Portcullis Group - Asian Prosperity Anchored in BVI: Unveiling Trusts and Family Office

Asian Prosperity Anchored in BVI: Unveiling Trusts and Family Office

David Chong Kok Kong Founder and President Portcullis Group

Definition

• A family office is a professional hub set up to serve the investment and personal needs of a rich family.

• The US Securities & Exchange Commission makes a distinction between: private advisers of family offices that are excluded from the definition of an investment adviser under the Investment Advisers Act 1940 (‘the Advisers Act’), and are therefore not subject to regulation under the Advisers Act; and those investment advisers who hold themselves out to the public as an investment adviser. The exclusion is limited to family offices that provide advice about securities only to certain ‘family clients’; and the family clients wholly own the family office and family members and/or family entities control the family office. This essentially is the difference between single family offices and multi-family offices.

• In Singapore, investment advice is regulated by the Securities & Futures Act (Cap. 289) and the Financial Advisers Act (Cap. 110).

In HK the same is regulated by the Securities & Futures Ordinance (Cap. 571).

In BVI the same is regulated by the Securities & Investment Business Act (SIBA).

• Who is a high net worth investor?

In Singapore they are known as ‘accredited investors’.

In Hong Kong they are referred to as ‘professional investors’.

In Malaysia they are known as ‘sophisticated investors’.

In BVI they are known as ‘professional investors’ (Professional Funds) & ‘sophisticated private investors’ (Incubator Funds).

● Accredited Investor Singapore Securities & Futures Act (Cap. 289)

1) individual net personal assets > SGD 2m or income in past 12 months not < SGD 300,000

2) corp. net assets > SGD 10m;

3) Trustee of a trust > SGD 10m.

● Professional Investor HK Securities & Futures Ordinance (Cap. 571)

1) trust corp. total assets not < HKD 40m;

2) individual portfolio not < HKD 8m within 12 months;

3) corp. or partnership: portfolio not < HKD 8m; or total assets not < HKD 40m.

● Labuan Private Fund Labuan Financial Services & Securities Act 2010

1) not > 50 investors not < MYR 250,000

2) any number of investors not < MYR 500,000.

● Sophisticated Investors Malaysia Capital Markets & Services Act 2007

2)

3)

4)

 John D Rockefeller

1870 Standard Oil; later became Exxon Mobil 1882 Room 5600 on 56/F Rockefeller Center, NY

7th generation sold 37% to Lord Jacob Rothschild RIT Capital Partners

 1907, Henry Phipps formed Bessemer Trust to manage proceeds from sale of Carnegie Steel which he founded with Andrew Carnegie name ‘Bessemer’ is tribute to Sir Henry Bessemer inventor of steel making process that was instrumental in success of Carnegie Steel.

‘A Frog in a Well Knows Nothing of the Ocean: A History of Corporate Ownership in Japan’

by Randall Morck & Masao Nakamura

 Big Four Zaibatsu

(term typically implies family control):

 Mitsui

 Sumitomo

 Mitsubishi

 Yasuda

 ‘The Mitsui dynasty was founded by Hachirobei Takatoshi Mitsui (1622-94), a silk merchant who expanded into other commodities because of his extensive use of barter.

The Sumitomos, who grew wealthy mining and smelting copper, apparently started in Kyoto and then moved to Osaka in the early Edo period.

Both families established complicated house rules─ constitutions governing all aspects of business.

Power was divided between a patriarch and a family council, which served a quasi-parliamentary function.’

Family Office Structure

BVI Protector



Section 86 Trustee Act 1961 (as amended) (British Virgin Islands)

(1) The reservation by the settlor to himself… or the grant to any other person… including (but not limited to) a protector or protective committee… any or all of the powers specified in subsection (2)

(2) The powers referred to in subsection (1) are:

(a) revoke the trusts

(b) amend the terms of a trust

(c) advancement, appointment, payment, application, distribution or transfer

(d) appointment or removal of a director

(e) purchase, retention, holding, sale of trust property

(f) appoint, add, remove any trustee, protector, enforcer

(g) add, remove or exclude any beneficiary

(h) change the proper law of trust

(i) specify which courts

(j) restrict any powers of a trustee requiring consent of any person specified in the trust instrument

Private Trust Companies

(company limited by shares)

(company limited by guarantee)

BVI PTCs

 Banks & Trust Companies Act 1990 (as amended)

licensed trust companies

 Financial Services (Exemptions) Regulations 2007 (as amended)

 a limited company either limited by shares or by guarantee

 memorandum states it is a private trust company

 business consists solely of: unremunerated trust business and/or related trust business

 registered agent is a person holding a Class I trust licence

 not solicit trust business from members of the public

 BVI Business Companies (Company Name) Regulations

the name of a PTC shall end with the designation ‘(PTC)’ placed immediately before one of the endings specified

