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Effects on use of a trademark as OEM in China

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With the rapid opening policy development of China, which has attracted more and more international brand owners to manufacture their products in China, called Original Equipment Manufacturer (“OEM”), the opinions on whether use of a trademark as OEM constitutes trademark infringement or whether it is sufficient to defend a non-use cancellation have been gradually developed, i.e. from infringing to not infringing in infringement proceedings, and from being valid to being invalid in non-use cancellation proceedings.

Use of a Trademark as OEM in Infringement Proceedings

It has been arguable that whether using a trademark as OEM and the OEM manufactured goods bearing the trademark without selling/circulation in the marketplace in China would constitute trademark infringement in China. Further, there is no specific law and rules regarding to this issue.

However, we can find some practical guidance by taking reference to some precedents, in particular the landmark PRETUL case (the Supreme People’s Court – No. 2014 – 38). The Supreme People’s Court (“SPC”) re-tried the case, and ruled that use of the PRETUL trademark as OEM does not constitute trademark infringement, on the grounds that the act of physically affixing the trademark to the manufactured goods is not deemed as the valid use of a trademark because such act does not function as an identifier distinguishing the source of goods in accordance with the PRC Trademark Law.

“Article 48 For the purpose of this Law, the use of trademarks shall refer to the use of trademarks on goods, the packaging or containers of goods and the transaction documents of goods, as well as the use of trademarks for advertising, exhibition and other commercial activities for the purpose of identifying the sources of goods.”

In addition, in the PRIME GUARD case (Ningbo Intermediate People’s Court – No. 2017- 02 – 4182), Ningbo Intermediate People’s Court also ruled that use of the trademark as OEM does not constitute trademark infringement, in which the main reasoning follows the landmark PRETUL case as above-mentioned.  

Moreover, in one of our client’s cases, our client’s OEM manufacturer was sued for trademark infringement by a local company who registered a trademark similar to our client’s trademark in respect of same/similar goods in China, we have submitted the following evidence including but not limited to Ningbo Beilun District Court in the first instance in support of our case:

  1. Registration Certificate of the trademark (“Local Reg.”) on the detained goods in the country where the Exported Goods were shipped to;
  2. OEM/Commissioned Manufacturing Contract entered between the manufacturer and the trademark owner of the Local Reg.; and
  3. Other evidence shows the Local Reg. has the legitimated trademark rights of the client’s trademark on the Manufactured/Exported Goods, and the Exported Goods are solely sold directly to the owner of Local Reg, but not in China etc.

We received a Judgment that is in favor of our client’s OEM from Ningbo Beilun District Court, ruling that their manufacturer use of the client’s trademark is an OEM act, and such act does not constitute infringement to the Plaintiff’s trademark rights.

The plaintiff further appealed before Ningbo Intermediate People’s Court. In the second instance, apart from the evidence 1-3 above, we supplemented evidence to enhance that the manufacturer use of the client’s mark is an OEM act and the client, who registered the Local Reg., has the trademark rights on the Exported Goods. Besides, we cited the two precedents i.e. the PRETUL case and the PRIME GUARD case in support our client’s OEM’s case.

We have just received the Appeal Decision that is in favor of our client’s OEM, in which Ningbo Intermediate People’s Court ruled that the plaintiff’s appeal is without merits and the facts affirmed in the first instance are certain and the laws applied are correct. Hence, Ninbo Intermediate People’s Court ruled that:

  • the Plaintiff’s Appeal be dismissed;
  • the Decision made in the first instance be maintained.          

Comment

In brief, to assess the infringement, the Courts primarily take into consideration the following facts:

  • Whether the manufacturer has ever been legally authorized to manufacture the products;
  • Whether the manufacturer has fulfilled duty of reasonable care;
  • Whether the use of the mark by the manufacturer confuses the customers as to the trade origin of the products;
  • Whether the manufacturer has intention of infringing the Plaintiff’s trademark rights.

