Tax incentives in the Greater Bay Area and tax planning advice for family enterprises

Background¹²

• CEO A is the founder of a manufacturing enterprise in the GBA. The enterprise is already publicly listed in Hong Kong. Its main business is the production and manufacturing of industrial products, selling to clients both in the Mainland China and abroad.
• CEO A is a permanent resident of Hong Kong. With years of dedicated efforts, he has grown his business and accumulated substantial family wealth besides enterprise assets. CEO A has also invested in private projects both domestically and overseas.
• CEO A has three children. His oldest son has already graduated and is now working in the family enterprise. The other two children are still in school.
• CEO A wishes to utilize the policy incentives in the GBA and introduce smart transformation and comprehensive tax planning in his family enterprise. With these initiatives he expects his enterprise to be able to attract high-tech talent and undergo company-wide technological transition. Finally, he would like to better manage his family assets, to improve tax efficiency, and ultimately to achieve wealth appreciation for his enterprise and his family. 
• At the same time, CEO A has been considering succession arrangements. He wants a family legacy of wealth, values and entrepreneurial spirit to live on beyond his years. He is also considering philanthropy as his way of giving back to the society.

Key consideration and action plan proposed by EY

Based on the current situation of CEO A’s family and business, we suggested that he aims for synergy between both by maintaining a parallel development. With reference to the following EY Family Enterprise DNA Model, CEO A can consider the appropriate arrangements for corporate management and family succession in the future.

The key considerations are

• It is often said that “harmony in the family brings forth success in all affairs”. We suggested CEO A to come up with a shared vision for his family enterprise with a clear articulation of and alignment with his family’s values. A governance structure supported by delineated values will bring unity and harmony in both his business and family.
• Review and assess the current structures for both family-held and enterprise-held assets and address any issues promptly. Conduct a health check on the compliance, financial and taxation aspects of his assets. Gather a good understanding of the current circumstances and potential risks in the enterprise and family wealth.   
• Consider building a top-level structure for family-held assets and distribution. Draw on mechanisms such as shareholding, trusts and family office to ring fence risks and coordinate development across family and enterprise assets effectively. 

EY proposed action plan addresses the two aspects of family and enterprise

Family governance, succession and private wealth management

• With assistance from professional consultants to have a thorough review and discussion of family traditions, missions, visions and values as soon as possible. Come up with an appropriate governance structure for family affairs, clarify the rights and duties of family members, and introduce a code of conduct. A family charter serves as a representation of mutual understanding, and we encourage periodic review and renewal of its provisions.
• To analyze and consider the tax residency status and the future place of residence for CEO A and his family members. Make reasonable adjustments based on the local tax rules.
• To sort through the holding status of family- and enterprise-held assets. Engage professionals to audit finances and assess past and potential risks in compliance and taxation, and make timely and relevant adjustments to address any issues.
• To learn about the characteristics of different succession instruments, take advantage of different wealth planning vehicles (for example, a will or letter of will, insurance, family trust or family office), by engaging professional consultants on investments, finance, tax and law to tailor the needs in asset-holding, investment and succession plans. Take early actions in risk isolation and taxation planning for both the family and enterprise assets.
• To plan ahead for the development of the next generation, groom the successor and empower him or her to rise above the challenges of taking over the family’s business.
• To formulate philanthropy planning for the family and the enterprise to meet the dual goals of honoring the family tradition and contributing to the society. 
• To consider setting up a family office in Hong Kong. Draw on the distinctive strengths of the GBA and Hong Kong’s tax concession regime for single-family offices, thereby preserving and appreciating family wealth. An appreciation of family wealth may one day provide the capital for the family enterprise to expand business operations in the mainland and even globally, and help maintain the sustainability and vitality of the business.

An enhanced management of enterprise operations and taxation

• Infuse your family values into corporate strategies. Plan, adopt and adjust your enterprise’s operation model with consideration of the distinctive local government policies in the GBA. Take full advantage of the favorable developments in the industrial sectors of the GBA and preferential policies of the local governments. With compliance in all relevant regulations, reduce tax liability and raise operational effectiveness. We suggest the following:
  • To increase investments to drive the transition to digitization and smart technology in manufacturing. Leverage the state’s preferential policies for science and technology. For example, set up research and development centers for new business sectors in Qianhai, Hengqin or Nansha where reduced CIT rates will enhance the core competitiveness of your enterprise.
  • To enhance and reorganize the sector functions of your enterprise. For example, reorganize the supply chain, take advantage of the local preferential tax policies on logistics, modern service industries, and supply chain technology. By reducing the overall tax liability, you can boost corporate profits.
  • To utilize the GBA’s preferential tax policies and supportive measures on the overall economy, advanced manufacturing, research and development, and high and new technology enterprises, and reach for new frontiers in your enterprise’s development.
• To review the current shareholding structure of the enterprise and align it with the top-level structure of the family-held assets. Subject to compliance in relevant laws and regulations, design the shareholding structure with full consideration of the tax agreements between Mainland China and Hong Kong SAR, Macao SAR and other countries or regions. 
• To engage in the “green movement” and strive to meet the environmental, social and governance (ESG) criteria in industrial transition, energy efficiency and carbon emissions, pollution control, and corporate environment.
• To raise awareness in social responsibility by incorporating it into the corporate strategy. Establish benchmarks for the right corporate values and seek a balance between corporate social responsibility and business sustainability.
• To incorporate digitization and smart technology in taxation and risk management to improve taxation management.
• To step up corporate competitiveness by taking advantage of the talent incentives in the GBA, to attract high-end talent in technology and advanced manufacturing. 
• To identify and nurture corporate successors and their team and prepare for management transition in the enterprise.