It is very common for People’s Republic of China (PRC) Investors to want to invest through either a Cayman Islands structure or British Virgin Islands (BVI) structure. It is very important for those investors to ensure that their assets are protected as much as possible and accountants dealing with high net worth Asian investors need to appreciate the cultural and political reasons for desiring to invest through such structures. Too often accountants will dismiss offshore tax havens as they are on the ATO radar. This is unwarranted. What is important however is ensuring that the issues associated with such structures are explained to clients and strategies developed to mitigate such issues as much as is possible. Following is a very small sample of some common issues.
One of the potential issues for having an offshore entity holding Australian shares is that the franking credits paid to the shareholder will effectively be lost. This mean that if a dividend is paid out to an offshore entity and those distributions are then paid back to an Australian resident individual the franking credits from the original dividend will not be able to be used by the Australian resident individual. Structuring at this point is critical and it may be appropriate for the Australian resident individuals to hold their interests through an Australian entity and for the PRC investors to hold their interests through an offshore structure. Accountants need to recognise however the cultural and political reasons for the structure and the PRC investors may want the entire investment to be held through the offshore structure. Tax should never take precedence over commercial reasons and so this is an extremely important aspect to be considered.
It will be important to consider how the Controlled Foreign Corporations (CFC) regime will impact upon you as an Australian tax resident. This area of law is currently undergoing dramatic changes and you need to engage an accountant who deals with these issues. It will be important to look at things such as the central management and control, the type of income (is it active – business- income or passive income), control percentages, permanent establishment, etc to determine how you will be affected.
Setup Costs and Ongoing Costs
One of the reasons that PRC investors sometimes use a BVI over a Cayman Islands company is due to the initial setup costs and ongoing costs. Cayman Islands companies are generally more expensive to establish and operate than a BVI. Discuss this with us so we can determine what may be the most appropriate structure.
Note that you must not deal with clients who want to establish such structures to evade tax or to launder funds. Gone are days when you could move money offshore and hope it would not be detected. AUSTRAC tracks all incoming and outgoing transfers and when transfers are made to established tax havens such as the BVI and Caymans it will be highlighted to the ATO. If things are being done correctly and there are legitimate commercial reasons for these structures then the ATO will not have an issue. Our principal director has been involved in a number of Operation Wickenby matters and we can assure you that it is not worth doing the wrong thing. The penalties and interest can be dramatic and worse you may serve time in a prison for having defrauded the Commonwealth and ultimately your friends and others who pay taxes of what is due.
Remember none of this is scary for those who have the experience. China is investing more and more around the world and it would be negligent of an accountant to dismiss offshore structures just because they really do not understand them. Offshore structures are legitimate investment vehicles for many public and private companies around the world and as China makes more investments into Australia the demand for such advice will continue.