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Interest in mid-shore hubs accelerates as economic substance requirement looms

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HNWIs are increasingly attracted to setting up corporate structures in mid-shore hubs like Hong Kong and Singapore, as opposed to traditional offshore hubs, due to new corporate structure regulations which seek greater operational transparency, says corporate service provider Vistra.

A number of offshore jurisdictions — including the British Virgin Islands (BVI), Cayman Islands, Bermuda, Guernsey, Jersey, and the Isle of Man — enacted legislation in January this year requiring local entities to demonstrate sufficient ‘economic substance’, or an adequate amount of relevant business activity in the jurisdiction. Existing entities have been granted a six month grace period to meet the requirements.

In view of these changes, Jonathon Clifton, regional managing director, Asia & Middle East for Vistra, told Asian Private Banker that he has observed a trend of more HNWIs setting up corporate structures in mid-shore financial centres as they are more likely to carry out business activities like fund management financing and leasing in these locations.

Jonathon Clifton, Vistra

“If we are talking about Asia from a private client perspective, traditionally there has been a high usage of the Crown dependencies and the British Overseas Territories such as the BVI, Cayman Islands, Jersey, and Guernsey,” said Clifton.

“What we have seen over the last five to ten years is that places like Hong Kong and Singapore have increasingly become desirable from asset protection and private client perspectives.”

He pointed out that succession laws, the convergence of global regulatory frameworks such as CRS and FATCA, and the latest EU economic substance rules, all try to provide authorities with more transparency around where profit is generated and who the ultimate owners of structures are.

“All these regulations that have come into play in recent times are to address the sentiment that if you have any corporate structures in a place, then it needs to have economic activities taking place within that particular jurisdiction,” Clifton explained, adding that there exists negative public perception surrounding the usage of offshore structures.

“Therefore, it is much easier in places like Hong Kong and Singapore to demonstrate legitimate economic substance for a company. It is not a zero-sum game though. What we often see in a typical structure owned by wealthy families and HNWIs would be a combination of both: for instance, it can be a Singapore corporate structure along with other BVI structures serving different purposes. The overall trend is more mid-shore and less offshore structures, but the latter still plays an important role, especially in this part of the world.”

Clifton also elaborated that while both Hong Kong and Singapore welcome wealthy families to set assets in their jurisdiction, each play unique roles for HNWIs.

“A lot of our work for our private clients in Hong Kong has to do with pre-IPO trusts, employee share option plans, and corporate trustees. This is largely due to the fact that Hong Kong remains one of the world’s pre-eminent IPO markets,” he said.

“While in Singapore, we tend to see more private client type of trustees being formed. You do have the potential sovereign risks where some people think beyond 2047, wondering whether they would be more secure in having their assets held within a Singaporean trust versus a Hong Kong trust. This would occasionally be raised in our conversations with wealthy private clients in Asia.”

In addition, Clifton mentioned that Singapore has been more “proactive” in developing its regulatory framework with Hong Kong “catching up” by introducing a licensing scheme for trust and corporate service providers in 2018 to uphold the quality of the industry.

“The industry by and large is quite supportive to that, it has the potential to weed out some of the more “cowboy” operators within the industry,” he concluded.

The licensing requirement in Hong Kong stemmed from the implementation of the Companies (Amendment) Ordinance 2018 (CAO) and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) in March 2018. Under the CAO requirements, trust and company service providers — including certain private banks — must pass a “fit and proper” test in order to acquire a new licence from Hong Kong’s Companies Registry.

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