Based on the current practice and the precedents, including but not limited the aforesaid cased, it is very likely that the Chinese court will rule that use of trademarks as OEM does not constitute trademark infringement if the manufactured goods are solely exported to the country of origin of the Local Reg. and the goods are not sold/circulated in China market.

OEM Use to defend Non-use Cancellation Proceedings

The issue that whether the use of a registered trademark as OEM is adequate to defend a non-use cancellation is disputed in China. Further, there is no relevant law set down to solve this issue.

In practice, some earlier precedents show that a registered trademark used on manufactured goods could be considered as valid use, so that it could defend a non-use cancellation. Whereas, some recent precedents shows such use was deemed as invalid, resulting from which the registration of the trademark will be canceled and removed from the register.

Use of a registered trademark as OEM is valid

In the SCALEXTRIC appeal case (Beijing High People’s Court – No. 2010 – 265), Beijing First Intermediate People’s Court ruled that the TRAB’s decision (No. 4077) be maintained and the registration of SCALEXTRIC be removed from the register on the grounds that the manufacturer use of the trademark as OEM does not comply with the use requirement of trademarks under the PRC Trademark Law. However, in the second instance, Beijing High People’s Court overturned the Decision made in the first instance by taking into full consideration of the user evidence of the OEM submitted and ruled that:

  • Beijing First Intermediate Court’s Decision (No. 2009 – 01840) be withdrawn;
  • The TRAB’s decision (No. 4077) be withdrawn;
  • The Trademark Office re-visit the non-use cancellation on registration of SCALEXTRIC (Reg. No.731233); and
  • The TRAB bears the entire official fees charged for both the first instance and the second instance.

In this case, Beijing High People’s Court ruled that the manufacturer use of the trademark as OEM is valid, and thus maintained the registration on the register

One interesting point to note is that the Beijing High People’s Court also ruled that: if use of a trademark as OEM is regarded invalid, this will be as the grounds for third parties to challenge the trademark via non-use cancellation. If so, this may result in the legitimate trademark being cancelled and removed from the register, which may prejudice to the registrant/right brand holder’s rights.

Use of a registered trademark as OEM is invalid

Nevertheless, on the contrary, in a latest case, i.e. the MANGO case (Beijing High People’s Court – No. 2016 – 5003), Beijing High People’s Court re-affirmed that use of the trademark “MANGO” as OEM is invalid under the PRC Trademarks on the grounds as follows:

  • Use of the trademark “MANGO” as OEM does not function as an identifier distinguishing the source of goods in the marketplace;
  • All the evidence submitted in both first instance and second instance is not adequate to prove the manufacturer use of the trademark, which complies with the requirement of the actual commercial use of a trademark in market circulation; and
  • Beijing First Middle Court’s Decision (No. 2015 -1249) cancelling/removing registration of the trademark “MANGO” from the register is not without merits.

Hence, Beijing High Court ruled to maintain the Decision (No. 2015 -1249) cancelling/removing registration of the trademark “MANGO” from the register.

Comment

It has been arguable that only manufacturing is sufficient to defend a non-use cancellation. However, according the MANGO case as above-mentioned, to effectively defend a non-use cancellation, we opine sales of the goods bearing the registered trademark in China market is advisable. Otherwise, only use of a trademark as OEM is unlikely to be prevailed in non-use cancellation proceedings, if the registration is challenged by a third party. Therefore, if there is no sales evidence in China, the registrant may consider re-registering the mark in every 3-year interval. 

One meaningful and key point to note is that Beijing High Court cited the landmark PRETUL case in support of the reasoning of the MANGO case, addressing that though the applicable articles of the PRC Trademark Law for these two cases are different, the nature of the legal concepts stipulated under the same law shall be treated and applied in the same way; otherwise contradictions/conflicts will be inevitably caused. This is because in the same way, use of a trademark is deemed as invalid in trademark infringement proceedings as ruled by the SPC in the PRETUL case. Thus, under the same concept of use of trademark and use of a trademark as OEM, the use of the trademark as OEM in the PRETUL case is invalid so does it in the MANGO non-use cancellation proceedings.

