BN(O) holders, upon successful applications, to reside and work or study in the UK, with a pathway to permanent residence and then citizenship. The visa will be valid for up to 5 years (subject to immigration control), and thereafter, provided that the visa holders have stayed free of criminality, have supported themselves financially and otherwise complied with the terms of the visa, they will be able to apply for settled status; and they may apply for UK citizenship after a further year of stay.

Effect of Bilateral Double Taxation Treaty between Hong Kong and the UK on Income Tax

Unlike the United States and Australia, the UK does have a bilateral agreement with Hong Kong preventing double taxation on residents of one or both jurisdictions (the “DTA”). In essence, apart from the introduction of the more favourable tax rates, DTA operates to set the boundaries on how and which region would charge the tax for different types of income. For example, DTA would set out which region has the taxing rights over an individual or entity, and, if such rights clash, which country shall take precedence. DTA may also exempt some income or gains from tax or allow a set-off against tax payable in the other. In short, DTA is very beneficial for Hong Kong residents who are doing business in the UK or vice versa.

The following table provides a comparison of the tax rates between non-treaty rate and UK-HK treaty rate to illustrate the benefits under the DTA:

Take withholding tax on dividends as an example, as shown in the table, 20% withholding tax would be applied to dividends paid to non-UK residents by UK Real Estate Investment Trusts (REITs). Under the DTA, this rate is reduced to 15%. For tax benefits in respect of income from employment, generally speaking, income generated in the UK by a Hong Kong resident in the course of his Hong Kong employment will be exempt from tax to the UK government provided that the resident is present in the UK for less than 183 days during the taxation year.

Pre-migration Tax Planning with trust

Generally speaking, non-residents only pay tax on UK source income. For a Hong Kong resident who wishes to migrate to the UK and would like to set-up a trust in Hong Kong (which again is a very effective tax tool) before arrival to structure his wealth and to avoid UK income tax, there are a number of ways to set up and run the trust. First, the trust must be managed and controlled in Hong Kong, i.e., outside of the UK. This is because the trustee may be treated as resident only in the “place of effective management” under the DTA, and therefore it would be subject to HK rather than UK income tax. Secondly, the trust income must be Hong Kong sourced because UK sourced income of non-resident trusts with UK resident beneficiaries is taxable by the UK at the UK trust rates. This can be achieved, for instance, by holding UK investments through a Hong Kong offshore holding company under the trust. The effect of this is that the income received by the trust would be treated as foreign-source dividends paid by the company. Thirdly, the trust must be a discretionary trust otherwise income of the trust would be deemed as income of the beneficiary who is a UK resident and whose interest in trust is fixed. 
 

Conclusion

As is evident from the above, migrants from Hong Kong to the UK can be subject to different tax treatments depending on how their wealth is structured. For those who are interested to use the trust vehicle to structure wealth and assets, it is important to bear in mind the tax consequences flowing from different set-ups of the trust. Great tax benefits can be achieved provided that the trust is set up correctly and effectively. Further, it should be noted that the UK tax laws have gone through drastic changes over the past 2 to 3 years.  As such, it is advisable to revisit any such structure to avoid being unintentionally caught by the new tax laws and regulations.

OLN provides a range of tax advisory services in the migration context. If you have any questions on the above, please contact one of the members of our Tax Advisory Team.

Disclaimer: This article is for reference only. Nothing herein shall be construed as UK or 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.

This article forms the second in its series focusing on pre-migration taxation planning published by OLN. For interested readers, the first article can be accessed via the link (https://oln-law.com/tax-emigration-from-hong-kong-the-importance-of-pre-migration-tax-planning), where we address the pre-migration taxation issues arising from emigration from Hong Kong to the United States. This time, the bullseye of deliberation falls squarely on “the land down under”, or more formally termed, Australia. As mentioned in the first article, Australia is one of the most popular emigration destinations amongst Hong Kong people. This perhaps does not come as a surprise due to what this country has to offer: first and foremost, it being an English-speaking country; secondly, its comprehensive healthcare system; thirdly, the freedom and protection constitutionally guaranteed to its residents/citizens by being a democratic society with the common law legal system; and fourthly, its good living environment which is epitomized by the richness of the natural resources and beautiful landscapes, as aptly characterised in the golden words of its national anthem, “we’ve golden soil and wealth for toil, our home is girt by sea…Our land abounds in nature’s gifts, of beauty rich and rare”. In the following, we discuss tax issues relating to intended migration to Australia, and in particular, the tax-mitigating tools which should be deployed before migration to this country.

