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Tomorrow’s WorldAsia Pacific Real Estate Asia Pacific Real Estate Conference 20136 December 2013

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Greater China –Challenges, Risks and OpportunitiesPwC Hong Kong:PwC Hong Kong:KK SoJacqueline WongM i TMaggie To

PwC Shanghai:gKenny Lam

PwC Taiwan: PwC Taiwan: Richard Watanabe

Challenges Risks & Opportunities?Challenges, Risks & Opportunities?

Preferential T li & fRegimes…

Shanghai PFTZ, Qianhai, Hengqin,

Nansha, Hong

Tax compliance & Enforcement…Treaty benefits,

C698, GAAR, Tax A dit? , g

Kong? Audit?

Tax measures to curb

HK’s FSDC Proposals...

speculation… SSD, BSD,

DSD, Property Tax, Luxury

PERE, REIT, OEIC

Tax?

PwC Asia Pacific Real Estate Conference 2013 | Singapore 3

Preferential treatments in special regions in ChinaPreferential treatments in special regions in China- Shanghai Pilot Free Trade Zone (“PFTZ”)

Covering 28.78 km2, includes:Waigaoqiao Bonded Area

• Waigaoqiao Bonded Area

• Waigaoqiao Logistics Park

Bonded Area

Waigaoqiao Logistics Park

Waigaoqiao Logistics Park

• Pudong Airport Free Trade Zone

Pudong Airport Free Trade ZoneZone

• Yangshan Port Free Trade Zone

Yangshan Port Free Trade Zone.


Preferential treatments in special regions in ChinaPreferential treatments in special regions in China- Shanghai Pilot Free Trade Zone (“PFTZ”)

• Gradually liberalized interest rate Fi i l

Still a lot of debates. The bottom line is that th i k h ld b • Gradual relaxing of RMB

conversion in capital account• Cross-border use of RMB

Financial system innovation

the risk should be manageable.

Institutional innovation

• Exploring the set-up of new types of financial institution and international platform

Forex control f

and international platform

• Build a forex administration system that is compatible with the PFTZ reform

reform• Facilitate investment and trade process

Is it possible for real estate companies to push down its financial costs?


Is it possible for real estate companies to push down its financial costs?

Preferential treatments in special regions in ChinaPreferential treatments in special regions in China- Southern China: Qianhai, Hengqing and Nansha

Qianhai(15 km2)

• Close to Hong Kong International Airport and Shenzhen Airport

• One hour to Central, Hong Kong

Hengqingq(106 km2)

• Macau is merely 200m away• Cross-border light rail to Macau • Hong Kong-Zhuhai-Macau Bridge: 35 minutes

only from Hengqin to Hong Kong.

Nansha(803km2)

• By ferry : 50 minutes to Macau, and 75 minutes to Hong Kong


• Anticipated that in five years it will take less than 40 minutes to get to Hong Kong

Preferential treatments in special regions in ChinaPreferential treatments in special regions in China- Southern China: Qianhai and Hengqin

Qianhai HengqinQianhai Hengqin• Support the establishment of an

innovative experimental zone for cross-border RMB business in Qianhai;

b d il l di

• Relax entrance barriers for banks and securities and insurance companies from Hong Kong and Macau through CEPA framework;

Expanding

• Cross-border pilot run RMB lending ;• Support qualified enterprises and

projects registered in Qianhai to issue RMB bonds in Hong Kong;

framework;

• Support to launch multiple currency industrial (equity) investment funds, land trust pilot program;

i ff h iFinancial Sector

• Support the establishment of funds or equity investment funds in Qianhai;

• Support the innovative development of foreign-invested equity investment funds;

• Foreign currency offshore services, cross-border RMB settlement and cross-border collateral financing business;

• Support to set up equity investment funds and fund management companies;funds;

• Support the establishment of international or (national) management headquarters or business operation headquarters by Hong Kong

and fund management companies;• Support to set up headquarters in

Hengqin;

• Two-way conversion of RMB and MOP d d i di id l i

ope at o eadqua te s by o g o g and other onshore and offshore financial institutions.

and HKD under individual item

Is it possible set up an investment platform for real estate


Is it possible set up an investment platform for real estate investment in these special regions?