Although China adopts case-by-case principle and the Courts change practice time to time, we believe that the trend of citing precedents in support of similar cases is gradually increased, which is playing a significant role, in particulars, those ruled by the SPC.

We will continue observing the development of the impacts on the use of a trademark as OEM in China. Lastly, to obviate the risk of trademark infringement and protect your trademark rights in China, it is always advisable to seek professional advice/assistance before starting OEM.  

Emigration from Hong Kong: The Importance of Pre-Migration Tax Planning (4)

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Ice hockey, maple syrup, reindeers and the Northern Lights – One country has got them all. What may now resonate in your mind could well be a country in North America. That’s Right. To conclude our article series on pre-emigration tax planning, this fourth and final piece aims at the second largest country in the world by land area and the top emigration destination by Hong Kong people, Canada. What makes such frosty country as Canada where some regions may have snowy winters lasting for as long as 7 months in a year so attractive for migration? We say, on a comparative basis, Canada has a very welcoming immigration-inclined policy (to be discussed hereinbelow) as marked by the nation’s slogan “diversity is our strength”. This favourable policy and racial diversity are further evidenced by numbers. According to Canada’s official census in 2016, 21.9% of the Canadian population were or had been a landed immigrant or permanent resident in Canada. Statistics also show that in terms of Canada’s demographics, only 32.3% of Canadians consider their ethnic origin to be Canadian, whilst other major ethnic groups are English (18.3%), Scottish (13.9%), French (13.6%), Irish (13.4%), German (9.6%) and Chinese (5.1%). Such large immigrant population are without a doubt attributable to the “perks” of living in Canada, including its universal healthcare system, low crime rates, top-standard education, cultural openness, international food scene, a thriving tech start-up space and the list goes on. All these lend support to Canada being named by the US News and World Report top in the world for having the best quality of life. This article, in line with the previous ones in the series which can be found in the “News & Articles” section on OLN’s website, examines the immigration requirements on the target country, and in this case, Canada, and what can be done pre-arrival in terms of tax structuring to maximise tax benefits.

How to Become Canadian Citizenship

To apply for Canadian citizenship, one must have a permanent resident (PR) status in Canada. There are five main immigration program categories which provide the pathway to obtain the PR status. They include the Express Entry Category, Business Immigration, Family Class Immigration, Canadian Experience Class and Provincial Nominee Programs (PNGs). Each class caters to the qualification and needs of a certain class of immigrants. By way of example, a person may select the Express Entry Category if he is a skilled worker who is in demand by the local labour market, or Family Class Sponsorship if the person would like to migrate to Canada to live with his/her spouse for family reunification, or PNG for most cases if the person has received a job offer from a Canadian employer and is willing to live in a specified province, or Business Immigration if the person would like to establish an eligible new business or purchase and improve on a new business and invest and having a certain amount of net worth (for British Columbia, under the Entrepreneur Immigration stream, the applicant has to invest a minimum of CAD200,000 in the business, having a net worth of a minimum of CAD600,000 and satisfying other requirements). Apart from the above, student visas are also available as a method of immigration. The students holding such visas arrive in Canada on a temporary basis during their studies. Upon completion of that, they are typically entitled to apply for a permanent visa if they have acquired employment or are in a desired profession. As a PR, the person and his dependants will have the right to receive most social benefits Canadian citizens are entitled to receive, including health care coverage and the right to live, work or study anywhere in Canada etc. To apply for Canadian citizenship after obtaining the PR status, the permanent resident has to have lived and filed tax returns in Canada for at least three years during the five years before the date of application for Canadian citizenship, paid any income tax owed and provide proof of language proficiency in either English or French (Canada’s official language).

