1. Assets owned by the establishments or places¹ of non-resident enterprises in China;
2. Real estate located in China; and
3. Equity investments in Chinese resident enterprises (together, the “Chinese Taxable Assets”).

1. Whether the primary value of an offshore holding company is directly or indirectly attributable to Chinese Taxable Assets;
2. Whether the assets of an offshore holding company are primarily comprised of, directly or indirectly, investment in China, or whether the income of an offshore holding company is mainly sourced, directly or indirectly, from China;
3. Whether the actual functions performed and risks assumed by an offshore holding company and its subsidiaries which directly or indirectly hold Chinese Taxable Assets can demonstrate the economic substance of a relevant corporate structure;
4. The duration of the shareholders of an offshore holding company, its business model and relevant corporate structure;
5. Overseas income tax implications in respect of an indirect transfer of Chinese Taxable Assets;
6. Whether an indirect investment or an indirect transfer of Chinese Taxable Assets can be substituted by a direct investment or a direct transfer of Chinese Taxable Assets; and
7. The applicability of any double tax treaty or arrangement for the indirect transfer of Chinese Taxable Assets.

1. More than 75% of the value of the offshore holding company’s equity is comprised of, directly or indirectly, Chinese Taxable Assets;
2. At any time during the year preceding an indirect transfer of Chinese Taxable Assets, more than 90% of an offshore holding company’s total assets (exclusive of cash) are directly or indirectly comprised of investments in China; or more than 90% of an offshore holding company’s income is directly or indirectly derived from China;
3. The offshore holding company and its subsidiaries, which directly or indirectly hold Chinese Taxable Assets, are registered in the jurisdiction (or region) where they are located to satisfy legal organization requirements but the limited actual functions performed and limited actual risks assumed cannot demonstrate their economic substance; and
4. The overseas income tax payable under the indirect transfer of Chinese Taxable Assets is lower than the potential Chinese tax that would be payable under the direct transfer of Chinese Taxable Assets.

1. Buying and selling shares of the same overseas listed company in a public securities market;
2. Certain intragroup restructuring transactions; and
3. Incomes resulting from transfers which are exempted from corporate income tax in China in accordance with applicable tax treaties.

1. If a responsible tax bureau considers that an indirect transfer transaction lacks reasonable commercial purpose and requires investigation and adjustment, such responsible tax bureau shall submit the case filing report together with its opinion and relevant supporting documents to the provincial tax bureau for review which will further forward the aforesaid documents to SAT for application of case filing;
2. The responsible tax bureau shall complete all investigation work within 9 months following the date of SAT granting the consent on case filing, and formulate its opinion and grounds for a non-adjustment plan or an initial adjustment plan on the case to the provincial tax bureau for review which will further forward the aforesaid documents to SAT for application of case closing;
3. The responsible tax bureau shall proceed with the case by (i) issuing a Notice Letter of Conclusion on Special Tax Collection Investigation if SAT agrees with its non-adjustment plan and case closing; or (ii) issuing a Notice Letter of Initial Adjustment on Special Tax Collection Investigation (“Initial Adjustment Letter”) if SAT agrees with its initial adjustment plan and case closing; or (iii) revise its submission materials and resubmit to SAT for approval if SAT does not agree with its case closing application; and
4. A Notice Letter of Adjustment on Special Tax Collection Investigation (“Adjustment Letter”) shall be issued by the responsible tax bureau if the enterprise being investigated does not raise objections within 7 days following the receipt of the Initial Adjustment Letter. According to the Procedures, even if the enterprise being investigated raises objections within the said 7 days, the responsible tax bureau still retains a discretion to ignore such objections and issue the Adjustment Letter.