Preferential treatments in special regions in ChinaPreferential treatments in special regions in China- Southern China: Qianhai and Hengqin

Qianhai Hengqin

Tax Preferential Treatments in Qianhai and Hengqin

Corporate Income Tax

15% for qualified companies1 15% for qualified companies2

Individual IIT rebate for only employment IIT Rebate for 11 types of IIT IndividualIncome Tax (“IIT”)

IIT rebate for only employmentincome of qualified expat talents

IIT Rebate for 11 types of IIT income of Hong Kong and Macao Residents Working in Hengqin

IIT Rebate Difference between IIT paid and Difference between IIT actually IIT Rebate method

Difference between IIT paid and 15% of taxable income from employment

Difference between IIT actually paid in Hengqin and the “hypothetical” tax in HK/Macau

O h B i C d l dd d Others taxbenefits

Business tax Customs duty, value-added tax, and consumption tax

1 The enterprises shall fall within the Catalogues for Encouraged Industries in Qianhai


1. The enterprises shall fall within the Catalogues for Encouraged Industries in Qianhai.

2. The enterprises shall fall within the Catalogues for Encouraged Industries in Hengqin.

“Offshore Fund Exemption” in Hong Kong“Offshore Fund Exemption” in Hong Kong

1Centrally

managed and controlled

Transactions in real estate & private

companies Excludedcontrolled

outside HK

5N th

Offshore Fund

2Specified

transactions

No other business in HK

Regime

43

Specified persons

4Revenue from

incidental transactions less than 5% of total

revenue


revenue

2013 Hong Kong Budget Paragraph 452013 Hong Kong Budget – Paragraph 45

To attract more PE funds to domicile in HK, proposed to extend the profits tax exemption regime for offshore funds to include transactions in private companies which:

(i) Are incorporated or registered outside HK;

(ii) Do not hold any HK properties; and

(iii) Do not carry out any business in HK.


Proposals by Financial Services Development Proposals by Financial Services Development Council (“FSDC”): PE Funds – Phase 1

Real Estate

2Specified

t ti ff h dT i

Scenario 2 Fund excluded?

transactions Offshore FundTax exemption

SPV(HK or non-HK)

SPV(HK or non-HK)

Tax exemption

• Only derives dividend income and profits from disposal of investments

Portfolio company (Non-HK)

Portfolio company (Non-HK)

investments

• Majority owned or controlled by PE Fund and remaining investors non HK residents

Assets and businesses

Assets and businesses

“10% de minimisexemption threshold”HK real estate less than 10%


Proposals by FSDC: PE Funds Phase 2Proposals by FSDC: PE Funds – Phase 2

To further investigate and make recommendation for:

• Hong Kong domiciled limited partnerships

• Hong Kong portfolio companies

• Tax exemption eligibility criteria for non SFC licensee advised or managed collective p g y ginvestment schemes

• “Central management and control” test for an offshore fund

• All investments in private companies (regardless of place of incorporation or business activities)

• Legal definitions (e.g. “securities” and “portfolio company”) and changes to the law


HK’s expanding double tax treaty networkHK’s expanding double tax treaty network

I f ( 6) P di U d i i In force (26)

Austria Jersey Spain

Belgium Kuwait Switzerland

Pending ratification (3)Italy

Guernsey

Under negotiation (10)United Arab Emirates

Indiag

Brunei Liechtenstein Thailand

Canada Luxembourg The Netherlands

Czech Republic Malaysia The UK

Guernsey

Qatar

India

Saudi Arabia

Bangladesh

FinlandFrance Malta Vietnam

Hungary Mexico

Indonesia New Zealand

South Africa

Mauritius

KoreaIreland Portugal

Japan PRCLatvia

Bahrian

Would HK emerge as a favorable jurisdiction for PERE funds…


Proposals by FSDC: H REITsProposals by FSDC: H-REITs

Proposed incentives to revitalise H-REIT market

• Relax the 10% investment limitation on H-REITs by MPF Schemes

• Preferential tax treatments

- Exempt H-REITs from profits tax on rental income from HK property- Remission of stamp duty on acquisition of non-residential property by H-REITs

• Property development

- Relax the REIT code to accommodate “design-and-build” scheme to allow H-REITs to invest in projects which H REITs would own and manage after completioninvest in projects which H-REITs would own and manage after completion

- Subject to a cap of 10% of the H-REIT’s total assets and a 2-year minimum holding period from completion

• Takeover and privatization• Takeover and privatization

- Provide H-REITs with same takeover / privatisation tools as HK listed companies


