Inheritance by listco shareholders through trusts

For family wealth inheritance and tax planning purposes, many shareholders of domestic listed companies wish to pass on some future earnings from company shares to their children through trusts. In some cases of existing companies listed on the Star Market, a small portion of shares were held by overseas trusts before listing. But most were spin-offs from overseas listed companies, or originally planned for overseas listing but ended up listing domestically after dismantling their red-chip structure.

In these cases, regulators have adopted an inclusive yet prudent attitude during the reviewing process, but this is of little help to companies wishing to realise shareholding by trust after listing. In this article, the authors analyse the feasibility of passing on inheritance wealth to children by shareholders of domestic listed companies through trusts.

Direct transfer to overseas trusts? In accordance with relevant Securities Law provisions, a transferee should open an A-share securities account for the transfer of shares of domestic listed companies. After retrieving relevant laws, regulations and cases, and consulting the China Securities Depository and Clearing Corporation (CSDC), the authors established that overseas entities may apply to open the following types of A-share securities accounts except for holding shares of a listed company before its IPO: (1) domestic natural person accounts; (2) qualified foreign investor accounts; (3) foreign strategic investor accounts; and (4) equity incentive securities accounts of foreign investors.

But relevant regulations on opening accounts for trust products are not applicable to overseas trusts, which do not conform to the above-mentioned circumstance that overseas entities may apply to open A-share securities accounts. Therefore, overseas trusts cannot currently directly open A-share securities accounts, making it impractical to directly transfer shares of domestic listed companies to overseas trusts.

Transfer to SPV controlled by overseas trust. Transferring shares of a listed company to an overseas special purpose vehicle (SPV) controlled by an overseas trust should meet the above-mentioned requirements for opening A-share securities accounts by overseas entities.

In addition, according to the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors, if transferring shares of a listed company to a domestic SPV controlled by an overseas SPV controlled by an overseas trust, “the relevant formalities shall be handled with the securities regulatory authority under the State Council pursuant to the Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies”.

Transfer to trusts established by shareholders in China. At present, non-transactional transfer of securities is only applicable to limited statutory situations such as inheritance, gifting, lawful property division and loss of corporate capacity, and the transfer of shares of listed companies to domestic trusts does not fall into these scenarios.

Thus, a non-transactional transfer is not applicable, and transfer of shares of listed companies to domestic trusts needs to be conducted by way of transactional transfer. Transferring shares of listed companies to domestic trusts may be realised by block trading after the domestic trust opens an A-share securities account.

But in view of the requirement of transaction authenticity, transferring shares of listed companies to domestic trusts in the form of transactional transfer requires relatively high capital cost in terms of taxation. Since the transferee is a domestic trust rather than the shareholder’s child, it is usually difficult to avoid income tax.

Direct transfer to children. This is currently commonly adopted. By signing a gift agreement or other means, shareholders of listed companies may transfer their shares to their children without consideration.

If the shares thus transferred are moratorium shares, their children must continue to comply with restrictions on the sale of such shares after transfer. Even if children obtaining such shares are of foreign nationality, the authors have confirmed with the CSDC that there is no special obstacle in opening A-share securities accounts.

For the transfer of moratorium shares, according to the Notice on Issues Concerning the Imposition of Individual Income Tax on Income derived by individuals from Transfer of Moratorium Shares of Listed Companies, individual income tax should be paid, with tax payable = [income from transfer of moratorium shares – (original value of moratorium shares + reasonable taxes)] × 20%.

However, according to the Administrative Measures on Individual Income Tax on Income Derived from Equity Transfer (for Trial Implementation), the obviously low income from equity transfer to children (with legally valid proof of identity and relationship provided) shall be deemed a legitimate reason to exempt individual income tax.

In addition to individual income tax, transfer without consideration will also involve stamp duty, handling fees, confirmation fees and other costs that may be imposed by the stock exchanges and the CSDC.

SOME SUGGESTIONS

Under current laws and regulations, passing on shares of listed companies through domestic and overseas trusts is still subject to various restrictions, and is in most cases inoperable.

However, considering the inherent advantages of trusts in passing of family wealth, a few market players are attempting to achieve this through methods other than agreement transfer or non-transactional transfer.

Direct transfer to children under current laws and regulations is the most common option, avoiding large capital and income tax costs in transactional transfer. Until any changes in policies, laws and regulations, this will remain the main path and means for shareholders of listed companies to pass on shares to their children.

If a domestic company preparing for IPO plans to pass on family wealth by trust, it may choose to complete the construction of an SPV shareholding structure before IPO filing (subject to examination and approval requirements for domestic IPOs), to realise the pass of rights and interests of the listed company by controlling the SPV through family trust after listing.

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