Top 10 pitfalls ultra-high net worth Chinese families need to know

By Echo Zhao, Anjie Law Firm
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Q: By default, does mainland China have a joint matrimonial property regime? A: Yes. Mainland China generally has a community property regime. According to article 17 of the Marriage Law, the wages, gains from business operations, proceeds from IP rights, and inheritance or gifts received by a spouse during marriage, shall be jointly owned by the couple, unless otherwise specified.

Q: Is the property acquired by a spouse as a gift or inheritance during marriage deemed as jointly owned by the couple in Mainland China? A: Yes. According to article 17.4 of the Marriage Law, the property acquired by either spouse as a gift or inheritance during marriage is deemed as jointly owned by the couple, unless there is agreement on, or expression of, opposite intentions.

Q: If the spouse who receives such gifts or inheritances intends to make such gifts or inheritances solely owned by him or her, what can be done? A: The law of mainland China allows the donor or testator to declare or specify that any gift or inheritance is only intended to be his or her child’s separate property, instead of being jointly owned by the couple through deeds of gifts or wills.

赵苗 -ECHO ZHAO-安杰律师事务所合伙人-PARTNER-ANJIE LAW FIRM
Echo Zhao
Partner
Anjie Law Firm

Q: Does China recognize pre- or post-nuptial agreements? Are there any specific requirements? A: Yes, there can be pre- or post-nuptial agreements. Both of them are recognized in mainland China. The law is not developed yet as to whether independent legal advice or full disclosure of assets shall be necessary for such pre- or post-nuptial agreements to be valid and enforceable.

Q: Is spousal consent necessary for a married settlor to set up a trust? A: Spousal consent is not a statutory condition for setting up a trust. Nonetheless, lawyers would advise the client to have one. If the trust set up by a married spouse is intended to channel away or conceal community property, or transfer such assets to a third party through the trust, such a trust may be challenged as void, or rescinded by the opposing spouse.

Q: In the case of intestate succession, what is the succession regime in mainland China? A: China’s intestate succession law is substantially different from Western countries in terms of the order of
precedence and the shares. In mainland China, the living spouse shall enjoy his or her 50% share under the community property regime. As to the estate of the deceased, it should be distributed among the living spouse, the parents and the children of the deceased in equal shares. According to article 10 of the Succession Law, lines of heirs for succession are limited. The first line of heirs include the spouse, the children and the parents. The second line of heirs include siblings and grandparents.

In the case where the deceased dies intestate and there are no statutory heirs, the properties should be res nullius. According to Chinese law, the court has the right to affirm the properties ownerless through special proceedings and the court making the judgment can nationalize the properties. According to the judicial interpretations and practices in mainland China, in such cases the court may distribute the properties to the one who succeeds in claims to have supported the deceased as appropriate. There was a judgment that a nephew, who had been the main supporter of the deceased, was awarded the ownership of res nullius through such a special proceeding. China has a limited forced heirship regime for dependents of the deceased to the extent that they otherwise cannot support themselves.

Q: Are grandchildren the statutory successors? A: No, nor are the great-grandchildren, nor other further descendants in direct line. If the testator wishes to pass the properties to people other than the statutory heirs, he/she should do so through wills. Such a bequest by will requires that the person entitled to the bequest shall explicitly express his/her intention or consent to accept the bequest within 60 days after the succession starts. Otherwise, he/she is deemed to have abandoned and waived the bequest.

Q: Does the law in mainland China recognizes probate? A: There are two major ways to navigate succession in mainland China, by notarization or by effective court judgment. The notary offices in China carry out quasi-government functions in administrative nature and public power.

Q: Is it essential for an owner of assets in mainland China to make a will in mainland China? Does the will have to be governed by mainland China laws? A: Theoretically it is not necessary, but it is advisable to make a separate will for the purpose of distribution of assets in mainland China for practical reasons. Foreign grants of probate are not recognised in mainland China. An heir must ask the competent court or notary office to issue a local court decision or notarization document of inheritance. In addition, foreign heirs might also be obstructed to inherit certain real estate or company shares due to restrictions based on national security, property purchase policies or foreign exchange controls.

Q: How will the revised Individual Income Tax Law affect citizens disposing of their offshore properties? A: The Individual Income Tax Law as revised took effect from 1 January 2019, and introduces the anti-tax avoidance regime in the sphere of individual income tax for the first time. The tax authority has the right to impose tax with accrued interest on arrangements that are not at arm’s length, fall under CFC (controlled foreign company) rules, or lack reasonable commercial purpose. This provision will affect clients when they transfer shares in offshore companies, set up SPVs (special purpose vehicles) or trusts, and carry out other restructuring activities in foreign countries.

Echo Zhao is a partner at Anjie Law Firm

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