BVI Vista Trusts (1)



Section 3 Virgin Islands Special Trusts Act 2003

The primary purpose of this Act is to enable a trust of company shares to be established under which

(a) the shares may be retained indefinitely ; and (b) the management of the company may be carried out by its directors without any power of intervention being exercised by the trustee

BVI Vista Trusts (2)

 Re Lucking’s Will Trusts [1967] Cross J:

‘Now what steps, if any, does a reasonably prudent man who finds himself a majority shareholder in a private company take with regard to the management of the company’s affairs? He does not, I think, content himself with such information as to the management of the company’s affairs as he is entitled to as shareholder, but ensures that he is represented on the board He may be prepared to run the business himself as managing director or, at least, to become a non-executive director while having the business managed by someone else. Alternatively, he may find someone who will act as his nominee on the board … trustees holding a controlling interest ought to ensure so far as they can that they have such information as to the progress of the company’s affairs as directors would have. If they sit back and allow the company to be run by the minority shareholders and receive no more information than shareholders are entitled to, they do so at their risk if things go wrong.’

BVI Vista Trusts (3)

 Bartlett v. Barclays Bank Trust Co. Ltd [1980] Brightman J:

‘I do not understand Cross J. [in Re Lucking’s] to have been saying that in every case where trustees have a controlling interest in a company it is their duty to ensure that one of their number is a director or that they have a nominee on the board who will report from time to time on the affairs of the company. He was merely outlining convenient methods by which a prudent man of business (as also a trustee) with a controlling interest in a private company, can place himself in a position to make an informed decision whether any action is appropriate to be taken for the protection of the asset. Other methods may be equally satisfactory and convenient, depending upon the circumstances of the individual case. Alternatives which spring to mind are the receipt of… the agenda and minutes of board meetings if regularly held, the receipt of monthly management accounts in the case of a trading concern, or quarterly reports.’

Trust Legislation

 Bahamas Trustee (Amendment) Act 2011

 Bermuda Trustee Act 1975

 BVI Trustee Ordinance 1961

 BVI Virgin Islands Special Trusts Act 2003

 Brunei International Trusts Order 2000

 Cayman Special Trusts (Alternative Regime) Law 1997

 Cayman Trusts Law (2007 Revision)

 Cook Islands International Trusts Act 1984

 Dubai Trust Law 2005

 Guernsey Trusts (Guernsey) Law 2007

 Jersey Trusts (Jersey) Law 1984 (amended 3 Nov 2006)

 Labuan Trusts Act 1996

 Mauritius Trusts Act 2001

 Samoa International Trusts Act 1987

 Singapore Trustees Act 2004

 United Kingdom Trustees Act 2000

 Japan Trusts Act 1922

 Taiwan Trust Law 1996

 PRC Trust Law 2001

 Switzerland Hague Convention on the Law Applicable to Trusts and on their Recognition 1985

wef 1 July 2007

Foundations

 Liechtenstein Stiftung (Family Foundation) 1926 (amended 2009)

 Austria Private Foundation 1993

 Panama Private Interest Foundation 1995

 Netherlands Antilles Private Foundation 1998

 St Kitts Foundations Act 2003

 Bahamas Foundations Act 2004

 Nevis Multiform Foundations Ordinance 2004

 Antigua & Barbuda International Foundations Act 2007

 Anguilla Foundation Act 2008

 Malta Law on Foundations 2008

 Foundations (Jersey) Law 2009

 Seychelles Foundations Act 2009

 Belize International Foundations Act 2010

 Labuan Foundations Act 2010

 Isle of Man Foundations Act 2011

 Cook Islands Foundations Act 2012

 Mauritius Foundations Act 2012

 Foundations (Guernsey) Law 2012

Income Tax Act 1947

Part 4 Exemption from Income Tax

 Section 13C trustee of trust fund arising from funds managed by fund manger in Singapore

 Section 13D prescribed person arising from funds managed by fund manager in Singapore (former Section 13CA)

 Section 13F foreign trusts (former Section 13G)

 Section 13N prescribed locally-administered trust (former Section 13Q)

 Section 13O company incorporated and resident in Singapore arising from funds managed by fund manager in Singapore (former Section 13R)

 Section 13Q trust income of beneficiary (former Section 13T)

 Section 13T eligible family-owned investment holding company (former Section 13W)

 Section 13U

(former Section 13X Enhanced Tier Fund)

 Section 13W gains or profits from disposal of ordinary shares

 Others: shipping profits; venture company; SMEs; start-ups; etc.