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

Like the United Kingdom, Canada has a bilateral agreement with Hong Kong to prevent double taxation on residents of one or both jurisdictions (the “DTA”). Therefore, although Canada taxes its residents on their worldwide income, the presence of the DTA essentially means that a person with dual residency in both Canada and Hong Kong for income tax purposes may be exempted to pay tax to one of the governments under certain circumstances. Under the DTA, for instance, a resident of Canada or Hong Kong will only be subject to taxation in the other place on profits from a business carried on in such place to the extent such business profits are attributable to a permanent establishment in the other place. Further, for withholding tax on dividends, that will generally be limited to the maximum of 15%. As regards tax benefits to businesses, Canadian resident companies with Hong Kong subsidiaries may repatriate net active business earnings of a Hong Kong subsidiary without additional Canadian taxes.

Pre-migration Tax Planning

It is worth noting that Canada has relatively aggressive tax avoidance rules. Canada’s Excise Tax Act for example contains a general anti-avoidance rule (GAAR). Section 274(2) of the Act states that “the tax consequences will be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that include that transaction”. To exacerbate matters, even if one technically complies with the Act, if it is not in the “spirit” of the legislation, the structure would still have to pay tax. Tax avoidance is made all more difficult in view of the fact that penalties and interests have been increased, limitation periods extended, advance rulings eliminated and time to resolve tax issues is much longer than before. As such, room for tax structuring is limited. Having said that, it is precisely for this reason a more cautiously and carefully planned tax framework should be implemented to avoid tax pitfalls and to fully take advantage of what is left in terms of Canadian tax benefits.

Trust

Foreign trusts, generally known as “Granny Trusts”, are common tools to defer and mitigate Canadian taxes. To qualify as an offshore Granny trust, there cannot be any Canadian resident contributor, or Canadian beneficiary and a contributor who is (i) a Canadian resident at the time, or (ii) has been a Canadian resident in the past five years, or (iii) will become a Canadian resident in the five years following the contribution, failing which, the trust will be deemed to be a resident of Canada and will be taxable in Canada on its worldwide income. Tax therefore can be avoided even if there is a Canadian beneficiary provided that there was and is no Canadian resident contributor. So, if a Hong Kong family relative contributes money to the trust and the trust later distributes income to Canadian relative, tax can be avoided.

Will

For Canadian estate tax, a Canadian will probating foreign assets would incur estate tax. As a result, prior to arrival to Canada, a Hong Kong will should be prepared to ensure no tax is payable to either government, as there is no estate tax in Hong Kong.

Pension

Under the DTA, pension paid to a resident of another place may only be taxed in the place in which they arise. Therefore income from Hong Kong pension plans is not taxed by the Canadian Government.

Capital Gains Tax

As to foreign properties and assets, individuals who become residents of Canada will only be liable to pay capital gains tax accrued after their arrival in Canada. Immediately before the person becomes a resident of Canada, the person will be deemed to have disposed of the foreign properties and have reacquired it at the fair market value. As such, the migrant will pay tax in Canada upon the actual disposition of his/ her house only on the gain earned after you became a resident of Canada. In this regard, it is best to adjust the value of the person’s foreign property on a “step up” or mark to market basis to minimise Canadian capital gains tax payable later.

Passive income

In terms of gift tax, no gift tax is payable in Canada if the transaction is carried out in an arm’s length. If it is not, tax is payable at fair market value. As such, any gifts should be properly considered and documented in advance.

Conclusion

In closing, despite the aggressive anti-tax avoidance policy of Canada, there is still room to maximise tax benefits for Hong Kong residents preparing to migrate to Canada. Before migration, therefore, the Hong Kong resident is advised to establish a carefully-planned sound tax framework to maximize Canadian 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 Canadian 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.

Singapore Convention on Mediation: The “missing third piece”?

