Tuesday, June 3, 2014

Offshore Wealth Management for Chinese Private Clients through Mauritius

Interview by Yogesh Gokool Head of International Banking, Trusts and Custody, AfrAsia Bank, at the 3rd Annual China Offshore Summit 

  • What aspects have Chinese clients differentiated themselves with those in more established markets?

A distinction has to be made between 1st generation and 2nd generation Chinese clients.  The 1st generation Chinese clients are very conservative and risk averse and quite skeptical about different asset classes in terms of their investments.  They would prefer to stay in cash and money market instruments, some real estate and stock markets

The second generation Chinese clients like prestige and are quite spendthrift.  They tend to spend a lot on western branded luxury goods.

Both generations of Chinese Clients like to maintain a certain degree of control over assets and the way they are managed, even if those assets have been transferred to a fiduciary structure, for example, a discretionary trust.   If the Settlor of a discretionary trust starts to instruct the trustees as opposed to making requests to them, this could lead to the trust being qualified as a sham and the whole structure being jeopardised.

  • Impact of Inheritance Tax (IHT) on Wealth Planning of the rich in China and possible consequences of adoption.

IHT is levied on someone who inherits money or property.  New IHT regulations have recently been proposed by the Chinese Government.  IHT, if introduced in China, can have both positive and negative effects.  On the one hand, it will reduce the widening wealth gap and social inequality that currently exists in the Country, whilst if applied on a too low threshold, it can become a burden on the middle class Chinese.

The introduction of IHT can also lead to tax avoidance, offshoring of assets and other arrangements, life insurance for instance and ultimately, emigration of the wealthy Chinese to other countries.

  • What can offshore wealth structures offer to maximise the growth and value of family wealth in terms of ownership, control of business and trans-generation succession?

According to a recent Bank of China report, it is believed that 20% of Chinese Wealth is held through offshore structures.  Chinese offshore investments have doubled since 2011.

The offshoring of assets could provide risk diversification to Chinese clients; their investing in different classes of assets from real estate and stock markets to alternative investments and Private Equity.

In addition, offshoring of assets and the use of offshore structures can mitigate currency risk if done through a jurisdiction where there is no exchange control, as is the case for Mauritius.  Chinese clients will thus be able to switch their assets in different currencies and not have ‘all their eggs in one basket’.

Last but not least, offshore structures provide protection from political instability and the expropriation of assets risk, i.e., the state taking possession of private assets as we have seen in many countries in the past.

  • What is substantial range of risk associated with offshore wealth planning?

The choice of the professional trustees and service providers is very important.  One would  not want to give one’s  assets to anyone to structure/ manage unless they are well regulated, properly licensed and have the knowledge, experience and background.

In addition, some offshore jurisdictions are blacklisted by the OECD and the FATF.  Would clients be comfortable in having their assets held by structures set up and managed in those jurisdictions?

  • What are the common pitfalls in processing inter-generation wealth transfer and how to work with private clients properly for solutions?

I do not think Clients would want their future generations to end up with a huge tax burden because a structure has not been properly set up inter vivos and, is non-compliant.  If assets are held offshore, it is very important to seek legal and tax advice, which is necessary to ensure proper compliance both within and outside China.

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