International opportunities for family philanthropy
As many Asian families continue to prosper, notwithstanding the difficult economic climate, so families continue to turn to philanthropy and how better to advance their philanthropic objectives. The Chinese economy is still growing strongly, especially when compared with the US and Europe. The Hong Kong real estate market still seems capable of defying gravity. Factors such as these and the feeling that loved ones are already well provided for lead family offices throughout the region to review their strategy for giving.
Education remains the most popular charitable purpose in the region. In Hong Kong charities for the advancement of education as their primary object continue to dominate the registry maintained by the Inland Revenue Department (IRD). Charities for the advancement of religion and the relief of poverty are also popular. Religious and educational charities, together with those for the relief of poverty, are permitted to enjoy tax relief in Hong Kong but spend their money overseas. There is also a residual category of Hong Kong charities for other purposes beneficial to the community but the requirement for local public benefit means they will only be recognised as charities by the IRD (and hence eligible for tax relief) if they can be shown to be beneficial to the Hong Kong community. This effectively excludes expenditure of such charitable funds overseas. Singapore does not generally make tax deductions available to charities which spend funds raised in Singapore abroad.
A report published by the Law Reform Commission of the Hong Kong Government in June 2011 recommended significant changes to Hong Kong’s charity law, including a broadening of the definition of charity. If adopted, this would see purposes such as the advancement of arts, culture, heritage or science or the advancement of environmental protection or improvement within the definition of charity. These reforms could well provide a stimulus to giving by wealthy families as new areas of charitable endeavour may well appeal to a younger generation of philanthropists. There is also the tendency for families to allow younger members to gain experience of managing a project or a foundation by being involved in the family’s philanthropic programmes.
Many Chinese entrepreneurs have a strong desire to give something back to the village or province whence their family originated. We see many philanthropic foundations setting up schools or other educational institutions in China. Also natural disasters, such as the recent earthquakes in Sichuan generate an outpouring of generosity in an attempt to alleviate the considerable hardship such disaster cause.
Philanthropy in China is not something for the fainthearted. China is anxious that funds from foreign funded NGOs, should not be used for purposes of which it disapproves. There are special rules for such foreign entities crediting funds to Chinese banks. Corruption is also an obvious on-going problem. Projects such as the construction of schools require close supervision to ensure that donated funds do not go astray.
If a family does not already have a structure through which to channel their philanthropy, what are the options?
In most jurisdictions the choice is between an unincorporated trust with individuals acting as trustees and a corporate entity such as a company limited by guarantee. While an unincorporated trust is simpler to set up and probably cheaper, there are some disadvantages. With a trust, the individual trustees are the legal (but not beneficial) owners of the trust assets. So it is they who will be shown as the registered owners at the Land Registry (or equivalent) of any real estate owned by the trust. Likewise shares in quoted companies will usually be registered in the names of the trustees. This means that when one of the trustees retires, first a deed of retirement and appointment will have to be prepared giving title to the new trustee body and secondly the trust assets will need to be re-registered in the names of the new trustees. With a body corporate such as a company limited by guarantee, while the identity of its directors may change from time to time, the corporation itself is, in theory at least, perpetual so that frequent changes to the title under which assets are held is unnecessary.
The tax reliefs available in Asia tend to be worth less than in the US or Europe for the simple reason that tax rates in Asia are lower. If, however, there are family members who have US or UK tax liabilities, then this may create a gifting opportunity. US persons (that is those who are US citizens or have held a green card for a period of years) have to pay US taxes, regardless of where they live. Although a non-US charity is not usually eligible for US tax relief, it is possible to create a US charity, which acts as the ‘friends’ of the family’s philanthropic foundation based in Asia. If the US entity is recognised by the IRS as a qualifying charity then the US family member will be able to make US tax exempt gifts to the specially created ’friends’ of the US entity. That charity may then decide to donate those funds to the family’s philanthropic body in Asia. The US family member’s donation then benefits from tax exemptions which would not be available had the donation been made direct to the Asian family foundation.
Similar arrangements may be available if there is a UK-based family member. For example, those domiciled in the UK are liable to have their estates taxed at 40% worldwide when they pass away. An exemption from the 40% may be obtained to the extent any assets are donated to a UK registered charity. So again, following the same model as in the US case above, it may be possible for a UK-based family member to escape this inheritance tax liability by donating to a registered UK charity, which should then be able to pass the gift on to the family’s philanthropic foundation. The 40% inheritance tax in the UK also applies to lifetime transfers, so gifts made during the lifetime of the donor, not only legacies, can benefit from these arrangements.
UK resident donors also can benefit from reliefs on capital gains tax and income tax when giving to a UK registered charity. The maximum rate of income tax in the UK is currently 45%, so the reliefs can be extremely valuable to a charity. Not only cash but also quoted securities and even real estate may be the subject of such gifts and attract the reliefs.
Patrick Hamlin is an Of Counsel at Withers in Hong Kong.