Fidinam Group Worldwide Newsletter international IT business Vietnam, adestination for Protection The Feng Shui ofAsset Non-Residential Property Investing inAustralian October 2019 Issue 10 Newsletter number 10 - October 2019

p.3 Investing in Australian Non-Residential Property

p.6 The Feng Shui of Asset Protection

p.8 Vietnam, a destination for international IT business p.10 Singapore, application of GST on Digital Services effective from 2020 p.13 New Free Trade Agreement p.15 The importance of maintaining economic substance in international structuring INVESTING IN AUSTRALIAN NON-RESIDENTIAL PROPERTY

Introduction most important criteria in real estate average return on investment of 7% Australia actively promotes overseas investment. With the population per annum, with lesser years of decline investment, and unlike many countries it has growth in Australia, especially in key compared to almost any other property limited barriers to entry into the market. This cities like Melbourne and Sydney not market in the world. is evidenced by the large amount of capital likely to slow down anytime, it makes • Low cost of debt, with many new inflows from overseas including Canada, investing in these cities attractive to lenders active in the market and Europe and Asia, due to the “safe haven” ensure a continuity of both capital and increased liquidity. status of the Australian property market. rental growth. • Week Australian dollar against the US However consideration should be given to • Australian property is often praised Dollar, provides for future exchange risk the potential tax implications for overseas by investors for its ability to maintain upside. investors, investment vehicles, borrowing steady rental yield while achieving • Australian properties have enjoyed and local management to ensure the positive capital growth. consistent capital growth over the optimum return out your investment. • As one of the world’s most consistent last 100 years, with property prices Why should you invest in Australian Property: property markets for the past three doubling roughly every 7 to 10 years. • High population growth is one of the decades, Australian properties see an • The Australian property market has

3 also displayed resilience in resisting The Economy below the long-term trend and GDP downward trends, giving investors The Australian economy, however, is not remains benign, prompting the Reserve the confidence needed to hold on to immune to the broader global economy, Bank of Australia (RBA) to act by cutting their investments for longer periods. and while we have not experienced a the cash rate to 1% with further cuts The low volatility of the Australian recession in over 27 years, economic expected to follow. A recent report property market has made it the growth has slowed in line with other released by Westpac Bank (major preferred choice over stock markets established world economies. Wage Australian Bank) provided the following and other property markets worldwide. growth remains low, inflation remains forecast:

Current Dec- 2019 Mar- 2019 Jun-2020 Dec-2020 RBA Cash rate 1.00% 0.75% 0.50% 0.50% 0.50% 10 Year bonds 0.91% 0.90% 1.00% 1.00% 1.10% AUD/USD $0.675 $0.67 $0.67 $0.66 $0.67

The above table, highlights Westpac’ views highlights average A grade commercial Investment Considerations for of a reduction in the cash rate from 1.00% property yields across Australia: Overseas Investors to 0.5%, with some economists seeing The Australian Government proactively rates heading to 0% and remaining low for State Yield promotes overseas investment within a long period to come, which is in line with Perth 6.5% in Australia; however investors need to other central banks globally. A low interest Brisbane 5.75% carefully consider their approach and be rate environment will stimulate investment aware of ownership structures, federal Sydney 4.75% activity and consumer spending, however, and state-based taxes, and property it reduces greatly the returns investors Adelaide 7.10% types open for overseas investment. have received from cash. Many investors Melbourne 5.10% Consideration should include: are now searching for yield and with National Average 5.8% 1. Ownership commercial property yields over 5% in You can own property in your personal Sydney, Melbourne and Canberra and “Since June 2004 the average yield spread capacity; however it may be more over 6% in Brisbane, Adelaide and Perth, to 10-year bonds has been 2.5% verses beneficial to own the property in an the asset class has become increasingly June 2019 at 4%, highlighting the potential Australian domiciled company and or popular. Yields at this level are some for further capital value appreciation” via a Managed Investment Scheme, 400-500 basis points over the risk-free Source: Savills Research these provide more flexibility when cash rate and with economic forecasts managing borrowings, capital gains looking to a prolonged period of low rates Due to the underlying strength of the and distributions. we expect to see yields fall further thus Sydney and Melbourne economies, Fidinam 2. Government approval increasing commercial property values. has active mandates in investing in both Depending on the asset size you these markets on behalf of its clients. may require Foreign Investment Commercial Property Overview We are also seeing interest grow in the Review Board approval; in many The strong influx of foreign capital, and Adelaide market due to the higher income instances this is for assets of state the ongoing appetite of major Australian yields, a lower entry point to invest and the significance and or over $150million investment funds looking to chase quality South Australian government undertaking AUD. assets and yields, has added a great deal a number in initiatives to promote South 3. Property Taxes of liquidity to the market. Together when Australia as an investment destination, the With the exception of Adelaide all coupled together with highly attractive costs largest of these being the removal of stamp states charge stamp duty at an average of borrowing continue to put downward duty for commercial property investments, rate of circa 5.5% of the purchase pressure on cap rates and with rising saving some 5.5% of the property price when you acquire a property and rents capital values continue to improve. value when you purchase in Adelaide. charge ongoing annual Land Tax, with NSW and Victoria remain as the preferred As active investors and managers across Victoria and Queensland charging an destination for investment, however there all Australian markets the Fidinam team additional “absentee Owner” Land Tax is increasing transaction activity occurring can assist your investment in any major surcharge. This is where ownership in Brisbane and Adelaide. The table below capital city of Australia. structuring of your investment can