The Interush Decision

The Decision

1. It was implied in Hang Seng’s mandate that the bank may refuse instructions and suspend accounts if it becomes aware of suspicious and unusual activities in the account. Thus, a “no consent” letter is not a prerequisite for the bank to exercise such right;
2. Furthermore, the “no consent” letter issued under section 25A(2)(a) did not operate to freeze suspicious property; its aim was to ensure that the ongoing investigation would not be prejudiced. Although under section 25 it is an offence to deal with crime proceeds, the bank remains the final decision maker as to whether to honor its customers’ instructions or not. The provision is not concerned with intervention, confiscation or deprivation of any property. As such, section 25A does not raise issues under Articles 6 and 105 of the Basic Law at all;
3. Though of no legal effect, the JFIU has published internal guidelines regarding the issuing of “no consent” letters. For example, the Superintendent of the investigation unit reviews the “no consent” letters on a monthly basis and if the aggregate extension exceeds 3 months, the JFIU Formation Commander is responsible to review the situation to ensure that the “no consent” letter has been properly extended. The Court was satisfied in Interush that such guidelines were a sufficient safeguard to ensure that the “no consent” regime operates fairly;
4. If any party is directly affected by the “no consent” letter or the suspension of a bank account, he/she can sue the bank for appropriate relief under section 29 of OSCO or under the common law;
5. The “no consent” regime is amenable to judicial review.

Implications

What are the implications of Interush for banks, customers and innocent third parties?

• An offer made only to “professional investors”;
• An offer to not more than 50 persons;
• An offer in respect of which the total consideration payable for the shares or debentures concerned does not exceed HK$5 million; and
• An offer in respect of which the minimum investment amount payable by an investor is not less than HK$500,000.

• Number each offer document serially, address it individually to a specific offeree and state only that offeree should be capable of accepting the offer and taking up the securities;
• Clearly state in the offer document that it is not an offer to the public and the offer document should not be passed to any other person other than the intended recipient; and
• Avoid any advertising, press release or press conference relating to the proposed offering or the offer document in Hong Kong.

Tan Cheng Gay & Others vs Tan Choo Suan and SJ (FACV no 3 of 2015)

Background

The dispute arose between the Deceased’s elder daughter (the first Respondent), who was the named executor under the last will of the Deceased (the Will), and his younger daughter and three sons (together the Appellants).

The Will was a joint will written in Chinese by the Deceased and his wife which expressly governed “在我們名下(不論在世界任何地方)的財産 (all the properties under [our] names (wheresoever situate worldwide))” (clause 2). Besides this clause which was the crux of the dispute, clause 5 of the Will stipulated that the income derived from the estate should be provided to the surviving spouse for life, and subject to that the residue should be donated to various charities in Hong Kong, Xiamen and Singapore (clauses 7-9). Clause 11 of the Will declared that since the children were adequately cared for during their lifetime, the parents did not intend to provide any part of the residuary estate to them.

The estate of the Deceased included valuable shares in a Singapore listed company EnGro Corporation Limited, part of which were held through a Hong Kong company (HKco) and another part under a Singapore company (Singco). The relevant shares in HKco and Singco were registered under the daughters’ name, who both acknowledged that they held such shares on trust for the Deceased. The estate also included various artwork and antique, as well as a share in a BVI company holding a bank account. The HKco shares were the subject matter of the proceedings in Hong Kong while the Singco shares were subject to other proceedings in Singapore.

1. If a narrow construction was to be adopted, only properties owned by and held under the name of the Deceased (in some “registered or officially recorded” sense) would be governed by the Will. This means that any property registered in the name of others (even though held by them on trust for the Deceased) would not be governed by under the Will. As such the HKco shares would not pass under the Will but would only devolve under the intestacy rules, with the results that the Appellants would benefit;
2. If however a wide construction was to be taken, properties “belonging to the deceased (屬於)” or beneficially owned by him, irrespective of whether those properties are held under his name, would still pass under the Will. Under this approach, the HKco shares would pass under the Will and benefit the various charities specified in the Will. This was the position taken by the Respondent, as well as by the judges at the Court of First Instance and the Court of Appeal. The judges were all of the view that the intention of the Deceased was “crystal clear”.

The matter may have been made complicated by certain events which could have led the Appellants to expect inheritance of the HKco shares. These include (i) several wills made prior to the Will with seemingly contrary intentions; (ii) acknowledgement by the daughters in a letter to the Deceased that part of the HKco shares held by them were actually held on trust for the benefit of their mother and siblings; and (iii) a letter (the Letter) written by the Deceased and his wife to the children just six months after the execution of the Will, stating that they would pass all their estate to charities except for the HKco shares which would be given to the children provided they sign a Deed of Family Arrangement to avoid future disputes. However, the arrangement was never finalized because the sons sought to persuade the parents to give them the Singco shares as well.