How to obtain Australian citizenship 101

In a nutshell, to apply for Australian citizenship, one has to hold the Australian permanent resident or “PR” status and satisfy the following residency requirements: (1) living in Australia on a valid visa for the past four years; (2) having been a permanent resident for the past one year; and (3) be away from Australia for no more than 12 months in total in the past 4 years, including no more than 90 days in total in the past one year.  To obtain the “PR” status, one generally has to first apply for a provisional visa under the available visa categories to temporarily work or live in Australia, such as an investor visa, spousal visa or work visa which may lead to a permanent visa if the respective requirements are satisfied. That being said, there are two common ways in which one can obtain the “PR” status directly: through skilled migration on a point-based system or through the Business Talent (Permanent) Visa (subclass 132). Additionally, one has the option to migrate by making investments in Australia. To illustrate the investment amount required by way of example, the investor stream under the Business Innovation and Investment (Provisional) Visa (subclass 188) requires an investment of at least AUD1.5 million in an Australian State or Territory and maintain business or investment activity in Australia. On the day one obtains a permanent visa, one becomes an Australian permanent resident, who can live and work in the country indefinitely, subject to renewal every 5 years unless citizenship has been obtained, and enjoy certain other rights customarily given to an Australian citizen. For Australian income tax purposes, a new arrival becomes an Australian tax resident after staying in the country for 6 months. Thereafter, this tax residency status can be got rid of by having no actual place of residence in Australia for an extended time, normally 2-3 years.

Absence of Bilateral Double Taxation Treaty between Hong Kong and Australia

As is the case with the United States, Hong Kong currently does not have a comprehensive treaty for double taxation with Australia.  This essentially means that, in the absence of bilateral tax concessions, an Australian tax resident whose income has a Hong Kong source, for instance, employment income from Hong Kong entities, interests in Hong Kong entities and rental proceeds from Hong Kong properties will be taxed twice, one time in Hong Kong based on Hong Kong’s territorial source principle of taxation, and another time in Australia based on the worldwide income principle. Nonetheless, a Hong Kong person may be entitled to claim a tax offset if tax on the Hong Kong income has actually been paid to the Hong Kong government and the income has been declared in one’s assessable income for Australian income tax purposes to the Australian government. A Hong Kong person holding a provisional visa as described above may also claim a special exemption on passive income derived in Hong Kong such as rental income.

Pre-emigration Tax Planning

There are a number of taxation tools that can potentially mitigate the Australian tax ramifications. For individuals, before migration, a formal valuation on all investment assets should be carried out to establish the value against which tax on future profits above such valuation will be levied. For instance, assets such as Hong Kong shares can be valued using the last market price (rather than the historical cost if more favourable) on the day of relocation to maximize tax efficiency. With this valuation method, the difference may be significant. This may subsequently have a huge impact on the tax payable on income when the proceeds are realised.  However, this might leave the inheritance tax issue unaddressed.

Again, a trust could be an effective tool for tax savings purpose, including inheritance tax. In the case of a foreign trust already in place or to be set up, under Australian tax law, income and gain the foreign trust generates which are later distributed to an Australian tax resident beneficiary are taxable on the part of the beneficiary.  In such case, if the beneficiary decides to migrate to Australia, the trustee of the foreign trust should make as much as possible distribution and unpaid retained earnings to the beneficiary before the migration. The trustee appointed or to be appointed should also remain in Hong Kong and have central management of the trust in Hong Kong as the foreign trust may turn into a resident trust if the trustee also migrates to Australia, with the tax consequence that worldwide income of the trust becomes assessable and taxable. The settlor of the trust should therefore appoint a trustee who he thinks will remain in Hong Kong (often a professional instead of a family member) to provide maximum tax benefits to the beneficiaries if the family (comprising the settlor and the beneficiaries) intends to migrate to Australia.

As seen from the above, before migration to Australia, a number of taxation tools should be properly carried out by the Hong Kong person or the relevant Hong Kong entity in order to minimise tax impact post-migration. In this regard, a comprehensive and detailed taxation framework should be implemented to achieve maximum gains from tax reductions.

OLN provides a range of tax advisory services in the migration context. If you have any questions on the above, please contact one of the members of our Tax Advisory Team.

Disclaimer: This article is for reference only. Nothing herein shall be construed as Australian or 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.