4 require addition advice to mitigate risk banking market that will assist with property acquisition if one of the most around these surcharges. Other taxes securing the right property finance. transparent in the world with strong to consider is the effect of Goods and Borrowing for an overseas investor, consumer protection. Services Tax (currently 10%) and if the while not difficult can be challenging asset is sold the potential for Capital due to Australia Anti Money Borrowing Gains Tax. Laundering laws and the “Know Your Leveraging a property investment in Australia, 4. Asset types Customer” required by the lender to is a prudent strategy for investors, as it Overseas investors can acquire all understand the ultimate beneficial allows you to hedge part of your investment, types of non-residential property and owner of the asset. as you are acquiring in Australian dollars, are restricted to only being able to 6. Australia’s legal system is based and with local interest rates at historical purchase new residential property. on the UK system just like Hong lows can substantially improve you cash on 5. Borrowing Kong or Singapore, so it’s familiar cash investment return, as example of this There is a strong banking and non- to many overseas investors, and is as follows:

Property purchase price $20million AUD

Investment income (yield) 5% per annum $1million AUD Mortgage (loan) 50% of purchase price $10million AUD Equity 50% of purchase price $10million AUD Mortgage interest 3% per annum ($0.3milliom) AUD Net income after interest $0.7million AUD

Cash on Cash return 7% per annum

Adopting a leverage strategy can increase of your overall investment strategy. your cash on cash returns from 5% to 7% per Local management will be well versed annum or over a 28% per annum increase in what is happening within with in investment return. However a leverage the domestic property market, have strategy needs to be carefully considered, strong and deep networks to assist as too much leverage can be risky if the in acquiring property, provide active market cycle changes and values fall. management to ensure the successful As a broad overview of the debt market financial performance of the asset and/ in Australia, and depending on the type or portfolio, work with the investor in MATTHEW BURROWS of property acquired a typical mortgage developing and implementing prudent Managing Director facility would look like: debt strategies, and advise on ownership structures to ensure maximum financial Fidinam (Australasia) Real Estate performance from the investment. [email protected] Mortgage (loan) 40-50% www.fidinamgw.com Interest rate 2.75%-3.25% Fidinam is well positioned to assist, it Finance fees 0.3 to 0.5% current manages over $400m in assets (establishment) for offshore investors and has ongoing Covenants mandates to acquire more quality Interest cover ratio 2 times investment property in Australia. Should The information contained in this note is you wish to learn more about investing in for general information purpose only and is Loan to value ratio 50% Australian property, please do not hesitate not intended to be relied as a substitute for to contact our Managing Director at tax, corporate and accounting professional Local Management Fidinam Australasia Real Estate via email consultation. Please refer to Fidinam staff Local management is an important part [email protected] . for specific advice.

