It looks as though the stars are aligning for Taiwan’s onshore wealth management market. A number of unrelated events are prompting Taiwanese HNWIs to reconsider whether it makes sense to keep their wealth offshore or whether an onshore structure is more beneficial.
Since the start of the COVID-19 pandemic, Taiwan’s success in containing its spread has prompted wealthy offshore Taiwanese families to return to the relative safety of the island.
The returning Taiwanese take an interest in estate planning and wonder whether there is merit in repatriating their offshore assets. (Asian Private Banker estimates that US$600-700 billion in HNW Taiwanese assets sit offshore.)
A year ago, Taiwan enacted favourable regulations aimed at luring that offshore cash back to Taiwan. The repatriated funds are exempt from income tax resulting from mainland China-sourced income, but otherwise still subject to 8% and 10% income tax rates for the first year and second year respectively (If certain conditions are met, half of the tax paid can be refunded).
The favourable tax code of August 2019 is paired with the Controlled Foreign Corporation (CFC) legislation which must be implemented one year after the tax code has been effective, although it is possible that this is delayed due to the pandemic. In a wealth management update, Baker McKenzie recommends that the CFC legislation “be seriously considered in the context of estate planning”.
So, if Taiwan taxpayers do not repatriate their offshore assets before the CFC legislation takes effect, such assets could be subject to the CFC legislation, which likely will consider the earnings from an offshore company controlled by the taxpayers to be dividends.
“If the CFC Rules become effective, foreign corporations controlled by Taiwanese may be deemed to be conduits and therefore be looked through for tax purposes,” writes Baker McKenzie.
Thomas Huang Tien-Mu, the new chairman of Taiwan’s Financial Supervisory Commission (FSC), has pledged to continue the policy of encouraging the repatriation of assets and the promotion of onshore wealth management in Taiwan.
Specifically, Huang is keen on developing the diversity of trust businesses in Taiwan, an industry mainly comprising money trusts and worth TWD 9.6 trillion (around US$326.3 billion)
Robert Fuh, CEO of Private Banking at Cathay United Bank shared his optimism with Asian Private Banker towards the sustained growth in the bank’s client base because of the immense “demand momentum for onshore private banking services”.
Economic substance requirements
Taiwanese have traditionally be strong investors in China, and in Fujian in particular. For political and tax reasons, these investments in mainland China are made through a tax haven, and the bulk of the profits are retained within the tax haven.
The enactment of economic substance rules in tax havens often used by Taiwan U/HNWs has begun to affect anybody who has a tax haven company.
CRS starts to bite
The Common Reporting Standard (CRS), approved by the OECD in July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
Regulations Governing the Implementation of the Common Reporting Standard (CRS) came into effect in Taiwan in 2019. These allow the Taiwanese Ministry of Finance to demand that financial institutions conduct due diligence on clients and gather the necessary information for the purpose of tax collection.
“Because Taiwan has not been able to join the CRS multilateral network, the Taiwan government has taken a country-by-country approach in the interim.” For example, the Ministry of Finance will start exchanging tax information with Australia and Japan in September 2020.
This means that while financial institutions in Taiwan have been conducting due diligence on their clients to identify all Australian and/or Japanese tax residents, the reciprocity of the CRS regime requires Japan and Australia to pass on tax information on Taiwanese residents who enjoy investments gains in bankable assets or any income (e.g. rental income from properties) in Japan and/or Australia.
With the first CRS exchanges with Japan and Australia, it is likely that the Taiwan authority will continue to populate the list of CRS exchange jurisdictions.
“The CRS will have significant impact on taxpayers who have foreign bankable assets because the Taiwanese Ministry of Finance will likely work with more foreign governments to obtain more tax Information in this regard,” writes the law firm.
Fresh wealth planning opportunities
As a result, Taiwanese HNWIs who used not to be too worried about the possibility that Taiwan would exchange information with Hong Kong under CRS, now realise that Hong Kong and Taiwan are likely to exchange information under CRS. This will make offshore structures more transparent, and thus less likely to be used for hiding assets.
The 8% and 10% tax rates have been criticised for being too steep. However, the expected enactment of the CFC legislation, the possibility of new FSC policies, the economic substance requirements, and the new CRS reality enhance the appeal of the August 2019 tax code.
“We believe that, due to the political situation in Hong Kong, low interest rates (…) in the US and possible new FSC policies in the near future, there may be new [wealth] planning opportunities that should be considered,” Baker McKenzie writes. “This is certainly true for funds that are now located in Hong Kong which may migrate back to Taiwan or seek shelter in Singapore, and particularly if there are US beneficiaries involved.”