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UK Companies and China

International business in Asia and particularly in China has for many years been synonymous with offshore services. The BVI, Cayman Islands and Samoa are household names and along with Hong Kong are major routes for inbound and outbound investment.

These international financial centres have their own specific characteristics that lend themselves to particular types of client and activity. Cost efficiency, rule of law, financial services infrastructure and listing capabilities are examples of factors determining the choice of location of the investment vehicle.

The UK is regarded as an on-shore centre although many of its tax characteristics are more aligned to mid-shore centres such as Hong Kong and Singapore. For example, the corporation tax rate is one of the lowest within the EU, at 20%. There are no withholding taxes imposed on the payment of UK dividends abroad and there is a capital gains tax exemption for qualifying companies in relation to "substantial shareholdings". There are no capitalisation requirements or legal fees associated with incorporation. Indeed, UK companies are probably the easiest and least expensive companies to incorporate in the world. There is no obligation to incorporate through a registered agent or corporate service provider, although there are many distinct merits in doing so.

These positive factors have not escaped Chinese businessmen and entrepreneurs.

There are approximately 13,000 live UK companies with Chinese nationals in appointment as directors but who are not resident in the United Kingdom.

Interestingly, of these companies, approximately 8000 are filing dormant accounts, a concession typically available only to those companies that have never conducted business, other than to issue a subscriber share. This statistic suggests that either many UK companies are being used for entirely passive purposes, such as name protection, or they are being erroneously treated abroad as "non-resident", a concept that, without EU or treaty provision, disappeared in the Finance Act of 1988.

Now is a good time to review these companies as changes in UK corporate governance are on the way. The Small Business, Enterprise and Employment Act, passed on 26th March 2015, will have a significant impact on UK company law. One of the key themes of the legislation is that of transparency – enabling clear vision of who runs and owns UK companies.

Some key changes in this regard are set out in the table below.

These changes are expected to take effect during the course of 2016 and 2017, giving plenty of time for companies to be reviewed and any steps put in place to ensure compliance. There is of course vibrant debate over whether the erosion of commercial confidentiality will have a positive or negative impact on international trade and investment. What is clear is that there will be options to assist entrepreneurs and businesses to structure their arrangements to strike a correct and responsible balance between transparency and confidentiality. The UK will continue to be the leading investment route into the European Union.

As the UK is a gateway to Europe, so Jersey is a very important gateway to London.Located just 200 miles south of London, Jersey's constitutional relationship with the United Kingdom dates back to 1204 and Jersey has for many years enjoyed a financially symbiotic relationship with the City of London. Jersey's role in this relationship is predominantly to contribute to the UK economy as a channel for overseas investment. It is estimated that Jersey serves as custodian of some £1.2 trillion of wealth from international sources, three quarters of which is estimated to be sourced from North America, Asia Pacific and the Middle East 1.

As the UK is a gateway to Europe, so Jersey is a very important gateway to London.

 

Jersey's relationship and proximity to the UK makes it an excellent platform for managing the investments of UK resident non domiciles and this is very relevant to wealthy Chinese individuals deciding to move to the UK. UK resident non domiciles are entitled to pay tax in the UK on a remittance basis; hence only income generated in or brought to the UK is charged to UK tax (it should be noted that there are specific costs associated with non-domicile status after an initial 7 year stay in the country). It is estimated that approximately £150 billion of foreign assets in Jersey fall into this UK "non-dom" category 2.

Consequently, it is very common for UK assets, such as commercial property or residential property, acquired for business purposes, to be owned through Jersey companies or trust structures.

Jersey has an impressive range of legal entities at its disposal. The combination of English Common and French Civil law presents some unique opportunities. Foundations for example sit comfortably alongside trusts, there are no fewer than 5 different types of partnership, Jersey company law permits companies to be limited by shares, guarantee or a combination of both (hybrid). Jersey also has special provisions for Protected and Incorporated Cell Companies. Such structures enable quite simple segregation of, for example, economic and controlling interests in companies.

Jersey's relationship with China is already well established. The first PRC company in Jersey was set up in 1994. Jersey companies were approved for listing in Hong Kong in 1999 and today, one third of the 67 Chinese companies listed on AIM are incorporated in Jersey. China and Jersey signed a tax information exchange agreement in 2011 and a double taxation agreement in 2013 3.

Many Jersey law firms and trust companies have offices in Hong Kong and increasingly these are extending to mainland China. This reflects a new and growing demand for corporate, financial, legal and trust services from a highly reputable, regulated and innovative jurisdiction that is able to cater for the increasingly sophisticated needs of Chinese investors. At the same time, Jersey meets modern standards of regulation and transparency that are becoming global imperatives.

The Jersey/London/China combination has already created opportunities for the administration of Dim Sum bonds, whereby Jersey is ideally placed to support London as a centre for the offshore RMB and to administer RMB funds within a tax efficient and highly regulated environment. HSBC in Jersey accept RMB deposits.

In conclusion, for global trade and investment, the UK offers vital economic and political stability, a long established reputation, an effective and attractive tax regime and some of the best company law in the world. As a holding company for European operations, the UK again is a natural choice of jurisdiction, and this is evident from the volume of UK companies being operated from China.

Standing alongside the UK, Jersey offers equal stability and substantial opportunities to support UK inbound or private investment for non UK resident and non UK domiciled clients. The depth of expertise in Jersey, both on the island itself, and through representative offices in Asia will continue to inspire the sophisticated investor to take full advantage of the powerful combination of Jersey and the City of London.


Abolition of bearer shares  

Interestingly, the UK and indeed many EU countries have fallen well behind with leading international financial centres, most of which abolished or immobilised bearer shares many years ago. The Act will abolish bearer shares.

Prohibition of the appointment of corporate directors  

Presently, a UK company must have at least one director who is a natural person. The Act will abolish corporate directors, save for certain exemptions that will be granted to appropriate groups or charities.  

Directors duties and shadow directors

The Act applies general statutory duties of directors to shadow directors – individuals who may have appointed directors as nominees with a view to running the company at their behest.  

Register of "people            with significant control" (PSC)

A most controversial aspect of the Act is the creation of a new statutory register documenting individuals that have significant control over a company, typically determined as over 25% ownership. The company will be responsible to ensure that this information is collected, is up to date and registered.
Holding central registers      at Companies House   Private companies will be able to choose whether the registers are maintained at the registered office, or whether the documents filed at Companies House constitute the official statutory records.  

Author:


 John Swann


John Swann

Director, Business Development
T: +44 (0)117 918 1427
E: jswann@jordanstrustcompany.com


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Footnotes...

1 - Data provided by Jordans Business Information Services

2 - Capital Economics Report – Jersey's value to Britain, July 2013

3 - Jersey Finance: Links with China, reviewed March 2015

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