5 THE FENG SHUI OF ASSET PROTECTION

In Hong Kong, the Chinese practice of through the five core elements of this well as a powerful online trading platform feng shui has an impact of all walks ancient pseudoscience. to purchase everything from U.S. equities of life. While the word literally means to the most obscure local currency bond. “wind & water”, this geomancy dictates Water – Bank account in Switzerland This solution is particularly useful to the value of a property’s value to whom All wealth start with cash, and there is middle class individuals who venture you should make friends with next. no better place to deposit them than abroad for the first time but need the Having an auspicious number 8 on your the safe jurisdiction of Switzerland. comfort of full control over their asset. licence plate is a status symbol. Then The confederation has a world-renowned factories or offices with leaking pipes reputation, as well as a banking system Wood – Secondary Residency are considered to be of bad fortune (as with strong regulatory oversight. In recent We plant trees in the name of water symbolises wealth). years, Switzerland has also become a sustainability. In turbulent times, families Believers purchase feng shui books at the highly digitised wealth management hub also seek secondary residency to ensure end of each year to get a sneak peak into for the sophisticated offshore depositors. children’s future is well protected. the future. Yet few of them could have Swiss banks stand out for their At Fidinam we make a distinction predicted what would have come of 2019 streamlined approach to onboard non- between citizenship and residency. – a year of everlasting trade tension, residents, willing to open personal In acquiring citizenship, one is expected Brexit-no-Brexit, as well as a series of bank accounts outside their domicile. to fully immerse in a new culture. geopolitical tug-of-war in Asia. With a minimum balance of USD 100,000, In parallel, residency can be a bridging In a period of uncertainty, it helps to customers would also benefit from a solution to serve specific purpose for a explore the topic of asset protection debit card to access cash worldwide, as defined period of time.

6 British Citizens who are concerned by their slowed in recent years. Investors again look access to continental Europe may consider for assets in jurisdictions with sound legal the resident non-domiciled regime in Italy protection. or Portugal. Likewise, young Asian families Australia is a worth-looking case. Aside seeking new growth opportunities (and from being a Common Law jurisdiction, better schools) may consider moving to the country is intrinsically tied to Asia. the UAE at a fraction of the cost of a full New wealth generated in China, Korea and emigration to an Anglophone country. Southeast Asia allowed Australia to enjoy a Some of these programmes require as few decade of uninterrupted growth. Recently, UNY CHAN as 2 days a year to reside in the country. a lower AUD coupled with an appetite to Manager of the Swiss/China Desk Yet they could move and settle there at attract foreign investors have put Australia a short notice. In the case of the UAE, on the global investment heat map again. Fidinam (Hong Kong) Limited residents also benefit from a tax-free Our Sydney office will dive into deeper [email protected] environment on their income and a world details on this topic. Go check it out on this www.fidinamgw.com class healthcare system. newsletter! The key to a successful alternative residency is to understand your objective. Therefore, Earth – Re-domiciliation in receiving impartial advice prior would be as Singapore important as the application process itself. Corporations do not benefit from sensationalised decision-making. But in Metal – Trust the interest of protecting company assets, The strongest defence of all is to distance the management cannot exclude any oneself from his/her own asset. While it scenario from its ongoing SWOT review. seems counterintuitive, entrusting your When time calls, thou shall move heaven prized estate to a licenced trustee can and earth. protect you on an unexpected rainy day. Singapore is known for its stability, good Trust is a tool for succession planning. governance, and an increasing focus on Unlike a standalone will, a trust is less likely tech. Little known is that Singapore is one to be contested in court for its authenticity. of the few Asian jurisdictions that offers a A trustee would validate the deed and route for re-domiciliation. distribution mechanism in advance – often If an entity’s asset or yearly revenue exceeds with the participation of a protector and a SGD 10M and/or if it hires more than 50 trust lawyer – to ensure cross-generation employees, it is allowed to be redomiciled in functionality. Singapore. As entrepreneurs expand their business Moving the corporate headquarters to worldwide, their sudden death could Singapore has become a popular chatter potentially disrupt operation. In jurisdictions topic among companies in the board room such as China and Vietnam, a change of across Greater China. But it was a British shareholder could necessitate reapproval design company, Dyson, that counts by the competent authority. Or in the case among the firsts to reap benefits from this of an IPO, the founder would often cash programme. As manufacturers gradually out at trust level (in tandem with residency move out of China to Southeast Asia, planning) to maximum tax efficiency. Singapore’s leadership within the ASEAN A trust is a practical estate planning tool for and a broad network of Double Taxation enterprising businessmen with operations in Avoidance Agreements also render the city The information contained in this note is more than 3 countries/regions. state a “future proof” platform for growth. for general information purpose only and is not intended to be relied as a substitute for Fire – Investment diversification in While Fidinam cannot advise clients on tax, corporate and accounting professional Australia feng shui, we are happy to help protect your consultation. Please refer to Fidinam staff The fiery growth in the emerging market has personal and corporate assets. for specific advice.