因為家族企業糾紛將家族成員告上法庭是一件令人遺憾，卻也不是不常見的事。我們當然不樂於看見家族的和諧受到破壞，但怎樣才能防患於未然？在本文中，我們將探討如何利用企業管治工具協助家族企業傳承的規劃。

從範例中學習

你可能還記得，身為香港第二大地產發展商和上市公司新鴻基地產有限公司(新鴻基)董事局成員的郭氏兄弟，曾透過訴諸法律程序解決公司控制權爭議的事。2008年，大哥郭炳湘向香港法院申請禁制令，以圖阻止董事局終止其被任命為董事局主席兼行政總裁，及/或改任他為非執行董事。該禁制令最終遭到撤銷，理由是法院不能干預涉及公司內部管理事宜的董事局事務。

雖然新鴻基的範例涉及董事局層面的事宜，但郭炳湘提起的法律行動反映了少數股東的困難。在現行法律框架「少數服從多數」的原則下，一般而言，法院不能協助少數股東維持其董事職位。

另一個關於家族企業控制的範例為鏞記控股有限公司 (鏞記控股)，該公司作為最終控股公司從事經營以燒鵝聞名的鏞記酒家業務。甘健成(原名琨勝)鑑於弟弟甘琨禮不公平地損害他於鏞記控股的利益，因此針對琨禮提出呈請，要求琨禮全面收購他的股份，或者讓鏞記控股清盤。最後，終審法院於2015年作出清盤令，但讓該清盤令暫緩28天生效，以待雙方商討收購的條款(但雙方最後亦未能就此達成協議)。尤其令人遺憾的是，雙方原則上同意了收購安排，但卻無法確定特別是價格等細節。結果，清盤一事無可避免，並交由外部的專業清盤人處理清盤程序。

從上述的範例來看，根據「少數服從多數」這個正當的概念，法院很少從少數股東的利益出發干涉公司事務。此外，雖然在現行的框架下有一些可以幫助少數股東的機制，令到他們免受多數股東的壓迫，但這種機制會導致不確定或者激烈的結果，未必能符合少數股東原先的目的，所以光靠這種機制是不足夠的。

這說明要解決家族企業傳承的問題，是需要額外的方法。例如，在鏞記個案中，如果股東事先就股份收購機制在股東協議中達成共識，就可以避免這種結果。股東只需要在股東協議上提前議定如何釐訂股份的收購價，無論是通過淨資產價值（NAV）法，市盈率法還是現金流量法。一旦立訂規則，股東只需要遵循白紙黑字的條款，就可以免於任何不必要的爭論和衝突。

然而，股東協議只是基於企業管治這個更廣泛的概念的一項工具，而企業管治則是任何家族企業傳承計劃中的重要一環。

企業管治工具

企業管治是指公司管理層、董事局、股東和其他持份者之間相互關係的一種規範化。在家族企業的脈絡裏，這些成員還包括既非董事亦非管理層的家族成員。企業管治對公司的順利運營和不同持份者的平衡至關重要。

家族企業的企業管治工具可以包括：

1. 《公司條例》（第622章): 第622章載有規管香港公司的條文，以及在香港以外成，但在香港設立營業地點的公司。
2. 公司章程 :　公司章程必須在公司註冊處註冊為公開資料，這不利於保障家族隱私，而且不應經常修改。
3. 股東協議：股東協議通常由所有股東簽署，並且通常具有法律約束力，以便根據預先議定的規則管理公司，並確保股東通過協議去確定其權利和協議牽涉的範圍。
4. 獨立董事/外聘顧問：運用獨立董事或外聘顧問可以保障公司的整體利益，但更適合較大型的家族企業。
5. 信託營運/家族辦公室: 這更適合已經發展到第二代或第三代的家族企業。

股東協議

毫無疑問股東協議可以解決許多在家族企業傳承過程中出現的企業管治問題。股東協議是公司所有股東之間簽訂的合同，以確定各自的權利和責任，及使公司的管理更有條理。藉着規管股東之間的關係、公司管理和股份擁有權，股東協議發揮了補充公司章程的作用。股東還可以根據股東協議有效利用其股份，或者利用當中的條款以各股東都能接受的方式退出公司。

此外，股東協議的簽訂時機是非常重要的。實際上，人們總會遇到完全無法預見的事，例如死亡、精神上無行為能力、離婚或家庭內的突然危機和爭議。一般而言，越快簽訂股東協議越好，因為不可預見的事件或家庭糾紛可能隨時發生。如果股東協議在早期階段達，當家族成員數目較少時(在家族成員自然橫向增長前)，自然可以更容易達成一致的共識。

結語

家族通過合同安排正式化成員之間的關係，這或許不符合傳統中國社會長幼有序的概念而對有些人聽起來有點奇怪。但是，合同條款確實在一定程度上能夠解決家族企業的潛在糾紛。如果你不想看到經營長久的家族企業分崩離析，最好還是防患於未然。