On November 5, 2015, the CFA unanimously ruled that the words“名下的財産 (properties under my name)”shall be given their natural, plain and ordinary meaning and agreed that the Will shall govern all assets belonging to the Deceased, whether or not they are held under his name. Hence, according to the provisions of the Will, the HKco shares should pass to the various charities.

As per Justice Ribeiro, if the narrow construction was otherwise adopted, there would be “implausible” practical consequence. Assets which would pass under the Will would just include the share in the BVI company registered under the Deceased’s name, and may not even include his artwork or antique. He queried why the Deceased would still have bothered to make a will in such circumstances, and acknowledged that it was a “golden rule” of construction that a testator is presumed not to intend to die partially intestate if he has gone through the solemn form of making a will. Justice Ribeiro also relied on the lifetime gift of income to the spouse stipulated by the Will, which would be meaningless if a narrow construction were to be adopted.

The judgement also dealt with the questions of whether extrinsic evidence should be admitted to assist the construction  of the Will pursuant to s.23 B of the Wills Ordinance. Under that section, such evidence may only be admitted to aid the interpretation of a will when there is ambiguity on its face, or ambiguity in light of the surrounding circumstances.

Justice Ribeiro agreed with the lower courts that no such ambiguity arose. He further opined that that even if such evidence were to be considered, the results would have been the same. Although in the Letter, the Deceased expressed an intention to gift the HKco shares to the children, this lifetime gift has failed to materialize due to the sons’ reluctance to sign the Deed of Family Arrangement, hence the shares remained in the Deceased’s estate to be dealt with by his Will.

It is thought provoking to note Justice Tang’s criticism against the lawyer responsible for drafting the Will. He said he “was troubled” by the fact that a bilingual solicitor trained in the common law who should have understood the difference between legal and beneficial ownership, had still seen it fit to use the words “名下 (under my name)” to describe the properties. He thus thought it necessary to examine the extrinsic evidence, but still came to the same conclusion that none of it assisted the Appellants. He also relied on the amount of the charitable gift stated in the Will as the key in helping with the construction. The Deceased must have thought his residuary estate to be quite substantial and a narrow construction of the Will would have defeated his intention.

This case reminds solicitors to be alerted to the applicable legal principles when employing a language other than English in which they may conduct most of their practice. While there is a division of legal and beneficial ownership under English law, the Chinese legal system does not recognize such a division. Therefore, when drafting wills in Chinese language, use of precise wordings to ensure conveyance of the correct legal intent is important. In this case, where the intent is found to be disposal of all assets in which the testator had legal and beneficial ownership, instead of saying “名下 (under my name)” use of “屬於我的財産 (all properties belonging to me)” may be appropriate. More elaborate language could also be used to avoid potential arguments, like “我擁有實益權的所有資産, 不論我持有法定權益與否 (all properties beneficially owned by me, whether or not I hold the legal title thereof).”

To avoid any confusion on the type of assets which would pass as residuary estate under a will, when giving or taking instructions for the preparation of the will, the testator and the advisor should both have a clear understanding of assets or type of assets which are intended to form part of the residuary estate of the testator. Preferably, a list of such assets could be put on file for record but the testator must clearly understand that he is free to dispose of the assets during his life time despite such a record is being kept.

Where a testator intends to make lifetimegift to others but subject to trusts, instead of passing the assets absolutely to the transferee and relying on the transferee to sign a “letter of intent”, like what the Deceased and his daughters did, it would be advisable for the transfer to be accompanied by a trust deed and/or a declaration of the trust on the assets transferred. The relevant documentation should also be stamped to provide admissible evidence of the trust arrangement, so as to avoid any future arguments as to whether the assets have been gifted absolutely to the transferee, or they still remained beneficially owned by the testator, or the beneficial interest has been passed to some other parties as beneficiaries of the trust arrangement.