7 VIETNAM, A DESTINATION FOR INTERNATIONAL IT BUSINESS

Information technology (IT) has been conditions for IT industry’s development. In 2015, Vietnam Prime Minister’s decision growing at an impressive rate of 30 percent Those includes Resolution 36-NQ/TW dated No. 392/QD-TTg was approved and in the per year, playing an important role in July 1, 2014 of the Politburo on enhancing decision, it is stated clearly that by 2025, Vietnam’s socioeconomic development. IT application and development. In this the information technology sector will According to the Vietnam Software and IT resolution, the Politburo emphasized the become a fast, sustainable and profitable Services Association (VINASA), Vietnam IT importance of IT development both at the economic sector with large export earnings. industry has been growing steadily over the governmental level (transforming paper- The IT sector will thrive for a minimum 15% past recent years. based processes into application and growth rate per year from 2015 to 2020 in What follows is a brief description of the software-based processes in all level of software, digital and IT services and aim to main factors having an impact on the IT governmental governance offices) and at the attract more foreign direct investment (FDI) industry in Vietnam such as governmental provincial level (installing security cameras, projects in the key fields, among which were support, workforce, infrastructure & applying smart cameras for local police on electronic hardware and digital outsourcing environment. their vehicles, etc.). The Politburo set out a services. In addition, Vietnam will increase plan for IT industry development in the period the competitiveness and stay among the Governmental support on 30 years since 2014. This resolution is top 10 countries providing software and According to the VINASA, Vietnam perceived as a ‘golden opportunity’ for IT digital outsourcing services in the world. government has been creating favourable development nation-wide. The government also issued the Resolution