Minimum Asset under Management (“AUM”)3

Updated Conditions of S13O and S13U Applications for Family Offices

13O (formerly known as 13R)

a) The fund has a minimum fund size of S$10 million at the point of application.

b) The fund commits to increasing its AUM to S$20 million within a 2- year grace period.

Investment Professionals (“IPs”)4

a) The fund is managed or advised directly throughout each basis period relating to any year of assessment by a family office in Singapore, where the family office employs at least two IPs5.

b) In the event that the family office is unable to employ two IPs by the point of application, the fund would be given a one-year grace period to employ the second IP.

13U (formerly known as 13X)

a) The fund has a minimum fund size of S$50 million at the point of application.

Business Spending

Local Investment

a) The fund will incur at least S$200,000 in total business spending7 in each basis period relating to any year of assessment, subject to the tiered business spending framework that is set out in the next table.

a) The fund is managed or advised directly throughout each basis period relating to any year of assessment by a family office in Singapore, where the family office employs at least three IPs5 with at least one IP a non-family member6.

b) In the event that the family office is unable to employ one non-family member as an IP by the point of application, the fund would be given a one-year grace period to do so .

a) The fund will incur at least S$500,000 in local business spending7 in each basis period relating to any year of assessment, subject to the tiered business spending framework that is set out in the next table.

a) The fund managed by the family office will invest at least 10% of its AUM or S$10 million, whichever is lower, in local investments8 at any one point in time.

Updated Conditions of S13O and S13U Applications for

Family Offices

3 AUM refers to the Net Asset Value based on accounting convention.

4 An individual has to be a Singapore tax resident to be considered an investment professional.

5 Investment professionals refer to portfolio managers, research analysts and traders who are earning more than S$3,500 per month and must be engaging substantially in the qualifying activity.

6 Non-family member refers to an individual who is not a family member of the beneficial owner(s). Family members may refer to individuals who are lineal descendants from a single ancestor, as well as the spouses, exspouses, adopted children and stepchildren of these individuals.

7 According to accounting principles. Expenses incurred should relate to the operating activities of the fund (as opposed to financing activities). Typical expenditure includes, but are not limited to, remuneration, management fees, tax advisory fees, and operating costs.

8 Products may include: i) equities listed on Singapore-licensed exchanges, ii) qualifying debt securities, iii) funds distributed by Singapore-licensed/registered fund managers, iv) private equity investments into non-listed Singapore-incorporated companies (e.g., start -ups) with operating business(es) in Singapore.

Companies’ gains from disposal of shares

 Singapore Budget 17 Feb 2012

 providing certainty of non-taxation of companies’ gains on disposal of equity investments

 Singapore does not have capital gains tax

 whether gains from the disposal of shares in a company are income or capital in nature is based on a consideration of facts & circumstances of each case factors considered include:

 motive of seller

 length of period of ownership of the shares disposed

 frequency of transactions

 reasons for sale

 means of financing the acquisition

 on or after 1 June 2012 gains from disposal of equity investments will not be taxed if:

i) divesting company holds a minimum 20% shareholding in the company whose shares are being disposed; and

ii) divesting company maintains minimum 20% shareholding for a minimum period of 24 months just prior to the disposal

 for share disposals in other scenarios facts & circumstances of each case

Hong Kong Family Offices

 IRD : Tax Concessions for Family-owned Investment Holding Vehicles

 effective retrospectively from 1 April 2022

 cf. Singapore 2008 Budget Statement

Family-owned Investment Holding Company (FIHC)

Acronyms

ESFO = Eligible Single Family Office

FIHV = Family-owned Investment Holding Vehicle

FSPE = Family-owned Special Purpose Entity

IFSPE = Interposed Family-owned Special Purpose Entity

Requirements for FIHV

 Minimum Asset Threshold

generally NOT real estate in HK

HKD 240 million about SGD 41 million about USD 30 million

 at least 2 full time employees (who are qualified to carry out investment services)

outsourcing to service providers in HK is permitted

 Annual Operating Expenses in HK of at least

HKD 2 million about SGD 343,000 about USD 255,000

 FIHV must carry out

core income generating activities (CIGAs) in HK

Eligible Single Family Office

 FIHV must be managed in HK by an ESFO

 ESFO must:

 private company (incorporated in or outside HK) which is normally managed or controlled in HK

 at least 95% beneficial interest held (directly or indirectly) by members of the family (except where a charitable entity is involved)

 provision of services to specified persons of the family are chargeable to tax

 safe harbour rule whereby at least 75% of ESFO’s assessable profits should derive from services to specified persons of the family

 not > 50 FIHVs managed by same ESFO may benefit from profits tax concession