For for purposes of family inheritance and tax planning, many shareholders of domestic listed companies wish to pass on a portion of future earnings from company stock to their children through trusts. In some cases of existing companies listed on the Star Market, a small portion of the shares were held by foreign trusts prior to listing. But most were spin-offs of overseas-listed companies, or originally planned to list overseas but ended up listing domestically after their red chip structure was dismantled.
In these cases, regulators have taken an inclusive but cautious stance during the review process, but this does little to help companies wishing to achieve post-listing trust shareholding. In this article, the authors analyze the feasibility of the transmission of wealth to children by the shareholders of national listed companies through trusts.
Direct transfer to foreign trusts? In accordance with the relevant provisions of the Securities Law, a transferee must open an A-share securities account for the transfer of shares of national listed companies. After retrieving relevant laws, regulations and cases and consulting with the China Securities Depository and Clearing Corporation (CSDC), the authors established that foreign entities may apply to open the following types of A-share securities accounts, except he exception of holding shares of a listed company before its IPO: (1) national accounts of natural persons; (2) qualified foreign investor accounts; (3) foreign strategic investor accounts; and (4) capital incentive securities accounts of foreign investors.
But the relevant regulations on the opening of accounts for fiduciary products do not apply to foreign trusts, which do not comply with the circumstance mentioned above that foreign entities can apply to open securities accounts. A-shares. Therefore, foreign trusts currently cannot open A-share securities accounts directly, making it impossible to directly transfer shares of domestic listed companies to foreign trusts.
Transfer to SPV controlled by a foreign trust. The transfer of shares of a listed company to a foreign securitization vehicle (SPV) controlled by a foreign trust must meet the above requirements for the opening of A securities accounts by foreign entities.
In addition, according to the provisions on the merger and acquisition of domestic enterprises by foreign investors, in the event of the transfer of shares of a listed company to a domestic SPV controlled by a foreign SPV controlled by a foreign trust, ” the relevant formalities shall be handled with the securities regulatory authority under the State Council in accordance with the administrative measures for the strategic investment of foreign investors in listed companies”.
Transfer to trusts established by shareholders in China. At present, the non-transactional transfer of title only applies to limited statutory situations such as inheritance, gift, legal division of property and loss of social capacity, and transfer of shares of listed companies to national trusts does not fall under these scenarios.
Thus, a non-transactional transfer is not applicable and the transfer of shares of listed companies to domestic trusts must be carried out by way of transactional transfer. The transfer of shares of listed companies to National Trusts can be achieved through block trading after the National Trust has opened an A-share securities account.
But given the transaction authenticity requirement, the transfer of shares of listed companies to domestic trusts in the form of a transactional transfer requires a relatively high capital cost in terms of taxation. Since the transferee is a national trust rather than the child of the shareholder, it is generally difficult to avoid income tax.
Direct transfer to children. This is commonly adopted now. By signing a gift contract or by any other means, shareholders of listed companies can transfer their shares to their children without compensation.
If the shares so transferred are moratorium shares, their children must continue to comply with the restrictions on the sale of these shares after the transfer. Even if the children obtaining such shares are of foreign nationality, the authors have confirmed with the CSDC that there is no particular obstacle to the opening of securities accounts for A shares.
For the transfer of moratorium shares, in accordance with the Notice on matters concerning the imposition of personal income tax on income derived by individuals from the transfer of moratorium shares of listed companies, the tax on personal income must 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 for personal income tax on capital transfer income (for the trial implementation), the manifestly low income from the capital transfer to children (with a proof of legally valid identity and relationship provided) will be considered a legitimate reason for personal income tax exemption.
In addition to personal income tax, the unrequited transfer will also incur stamp duty, processing fees, confirmation fees and other charges that may be imposed by exchanges and the CSDC.
Under applicable laws and regulations, the transmission of shares of listed companies through domestic and foreign trusts is still subject to various restrictions and is, in most cases, inoperative.
However, given the inherent advantages of trusts in the transmission of family patrimony, some market players are trying to achieve this by means other than conventional transmission or non-transactional transmission.
Direct transfer to children under applicable laws and regulations is the most common option, avoiding significant capital and income tax costs in a transactional transfer. Until any changes in policies, laws and regulations, this will remain the primary route and means for shareholders of listed companies to pass shares on to their children.
If a domestic company preparing for IPO plans to pass on the family estate by trust, it may choose to complete the construction of an SPV shareholding structure prior to the IPO filing (subject to requirements Review and Approval Process for Domestic IPOs), to effect the transmission of the rights and interests of the listed company by controlling the SPV by family trust after listing.
Meng Wenxiang is a partner and Shu Weijia is a partner at Grandway Law Offices. Hu Bingzhi, an intern at the firm, also contributed to the article
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