8 41/NQ-CP dated May 26, 2016 on tax Military Industry and Telecoms Group (Viettel) incentives to promote IT application and announced the implementation of 5G service development in Vietnam in order to improve and the placement of the infrastructure of competitiveness and attract investment Internet of Things (IoT) in Ho Chi Minh City. in the sector. This resolution provides The Secretary of the municipal People’s preferential terms on corporate income Committee Nguyen Thien Nhan underlined tax and personal income tax. For example, the city’s determination to build a smart new IT projects with over 1,000 full-time city, saying that the cooperation with Viettel employees enjoy an annual corporate to build modern ICT infrastructure and core TU NGUYEN income tax of 10 percent for 15 years. platforms for digital society will help the city Business Developer realize its vision and strategy, maintaining its Workforce leading role in the country in digital transition Fidinam (HCMC) Vietnam is rapidly developing a labour force (according to MIC). [email protected] to meet the requirements of the IT surge. www.fidinamgw.com Mathematics and IT are the top choices of In recent years, there have been a bloom for Vietnamese students. With more than 290 start-up communities and the international universities offering IT studies and 55,000 unicorns in IT and technologies having their students enrolled each year, Vietnam is a presences in Vietnam such as Grab, Go- leading IT service destination in Asia. Viet (Go-Jek), Alibaba, etc. as well as the According to a report from the Ministry of local unicorns with investments coming Education and Training, the country has from overseas tech investors namely a total of 235 universities nationwide, Tiki, VinaGame (Temasek), VNTrip, Elsa including 153 IT training colleges with (education technology), etc. annual output of 50,000 IT graduates. The top 7 trends in the IT sector in 2019 “The matter of training high quality IT for Vietnam are the following: FinTech, personnel is becoming a focus of both Blockchain, Artificial Intelligence, SaaS the education sector and IT businesses to – Software as a Service, E-Commerce, satisfy work demand,” the report said. Marketplace Platform and Edtech – education technology. Infrastructure & environment Vietnam has been known for its IT & software Outsourcing or direct investment outsourcing services and capability. For International investors can consider the many years, MNCs such as Intel, IBM, conventional way to outsource IT service Samsung Display, Nokia and Microsoft have to Vietnam service providers or they chosen Vietnam to outsource their software can decide to directly invest into the projects. In 2018, Vietnam exported $3.5 country’s vibrant market with high-quality billion worth of software, up 11.6 percent workforce, supportive infrastructure and from 2017, according to the Ministry of government via two options: (a) hiring Information and Communications (MIC). IT workforce in Vietnam remotely for their company’s projects overseas or (b) Vietnam, driven by its growing internet set up an entity in Vietnam, recruit IT penetration, smartphone adoption, and young professionals in Vietnam to assist the demographics, offers huge potential for IT, company’s business plan both in Vietnam tech and start-up companies. Especially the and overseas. ones focusing on fintech, e-commerce, and Fidinam has been assisting a number of The information contained in this note is food technology. These sectors have been foreign investors in IT industry to outsource for general information purpose only and is the top priorities for investors in the last few their service and/or to invest in Vietnam. not intended to be relied as a substitute for years. The other sectors with potential include We support the client in decision-making tax, corporate and accounting professional micro-financing, online travel, and logistics. process from industry research to market- consultation. Please refer to Fidinam staff Noticeably, on 21st of September 2019, Viettel entry advisory and set-up of the operations. for specific advice.

9 SINGAPORE, APPLICATION OF GST ON DIGITAL SERVICES EFFECTIVE FROM 2020

As it was announced in Budget 2018 and the nature of which renders their an online professional profile page, by the Singapore Minister of Finance, supply essentially automated with • support services performed via starting from 1 January 2020 Good minimal or no human intervention, and electronic means, to arrange or and Service Tax (GST) shall be levied in impossible without the use of information facilitate a transaction (i.e. booking Singapore to imported digital service technology”. Accordingly, Digital Services fees). rendered in Business-to-Consumer (B2C) include, among others, the supplying of transactions. the following: Conversely, services such as advertising • digital content, such as mobile on intangible media platform circulated The new regime, also known as Overseas application and e-books, outside Singapore and professional Vendor Registration Regime, aims to level • software programs, downloading of services involving human intervention the GST treatment of all digital services software, driver and firewalls, (for instance, legal services from consumed in Singapore, regardless if they • subscription-based media, including lawyers), are not included in the definition are rendered from overseas or locally. online newspaper, music, films, of digital services and do not fall under gaming, live streaming of TV shows the new regime. As consequence, under certain condition, and music, the overseas digital service providers will • online courses via e-learning, New regulation on application of be required to comply with Singapore GST • electronic data management, GST for overseas supplier registration and reporting rules. i.e. website hosting, online data Under the current GST rules, in force until warehousing, file-sharing and cloud 31 December 2019, a B2C supply of digital Digital Services storage services, services may be subject or not to GST For the purpose of the Overseas Vendor • services providing or supporting a depending from the status of the supplier: Registration Regime, Digital Services business or personal presence on indeed, GST applies if the service is are defined as “services supplied over an electronic network, including rendered by a Singapore supplier, while it is the Internet or other electronic network subscription for the maintenance of not applied if the supplier is based overseas,