Proposals by FSDC: Open ended Investment Proposals by FSDC: Open-ended Investment Companies (“OEICs”)

• Legal and regulatory requirements√ Issued under SFO√ To be approved by SFC√ To be approved by SFC√ Public OEIC: authorization by SFC and offered to public√ Private OEIC: no authorization by SFC and only offered on private placement basis

• Investment scope: any asset class

• Subject to investor protection and governance rules

• Tax framework√ Public OEIC – Same exemption as that currently applied to SFC authorized funds;

no stamp duty on sale, purchase or transfer of shares in Public OEIC p y p√ Private OEIC - enjoy same tax exemption currently available to offshore funds on

same condition except that central management and control can be in Hong Kong; no stamp duty on sale, purchase or transfer of shares in Private OEIC provided that certain conditions satisfied


certain conditions satisfied

Taiwan Emergence of insurance companies as a Taiwan – Emergence of insurance companies as a major real estate investor

Th t i ti i d T i i i f • The restrictions imposed on Taiwanese insurance companies from buying domestic real properties have been gradually relieved.

• Insurance companies are the biggest commercial properties buyers su a ce co pa es a e t e b ggest co e c a p ope t es buye s in Taiwan.

• On the other hand, Taiwanese insurance companies are allowed to i i l i ( bj i l)invest in overseas real estate properties (subject to prior approval).

• Which cities/markets are allowed to buy?

New York London Frankfurt Toronto Shanghai and Ho Chi Minh − New York, London, Frankfurt, Toronto, Shanghai, and Ho Chi Minh City, and

− Others (e.g. Tokyo)?


Taiwan Emergence of insurance companies as a Taiwan – Emergence of insurance companies as a major real estate investor (Cont’d)

• Taiwanese insurance companies are subject to various regulatory restrictions to invest overseas:

− Not permitted to leverage to buy real estate

− Not permitted to set up SPV (except for China) to hold real estate

− Cannot be a partner of a LLP / TK etc.

− Insurance Bureau is reviewing the above restrictions and is likely to relax.relax.

• Currently all proposed foreign investments need to get prior-approvals from Insurance Bureau on a case-by-case basis.


Measures to curb speculationMeasures to curb speculationHong Kong stamp duty measures

20 Nov 2010SDHK$100 to 4 25%

27 Oct 2012SDHK$100 to 4 25%

SDHK$100 to 4 25%

23 Feb 2013DSD (Note)Generally doubling existing ratesto 4.25%

SSD15% ≤ 6 months10% 6-12 months5% 12-24 months

to 4.25%SSD (Note)20% ≤ 6 months15% 6-12 months10% 12-36 monthsBSD (Note)

to 4.25% existing rates i.e. 1.5% to 8.5%SSD (Note)20% ≤ 6 months15% 6-12 months10% 12 36 monthsBSD (Note)

15% for non-PR & company purchases

10% 12-36 monthsBSD (Note)15% for non-PR & company purchases

20112010 2012 2013

Nov Jan Jan Oct Jan Feb

Note: Amendment bills not yet approved by the Hong Kong Legislative Council


Increasing stamp duty cost on transfer of Hong Increasing stamp duty cost on transfer of Hong Kong property

Property Type SSD (held for not more than 3

BSD DSD

more than 3 years)

Residential

Office

Retail

Industrial Industrial

Carpark spaces


Measures to curb speculationMeasures to curb speculationMeasures in other jurisdictionsHK Macau Taiwan PRC

Special Stamp Duty(from 20 Nov 2010) 20%, 15% and 10% on transfer of residential properties held not more than 6 months, 12 months and 36 months from 27 Oct 2012 onwards

Special Stamp Duty(from 14 Jun 2011)2o% and 10% on the transfer of immovable property (regardless of whether residential, retail or commercial property) if resold

Selective Goods and Services Tax also known as Luxury Tax (from 1 Jun 2011)15% and 10% on real properties purchased not

Property TaxThe 3rd Plenary Session of the CPC 18th Central Committee: to extend beyond the pilot cities of Shanghai and Chongqing

months from 27 Oct 2012 onwards commercial property) if resold within 1 and 2 years.

properties purchased not for self use and sold within 1 and 2 years

Buyer’s Stamp Duty (from 27 Oct 2012)