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Introduction

It is increasingly common for parties in dispute to seek to resolve issues via alternative dispute resolution (ADR) to avoid costly litigation and being involved in an adversarial situation which is often detrimental to the ongoing business relationship of the parties.  One common form of ADR is mediation and in this regard, The United Nations Convention on International Settlement Agreements Resulting from Mediation, or as commonly known, the Singapore Convention on Mediation (the “Convention”), was ratified on the 7th August this year by 46 signatory states (including the United States, China and Singapore) to establish a framework for enforcement of international settlement agreements through international cooperation at the state level between the signatory countries.  This is particularly significant for international trade as disputes often involve different countries. 

According to the words of the Prime Minister of Singapore Mr Lee Hsien Loong at the signing ceremony, the Convention represents the “Missing Third Piece” in the ADR enforcement framework in the international arena for cross-border disputes where currently many businesses either relied on arbitration, enforced via the New York Convention, or on litigation.

This article explores the substance of the Convention and the potential value it may bring to parties in cross-border disputes hoping to settle by mediation.

The advantage of the Convention

On a high level, the advantage of the Convention is to allow direct enforcement of cross-border settlement agreements achieved from mediations in the signatory jurisdictions.  Prior to the Convention, a party to a litigation could only start the enforcement process (which normally would involve further court applications) in the foreign jurisdiction after judgment was obtained.  Similarly, for arbitration, the winning party would need to first obtain an arbitral award before it could be enforced in the foreign jurisdiction.  These were often time-consuming and costly processes.  The Convention provides for the mechanism whereby the parties can now enforce settlement terms in a much quicker way and bypass these burdensome and expensive routes.

The Requirements

To achieve the aforesaid benefits, it is important to note the requirements for an effective mediation settlement agreement recognised and enforceable under the Convention.  The main requirements as stated in Article 1 of the Convention are as follows:-

  1. the mediation settlement agreement must be in writing; and
  2. at least two parties to the settlement agreement must have their places of business in different States, or alternatively, the State in which the parties to the settlement agreement have their places of business should be different from the State in which a substantial part of the obligations under the settlement agreement is performed or the State with which the subject matter of the settlement agreement is most closely connected. 

Article 1 of the Convention, however, also restricts the ambit of the Convention.  It states that the Convention does not apply to settlement agreements:-

  1. where the transaction being the subject matter of the dispute is for personal, family or household purposes;
  2. where the subject of dispute relates to family, inheritance, or employment law;
  3. that have been approved by a court or concluded in the course of court proceedings and are enforceable as a judgment in the State of that court;
  4. that have been recorded and are enforceable as an arbitral award.

The value of the Convention

Although the Convention will only come into effect 6 months after 3 States have acceded or ratified the Convention, the potential value the Convention may bring to commercial parties in dispute, as mentioned hereinabove, is evident and cannot be understated.

There is no doubt that the Convention represents an important milestone in that it opens up a new path for international cooperation in the cross-border mediation context with the view of providing parties a cost-effective and direct way to settle disputes.

Parties are now afforded a new choice in considering how to move the matter forward when they encounter legal disputes in conducting their business.  For these reasons, the Convention is certainly a welcoming one.  In this regard, individuals and businesses who regularly enter into cross-border transactions should pay close attention to the continuing development of the Convention to gain maximum benefits from it.

OLN provides a wide range of dispute resolution services including arbitration services. If you have any questions on the above, please contact Selwyn Chan, Partner and Notary Public at selwyn.chan@oln-law.com. 
 
For more information about Selwyn Chan, Partner of Oldham, Li & Nie, please visit the following link: https://oln-law.com/selwyn-chan.  
 
Disclaimer:  This article is for reference only.  Nothing herein shall be construed as legal advice.  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.

Emigration from Hong Kong: The Importance of Pre-Migration Tax Planning (3)

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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:

 DividendInterestRoyalties
UK Non-treaty Rate0/20%20%20%
UK-HK Treaty Rate0/15%0%0%

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.

Emigration from Hong Kong to Australia: The Importance of Pre-Migration Tax Planning (2)

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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.

Nip conflicts in the bud

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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 。)