10 even though consumed in Singapore, being the following conditions: 2. To charge GST on services provided deemed a service falling outside the scope • global taxable turnover exceeding S$ on B2C basis, where B2C refers of GST. 1 million in a calendar year, either to transaction made to non-GST calculated on a retrospective or registered customers, either private Starting from 1 January 2020, the prospective view; and individuals or entities, which are not application of GST on digital services • yearly supplies of digital services GST registered in Singapore. It must will be subject to a two-tier registration to customers residing in Singapore be noted that the responsibility to threshold based on (i) value of annual exceeding S$100,000 for a calendar provide GST registration number lies global turnover; and (ii) value of digital year, either calculated on a with the GST-registered customer services made to customers in Singapore, retrospective or prospective view. and therefore overseas suppliers are regardless of the country of establishment Overseas suppliers meeting both the above allowed to treat services as being of the provider. criteria shall be required: supplied to a non-GST registered 1. To apply to Singapore Inland customer, charging and accounting In particular, GST shall be levied by any Revenue Authority (IRAS) for the GST for GST, unless the customer provides overseas supplier when it satisfies both registration. its own GST registration number.

11 3. Submit quarterly GST report to IRAS authorises the delivery of supply to and pay GST. the customer • The electronic marketplace sets the For ease of compliance, the Overseas Vendor terms and conditions under which the Registration Regime provides overseas supply is made; suppliers of digital services to register with • The documentation provided to the ACRA according to a simplified pay-only customer identifies the supply as regime, and that input tax claims incurred made by the marketplace, and not the on taxable purchases made in Singapore are merchant; or DANIELA RADRIZZANI not allowed. The GST report submitted by • The electronic marketplace and the Head Of Finance overseas suppliers on quarterly basis must merchant contractually agree that the therefore state only the value of supplies and marketplace is liable for GST. Fidinam Singapore Pte. Limited the GST collected in the relevant accounting [email protected] period. If any of the above-mentioned requirements www.fidinamgw.com is met, the electronic marketplace operator Electronic Marketplaces will be deemed a supplier pursuant to the To reach a wider network of customers, Overseas Vendor Registration Regime. suppliers may choose to market and sell In this scenario, it may be required to charge their products through intermediaries such GST on B2C supplies of digital services as Electronic Marketplaces. made in Singapore on behalf of the overseas suppliers listed on its platform. This includes An electronic marketplace is defined as all supplies of digital services made through a medium that allows the suppliers to the platform by the overseas suppliers, make supplies available to customers regardless of whether they are registered or by electronic means. This includes liable to register for GST. marketplaces operated via any types of electronic interface such as website, It must be noted that the above-mentioned internet portal, gateway, distribution threshold condition set forth for overseas platform, so excluding payment suppliers of digital services shall also apply processors or internet service providers. to overseas electronic marketplace operators: Given the electronic marketplace’s they must GST register if the yearly global involvement in the digital supply chain and taxable turnover and the yearly value of digital its interaction with both the suppliers and services provided to customers in Singapore consumers, under certain conditions both are above the two-tier threshold of S$ 1 local and overseas operators of electronic million and S$ 100,000, respectively. marketplaces may be regarded as suppliers of digital services made through the marketplace, on behalf of overseas suppliers. Overseas Vendor Registration Regime will apply on invoices issues and payment Specifically, the operator of electronic received from the 1 January 2020 onwards. marketplaces is regarded as the suppliers With GST chargeable across the border, if any of the following conditions is met: businesses in Singapore will no longer • The electronic marketplace authorises suffer a competitive disadvantage due to the charge to the customer; extra tax liability on digital services provided • The electronic marketplace to non-GST registered consumers.

The information contained in this note is for general information purpose only and is not intended to be relied as a substitute for tax, corporate and accounting professional consultation. Please refer to Fidinam staff for specific advice.

12 NEW FREE TRADE AGREEMENT

2019 is a flourishing year for the negotiations consent to the agreements on 13 February million consumers and ranks as the and finalisation of free trade agreements, 2019, ratification procedures are underway eighth economy in the world; the especially between the European Union and for their entry into force. ASEAN members are Brunei, Cambodia, APAC countries. Indonesia, Laos, Malaysia, Myanmar, According to the European commission Philippines, Singapore, Thailand and What follows is a summary of what has reports: Vietnam. been signed and what is still pending. • Singapore is the EU’s 14th largest • Singapore is a major destination for trading partner in goods and the European investments in Asia, and the Free Trade agreement UE - Singapore EU’s largest trading partner in the third largest Asian investor in the EU The EU-Singapore trade and investment Association of Southeast Asian (after Japan and Hong Kong). agreements were signed on 19 October 2018. Nations (ASEAN). The ASEAN region • In 2017 the existing bilateral foreign Following the European Parliament’s is a dynamic market with some 640 direct investment stock between the

