The flow of private capital across borders, together with the ease of living and working in different countries, creates opportunities for High Net Worth Individuals (HNWIs). However, it also results in significant obligations for HNWIs as the call for greater transparency and governance in taxation, and the advances in technology place governments in a position to better monitor investments and transactions across jurisdictions. Drawing on the tax laws in jurisdictions such as China, Singapore, Australia and the United States (US), this article considers some of the challenging issues encountered by HNWIs and explores the various strategies for dealing with them.
One of the more complex areas confronting HNWIs are the anti-avoidance rules and there are a number of aspects where care is required to prevent an inadvertent breach of these provisions. For example, as part of the reform of their Individual Income Tax (IIT) Law, China has introduced its anti-avoidance rules to deal with situations where a related party transaction violates arm's length principles; an improper tax benefit is obtained without a reasonable commercial purpose; and where undistributed profits are retained in controlled foreign corporations (CFCs). As a consequence, HNWIs who utilize a company in say the British Virgin Islands or Hong Kong may be challenged by tax authorities, who can impose IIT on the profits that should have been distributed. Singapore also requires the reporting of related-party transactions and has anti-avoidance provisions that can reverse any tax advantage obtained without a bona fide commercial reason. Under Australia's transfer pricing regime, a loan from a foreign subsidiary can impact the level of tax paid in Australia if the amounts for the transaction do not adhere to the arm's-length principle. Australians who have interests in offshore entities may also be subject to complex rules regarding Controlled Foreign Companies or Controlled Foreign Trusts, which can result in income from these entities being included in the assessable income of the controller.
In advising HNWIs, a careful analysis of their investment structures, related-party transactions, profit-sharing arrangements and levels of control in offshore entities is required to prevent any breaches of the anti-avoidance rules in each jurisdiction.
Another challenge that often arises for HNWIs is determining their residency status for tax purposes. The need for vigilance was highlighted by the changes to the IIT Law in China, where from 1 January 2019, the threshold period was reduced from one year to 183 days, so that an individual not domiciled in China is considered a resident for tax purposes if they spend 183 days or more of the tax year in the territory of China. In this situation, a foreign individual will be required to pay income tax on both their China-source and foreign-source income, although concessions are available on the foreign-source income for individuals who reside in China for 183 days or more in a tax year but not for more than six consecutive years. Australia also has a '183 day test', where a person who spends more than half the year in Australia will be a resident for tax purposes and must declare all their worldwide income even if tax is paid overseas, unless they can establish that their usual place of abode is outside of Australia and they have no intention of taking up residence. A foreign income tax offset is generally available to apply against the Australian tax. There is also a 'domicile test' that considers a person's permanent place of abode and a 'resides test' that considers aspects such as physical presence, purpose, family and business ties, location of assets and living arrangements. Satisfying any one of these tests will result in Australian tax residency. In the case of Singapore, individual persons are not subject to tax on overseas income derived outside Singapore, regardless of their tax residency.
The US uses the 'substantial presence test', under which a person is considered a resident for tax purposes when they are physically present in the US on at least 31 days during the current year and 183 days (counted using a specified formula) during a three-year period which includes the current year and the two preceding years. One of the consequences for a HNWI being regarded as a US tax resident is being subject to the Foreign Account Tax Compliance Act (FATCA), which is a global initiative to ensure compliance with US tax laws. Under the FATCA regime, certain due diligence and reporting obligations are imposed on financial institutions to report US citizen, US tax-resident account holders and specified US entities established in the US or controlled by US persons. Failure to comply can result in the foreign financial institution incurring a 30% withholding tax on all payments of income sourced from the US. The FATCA regime also facilitates the flow of tax information between jurisdictions, helping governments to ensure their tax residents are complying with their tax obligations.
In advising HNWIs, it is clear the tax resident rules are complex as they may be a tax resident of multiple jurisdictions. Careful planning is required to consider the rules in each jurisdiction and ensure a person's travel or working arrangements do not result in unforeseen tax consequences.
The ownership of assets across multiple jurisdictions means HNWIs are also exposed to the succession laws and estate tax regimes in different countries. To illustrate this, when advising a HNWI who was both an Australian tax resident and US citizen with assets in the US, Singapore and Australia, it was important to consider the estate tax regimes in each jurisdiction. US citizens pay estate taxes on their worldwide assets and are required to file a US estate tax return when the fair market value of their gross assets at the date of their death, together with prior taxable gifts, exceeds the applicable threshold (i.e. US$1.4m in 2019). Non-residents with US-situated assets also have to file a US estate tax return if the fair market value of their US-situated assets exceeds US$60,000. Estate duty was abolished in Singapore in 2008 and while Australia does not impose estate taxes as such, there are important tax consequences to be mindful of when leaving assets to foreign residents and distributing income to a non-resident beneficiary of an Australian trust. Advice was also required to deal with probate in the different jurisdictions and consideration was given to the pros and cons of having one international will compared to having a will in each of the jurisdictions where the assets were located. Relevant matters to consider included the value and nature of the assets (i.e. movable or immovable property), whether the jurisdiction was a party to the 'Convention Providing a Uniform Law on the Form of an International Will' and whether the country was part of the Commonwealth as the courts will tend to recognize and enforce a grant of probate in another Commonwealth country.
In advising HNWIs, careful planning is required to ensure that potential estate tax consequences are addressed and a person has the appropriate will and other estate planning arrangements in place to fulfil their testamentary wishes and protect the interests of their beneficiaries.
Increasingly, HNWIs are taking a more sophisticated and professional approach to managing their wealth and the past decade has seen a proliferation in single family offices (SFOs). Advising HNWIs on SFOs entails expertise across a broad range of areas and often involves cross-border teaming to ensure the optimal location and structure is chosen to meet the family's requirements and manage tax consequences. Having the appropriate governance framework, risk management processes and funding model in place is essential, including determining the functions to be undertaken by the SFO and those that need to be outsourced and the associated staffing levels required.
While not all HNWIs require an SFO, the benefits in terms of having a greater focus on compliance or enhancing governance for example are still applicable and can be integrated into how a HNWI manages and protects their wealth. Adopting such measures and ensuring access to sophisticated advice, will help a HNWI maximize opportunities and manage challenges in a dynamic global environment.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.