1 Donations to Relatives
- Characteristics of donations
Donation refers to the act whereby the donor gives its own property to a donee gratis, and the donee indicates its acceptance of the donation. Donations take place prior to the decedent’s death and a donation agreement takes effect at the time when the donee agrees to accept the donation. If a donation is subject to collateral obligations, the donee shall perform its obligations as agreed.
The donor may revoke the donation at any stage prior to the transfer of its proprietary interests in the granted property, except for the notarial donations, which are irrevocable.
In the event that a donor dies or becomes incapacitated due to an unlawful act of the donee, the donor’s successor or statutory agent may revoke the donation. Such revocation may be made within six months from the date when such successor or statutory agent learns of or should have known the cause for the revocation. - Donation-related taxes
According to the relevant regulations, neither the donor nor donee is required to pay business taxes or surcharges, land value-added tax or value-added tax with respect to donations. A donee of real estate is required to pay deed tax, with the exception to donations between husband and wife occurring during marriage. Both the donor and donee are required to pay stamp duties.
As for individual income tax, it only applies when donated assets are real estate or equities. Other donated assets are not subject to individual income tax.
Donations of real estate made to the donor’s close relatives or to dependents for whom the donor bears direct foster or support obligations are not subject to individual income taxes. If the donee is not a close relative or any dependents for whom the donor bears direct foster or support obligations of the donor, the donee will be required to pay individual income taxes at a rate of 20% on the unrealized gain(contract price less any taxes and expense the done paid during donation) of the donated real estate.
Donations of equities to close relatives or to dependents for whom the donor bears direct foster or support obligations do not subject either the donor or donee to individual income taxes. The donor is required to pay individual income taxes on the unrealized gain from the transfer of equities to persons other than close relatives or to dependents for whom the donor bears direct foster or support obligations. In some regions (such as Hebei and Guangdong), the donee is also required to pay individual income taxes on donations of equities.
2 Legacy-support Agreements and Succession Contracts
1. Characteristics of legacy-support agreements
Legacy-support agreements refer to contracts signed by and between a citizen and a person who, in accordance with the agreement, assumes the duty to support the former in his or her lifetime and attends to his or her interment after death, in return for the right to legacy.
2. Applicability of the contract of inheritance regime in China
Presently, PRC law does not clearly permit or prohibit inheritance contracts. However, in PRC judicial practice, courts usually recognize inheritance contracts made between the decedent and his or her heir, or those between heirs. - Disclaiming inheritances in family agreements
Because family agreements (including family constitutions) are concluded before the death of the decedent, the successor's expression of intent to disclaim an inheritance usually does not take effect. Legal provisions require a disclaimer of inheritance to be effective only if it is made after the succession process begins. However, in judicial practice, disclaimers are often considered effective if the disclaiming successor is compensated or is exempted from certain obligations in return for making the disclaimer.
3 Family Trusts - Characteristics of family trusts
“Family trusts” is not specifically defined under current PRC laws,but is rather used as a business term, thus there is no legal definition. Besides the element of trust, family trusts also have an element of family, namely,such trusts are established mainly for the benefit of one or more family members, and the beneficiaries of family trusts generally consist of multiple members of a family.
Under the current legal system, family trusts are treated as a type of trust contracts. The settlor, trustee and beneficiary are necessary elements of the construction of family trusts, while the purpose of the trust, the methods for managing the trust assets and the distribution of trust income are flexible. - Testamentary trusts
PRC law recognizes testamentary trusts.In practice, however, a testamentary trust may not be operable if the testator seeks to establish the trust by a will but fails to reach an agreement with the trustee (usually a trust company) in advance on core terms of the trust (e.g.,conditions for receiving trust distributions, standards for identifying beneficiaries, trustee remuneration, etc.). - Who can serve as trustee of a trust
According to the Trust Law of the People’s Republic of China (“Trust Law”), both natural persons and legal persons can serve as trustees. According to Article 43 of the Law on Commercial Banks of the People’s Republic of China, however, commercial banks are prohibited from engaging in trust investment and securities business activities in China. As a result,commercial banks cannot serve as trustees of family trusts.
Since there is no property declaration system in China, if a natural person acts as a trustee, it will be difficult to distinguish the trustee’s personal assets from the entrusted assets. This means that any individuals acting as a trustee may face significant legal risk.
If the trustee charges fees for trust services, the nature of the trust will become a business trust that is subject to supervision and administration by the PRC regulatory authorities. Therefore, an unlicensed trust company cannot act as the trustee for family trusts. - Do trusts provide protection for the settlor and beneficiaries’ wealth
Yes. During the duration of the trust, the trust assets will be independent of the assets of the settlor, the beneficiaries and the trustee and will be free from recourse by creditors of the settlor, the beneficiaries or the trustee, provided that the following conditions are satisfied:
The settlor’s settling of a trust does not harm any interests of the settlor’s existing creditors. The criterion for determining whether the interests of the creditors are harmed is based on whether the settlor’s net assets are reduced to less than zero after the trust is settled, which is intended to evaluate whether the trust has caused the settlor’s assets to be insufficient to repay his or her debts owed to creditors.If settlement of a trust harms the interests of creditors, the creditors may file a lawsuit requesting the cancellation of the trust within one year from the date when the creditors know or should have known of the cause for cancellation.
The trust assets are independent of the trustee’s assets. Where the trustee dies or is dissolved or terminated according to law or is declared bankruptcy, the trust assets are not regarded as estate or liquidation assets of the trustee. Rather,in the foregoing circumstances, the trust will be terminated and the trust assets will be distributed according to the statutory order to the beneficiaries and their heirs or to the settlor and his or her beneficiaries.
The trust assets are independent of the beneficiary's property. According to Article 47 of the Trust Law, the settlor may stipulate in a trust contract that the right to receive trust benefits cannot be used to repay the debts of the beneficiary. - Family Trusts-related Taxes
In the process of establishing a trust, which assets that are placed in trust are subject to taxes
According to existing law, all assets that are not subject to registration requirements are not subject to taxes when placed in trust, such as funds, artwork, collectibles, jewelry, etc.
Assets that that require registration when placed in trust, such as real estate and equities, are subject to certain taxes at the time of registration. These taxes mainly include individual income tax, deed tax and stamp duty, and also value-added tax for real estate. An individual income tax rate of 20% levied on the unrealized gain in the assets transferred to the trust (the original buying price less the price when settling the trust, i.e.the premium).
Are the distributions subject to income tax
For now, trust distributions paid to natural person beneficiaries are not subject to individual income taxation.
At present, there is no individual income tax withholding on trust distributions for trusts settled in China and for which the beneficiaries include both PRC and non-PRC citizens.However, non-PRC citizens may be subject to tax obligations according to laws of their countries of citizenship and may have to declare income and pay taxes in accordance with local laws and regulations.