13 EU and Singapore was roughly €334 Nam will eliminate customs duties for billion, having expanded rapidly over 75% of their products within ten years, and the past years. reduce another 10% of tariff lines within 14 years. Meanwhile, Cambodia, Lao PDR and Besides the trade negotiations with Myanmar will eliminate customs duties for individual ASEAN Member States, the EU 65% of their products within 15 years and cooperates closely with the ASEAN region reduce another 20% on tariff lines within as a whole. Cooperation between the two 20 years. regions is framed by a biannual ASEAN-EU NICOLAS MICHAUX Trade and Investment Work Program. Free trade agreement Vietnam Managing Director The EU-Singapore trade agreement The European Union and Vietnam signed will create new opportunities for EU a Trade Agreement and an Investment Fidinam (Hong Kong) Limited businesses to export to Singapore Protection Agreement on 30th June 2019. [email protected] and will help create jobs too. In fact, The agreements will be presented on www.fidinamgw.com Singapore will now offer better access the Vietnamese side to the National to its market to EU companies than it Assembly for ratification and on the EU does to firms from elsewhere, especially side to the European Parliament for its in the transport, telecommunication and consent, as well as to the respective financial services sectors. Moreover, national parliaments of EU Member States Singapore has agreed to make it easier in the case of the Investment Protection for the EU to export a wide range of Agreement. goods on its market such us electronics, The EU is Vietnam’s second-largest export textile and dairy products. market after the United States, with main The agreement will also bring new rules exports including garment and footwear on the custom procedures, simplifying products. In 2018, Vietnam exported and speeding up paperwork and physical $42.5 billion (€37.32 billion) worth of checks, something that will help a lot the goods and services to the EU, while the smaller companies. value of imports from the region reached $13.8 billion (€12.12 billion), according Free trade agreement SAR Hong Kong to official data.The largest sector The ASEAN – Hong Kong, China Free Trade of investment by the EU is industrial Agreement (AHKFTA) entered into force processing and manufacturing. on 11th June 2019, for Hong Kong and five ASEAN Member States, namely, Laos, Free trade agreement Australia Myanmar, Singapore, Thailand and Vietnam. Australia and the European Union (EU) Under the AHKFTA, Hong Kong and launched negotiations for a free trade Singapore will grant tariff free access and agreement (FTA) on 18 June 2018. As a bloc, will bind their customs duties at zero upon the EU is Australia’s second largest trading entry into force of the agreement. Brunei, partner, third largest export destination, and Malaysia, the Philippines and Thailand second largest services export market. The will eliminate customs duties on 85% of EU was Australia’s largest source of foreign products traded with Hong Kong within investment in 2018. ten years and reduce another 10% of tariff The EU and Australia prepare for the next lines within 14 years. Indonesia and Viet round of FTA negotiations in October.

The information contained in this note is for general information purpose only and is not intended to be relied as a substitute for tax, corporate and accounting professional consultation. Please refer to Fidinam staff for specific advice.