(文章首次在香港特許秘書公會2019年8月號會刊發表 (http://csj.hkics.org.hk)，由 Ninehills Media Ltd 出版 。)

The colloquial phrase “the grass is always greener on the other side of the fence” is perhaps most fitting to describe the proliferation of emigration thoughts in the minds of the Hong Kong people recently. According to an article from the South China Morning Post, there were two distinct periods in Hong Kong which prompted a flux of emigration from Hong Kong: the first was before the handover of sovereignty over Hong Kong from Britain to China in 1997 whilst the second was after the “Umbrella Movement” by the Pro-Democrats in 2014. Now, the alarming situation in Hong Kong instils concerns into local residents over the stability and prosperity of the place, marking a possible third wave of emigration. Many have begun searching for an emigration destination which presents better living, better protection, and better future or retirement for themselves and their next generation. Census shows that the top destinations for emigration by the Hong Kong people include Canada, Australia, Taiwan and the United States. This article examines from a taxation point of view the considerations a person should pay due regard to before emigration so as to better plan for future taxes which might arise at the time of and after the emigration in the emigration country. For brevity, the article will limit its analysis to migration from Hong Kong to the United States, and accordingly, the taxation issues in this respect.

Brief Overview of Steps to Obtain US Citizenship

To obtain US citizenship, one has to first apply for permanent residency and the Lawful Permanent Resident Card, commonly known as the “green card”, before applying for naturalization after having held the “green card” for five years and satisfied other requirements.

For a resident alien, meaning a person who holds a “green card” or anyone who has stayed in the country for at least 31 days in one calendar year and 183 days over the past three years are subject to worldwide income tax, like US citizens.

Absence of Bilateral Double Taxation Treaty between Hong Kong and the United States

Hong Kong currently does not have a comprehensive treaty for double taxation with the United States as it has only concluded a double taxation agreement for shipping income.  This essentially means that, in the absence of bilateral tax concessions, a US citizen or resident alien whose income has a Hong Kong source will be taxed twice, one time in Hong Kong-based on Hong Kong’s territorial source principle of taxation, and another time in the United States based on the worldwide income principle.

Pre-emigration Tax Planning, FGT and FNGT

As could be imagined, one would face a drastic change in his/ her tax position by moving from a low tax regime (Hong Kong) to the US. There are a number of taxation tools available which can potentially mitigate the impacts.

 (1) Setting up a Trust

One of the commonly adopted tax planning tools is setting up a foreign grantor trust (the “FGT”) for people who wish to become a US tax resident.  Such tax planning tool is considered very efficient for people who own substantial assets prior to becoming a US tax resident, for US income tax and estate duty purposes. The beauty of such trusts is that the income from the distribution of such trust is not taxable. The income would otherwise be taxable if it comes directly to the US citizen from the underlying investments.

In a typical FGT structure, a non-US person will settle a non-US revocable trust for the benefit of US family members (including those who wish to emigrate to the United States).  From a US tax perspective, the settlor, during his lifetime, will be considered the owner of the trust assets.  It follows that any distributions to be beneficiaries (including those US persons) will not give rise to any US tax liability on the part of the beneficiaries notwithstanding the fact that there will be US reporting obligations. 

Foreign non-grantor trust (the “FNGT”), on the other hand, with appropriate structure in place, can achieve favourable tax results for US persons, especially in the context of inheritance. 

(2) Existing Trust

It is not uncommon that some Hong Kong people who wish to become a US person are already beneficiaries of a trust.  In light of any forthcoming US residency, the trust structure shall be revisited to avoid any adverse tax implications.

To minimise US taxes, generally speaking, the trust should prior to the beneficiary becoming a US person (1) make as much distributions as possible to the beneficiaries, (2) distribute all unpaid retained earnings and in which case the personal financials have to be revised to reflect that the beneficiary has already received the same and such distribution has now converted into the beneficiary’s personal assets which is not subject to US tax, (3) re-valuate the trust assets reflecting the mark-to-market adjustments in the financial accounts of the trust; and/or (4) “step up” in basis of the assets to minimise capital gain taxes.

Conclusion

In closing, in considering emigration (especially into the United States), one has to pay sufficient regard a priori to the tax ramifications with being a resident of the country emigrated to. There are various tax planning tools which can considerably reduce tax liabilities which have to be deployed before the change of residency. In this regard, a carefully-planned tax-minimisation framework should be adopted before emigration to maximise tax efficiency

OLN provides a range of tax advisory services in the migration context. If you have any questions on the above, please contact one of the members of our Tax Advisory Team.

Disclaimer: This article is for reference only. Nothing herein shall be construed as US or 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.