Buyer Stamp Duty(from Oct 2012)

15% on transfer of residential properties from 27 Oct 2012

10% on transfer of residentialproperty

New Ad Valorem DutyNew Ad Valorem Duty(from 23 Feb 2013)Ad Valoerm Duty rates increased to 1.5% to 8.5% on the transfer of residential and non-residential properties from 23 Feb 2013

PwC Asia Pacific Real Estate Conference 2013 | Singapore

Treaty benefit claims PRC Treaty benefit claims – PRC

Application of DTA and impact on traditional holding structure for real estate investment in China

Hong Kong • PRC-HK DTA reduces the dividend WHT

rate to 5% if certain conditions are satisfiedg glisted company

100%

rate to 5% if certain conditions are satisfied

• But in practice, may be difficult to get the 5% rate

P ibl h ll P t h

100%

Parent company A(BVI)

• Possible challenge – Parent company has no substance, actual management carried out by Hong Kong listed company

• Difficult to get referral letter in ChinaParent company B

(BVI) Dividend

• Difficult to get referral letter in China

• Subject to detailed enquiries by Hong Kong IRD when applying for tax resident certificate

Chinese subsidiary

100%certificate

• Any solution?


y

Application of “beneficial ownership” status Application of “beneficial ownership” status –Safe-harbour rule under Circular 30

Fact Pattern:

• Parent companies A and B: HK companies

l h h ld l d

Hong Kong listed company

• Ultimate shareholder: a HK listed company

Conditions for Safe-harbor rule (i.e. to be deemed as beneficial owner directly without

Parent company A(HK)

100%

deemed as beneficial owner directly without assessment):

• Only applicable to dividend incomeParent company B

100%

(HK)

• 100% related

• Tax resident of the same treaty jurisdiction

Parent company B(HK)

100%

Dividend

Question:

• Can the safe-harbor rule apply in this case? l d ff l

Chinese subsidiary


Practical difficulties?

22

Circular 698 and anti avoidance rulesCircular 698 and anti-avoidance rules

C t i t it f l t t i t t i Chi d Current issues at exit of real estate investment in China and application of anti-avoidance rules

• Exit at domestic level by sale of real property or Chinese property t at do est c eve by sa e o ea p ope ty o C ese p ope ty holding company is expensive

• Exit generally takes place at offshore level where possible

• Circular 698 imposing a reporting requirement on seller

• Any update on this?

• Practically, any successful case to defend the application of anti-avoidance rules?


Indirect equity transfer in China

Lesson learnt from cases:

Indirect equity transfer in China – Update on Circular 698Lesson learnt from cases:

• Whether to disregard a listed vehicle (i.e. Company B)? IPO could be a valid “commercial p rpose”?

Fund

purpose”?

• Debt repayment first – to reduce the capital gain if it is probably to be taxed in China

Company A

• Tax authorities collected the evidence via public information, internet and interview with management team - self-reporting is not the only

Company B(listed co)

Debt Exit

a age e t tea se epo t g s ot t e o y way disclosing the indirect equity transfer

• Real estate company – a target? 100%

• Waiting for tax authorities’ assessment or active reporting?

• Listed company may be deemed PRC TRE

Chinese subsidiary


sted co pa y ay be dee ed C

24

PROPER & TIMELY PLANNING IS IMPORTANT!

Investment Structures in Taiwan (Branch)Investment Structures in Taiwan (Branch)Potential challenge by tax authorities

• Currently, gains realized from disposal of SPV’s shares are not taxable in Taiwan. Note: Taiwan tax authorities are aware of this “loophole” and

Overseas Investors

pmay impose tax on gains from SPV stock transactions (if sole asset of SPV & its branch is the Taiwan real estate).SPV

• More stringent tax authority challenges & potential new anti-avoidance rules on real estate transactions expected.

Offshore funding

p

TaiwanBranch

Taiwanese Real Property


Hong KongHong KongTax audits and other challenges

T dit i t t f d d f d Tax audits on investment funds and fund managers

• Management fees and carries

• Carrying on business in Hong Kong / PE issues• Carrying on business in Hong Kong / PE issues

Offshore claims and capital gains claims on exitOffshore claims and capital gains claims on exit


Q&AQ&A

AND Any questions?AND…..Any questions?


Th k Y Thank You

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No

i ( i li d) i i h representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Limited, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. p y

© 2013 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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