14 THE IMPORTANCE OF MAINTAINING ECONOMIC SUBSTANCE IN INTERNATIONAL STRUCTURING

Hong Kong has an expanding international tax Tax resident legal entities can be subject to the What is economic substance? treaty network. economic substance requirements, which have In a global economy, businesses may decide Comprehensive Double Tax Agreements been introduced by the OECD, under the Base freely the jurisdiction where to base their (CDTAs) are bilateral agreements signed Erosion & Profit Shifting (BEPS) regulation, with operations and establish their entity. between two countries with the aim to protect the aim to prevent tax avoidance. The concept However, the choice should depend on a number against the risk of double taxation where the of substance concerns not only multinational of factors, reflecting an economic reality. same income is taxable in two jurisdictions, to corporates, but also Small and Medium Indeed, the company incorporated in the avoid the absence of taxation, and to facilitate Enterprises and generally, all businesses with jurisdiction must be necessary from an cross-border trades and investments. CDTAs international and cross-border transactions. economic and commercial perspective. Tax generally reduce the withholding tax rates on Economic substance, nowadays, is a tool used considerations can also be taken into account investment income (such as interest, dividends, by the tax authorities against tax optimization provided that it is not the sole and entire royalties) and provide favorable tax treatment schemes which are implemented with the motivation. on capital gains, allowing taxpayers to reduce exclusive goal to obtain a treaty benefit (the so- Each country has its own definition of their tax burden. called treaty shopping). It is therefore intended corporate tax residence and substance, However, in order to claim the benefits of a tax for all legal entities considering to have an and tax authorities are paying more and treaty, the taxpayer must be a resident of at international expansion by setting up a foreign more attention to the respect of these least one of the contracting country. entity. requirements.

15 What are the economic substance fixed assets/cash maintained in Hong requirements in Hong Kong? Kong; The Hong Kong law does not provide any 9. If the company has establishment clear definition of tax/economic substance. outside Hong Kong, details (office Hong Kong residents who require proof of address, management and employees resident status may apply for a Tax Residency details, business activities, income, etc.) Certificate (TRC). is also required. Under CDTAs entered by Hong Kong with other treaty partners, a Hong Kong resident This list should not be considered SARAH MERIGUET company is defined as “a Hong Kong comprehensive. Manager of the French Desk st incorporated company” or “a company It should be noted that on 1 February 2015, incorporated outside Hong Kong that is the Inland Revenue Department has adopted Fidinam (Hong Kong) Limited managed or controlled in Hong Kong”. stringent rules and procedures for obtaining [email protected] Based on this definition, being a Hong Kong a certificate of Hong Kong resident status. www.fidinamgw.com incorporated company should be sufficient Hong Kong authorities are now stricter in to obtain a TRC. However, the Inland Revenue reviewing these applications. Department (IRD) generally requires to obtain Finally, in order to minimize the risk of a lack information and supporting documents as of substance, it is important to pay attention proof for the applicant’s management or to the location of the human, economic control normally exercised in Hong Kong. and material resources needed to perform The substance test is conducted on a case- the activity. In fact, the place of effective by-case basis. The tax authorities will assess management is determined after looking the activity, and the commercial operations of into the activity of the company. The level of the company to determine if it has substance. substance which must be maintained in the General list of information/documentation jurisdiction of the entity will depend on its requested by the IRD are as follows: actual function. 1. Composition of board – whether the board members have residence in Hong Consequences of non-compliance and Kong; lack of substance 2. Board meetings – where the place If the substance requirements are not met, or if of board meetings are held, what is the management of the company is in another discussed and resolved, how the resolved jurisdiction, the risk is to be considered as tax matters are implemented or executed; resident not in the country of incorporation, 3. Business operation, including the but in the country where the management business address, management and is effectively done.. Indeed, companies staff numbers and details, business incorporated in Hong Kong but managed activities details, place of operation; outside Hong Kong are likely to be considered 4. For business address - the Hong Kong as tax residents in the foreign jurisdiction and lease agreement (if any) should be therefore may be subject to foreign corporate provided; tax (according to the foreign tax law). 5. For management and staff numbers If the tax authorities are not satisfied that the – employment visas, employment company has enough substance, then the contracts and employer’s return application for the tax residency certificate submitted as well as their personal will be rejected. particulars (nationality, residential Entrepreneurs must be aware of these address) and responsibility/place to requirements when considering to establish perform the job; the most appropriate and efficient tax The information contained in this note is 6. For business activities – nature of structures for cross-border activities. for general information purpose only and is income (any passive income or offshore Others having already set up a foreign not intended to be relied as a substitute for income included); company are recommended to review their tax, corporate and accounting professional 7. Name of bank in Hong Kong; business structures to ensure that it complies consultation. Please refer to Fidinam staff 8. Audited accounts showing the value of the requirements of substance. for specific advice.

16 OUR GLOBAL PRESENCE

SWITZERLAND/EUROPE OUTSIDE EUROPE

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