15 minute read 9 Sep 2022
bird eye view of gba bridge

How to leverage opportunities created for tax planning in order to support the development of family enterprises and wealth succession?

Authors
Carrie Tang

EY Greater China Family Enterprise Leader, Greater China EY Private Tax Leader and EY Greater China Business Tax Advisory Services Leader

Loves meeting new friends and building long-term relationship. Passionate about developing new business and practice. Enjoys music and ball games.

Joy Chen

Partner, Family Enterprise and Family Office Advisory, Greater China EY Private, Ernst & Young Tax Services Limited

Trusted advisor to entrepreneurial families, their businesses and family offices. Passionate about lifelong learning, diversity and inclusion. Supporter of next generation leaders around the world.

Ivy Sun

Partner, EY Private Tax, Ernst & Young (Shanghai) Certified Tax Agency Company Limited

Enjoy reading, traveling, exercising and making new friends. Like challenging and innovative work and look forward to growing with entrepreneurs and their family businesses. Love dogs.

15 minute read 9 Sep 2022

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

In brief:

  • Local government in the GBA has implemented a series of tax incentives to promote the development of family enterprises.
  • Family enterprises should focus on family governance, family succession, wealth management, and family enterprise operation and tax planning. 

The Guangdong-Hong Kong-Macao Greater Bay Area has distinctive qualities that bear promise for its development. Upon the basis of “one country, two systems”, the GBA is consisted of three customs territories and four core cities1. As compared to other development areas, it is uniquely positioned geographically and has the unusual advantage of a fused eastern and western heritage. Along with mutual access in its financial markets, a good ecology, a thriving capital market and generations of multilingual professional talent, the GBA offers favorable conditions for entrepreneurs to succeed in enterprise and wealth creation. The sustainable development of family enterprises in the private economy also encourages stability and growth in the GBA.

The local governments in the GBA have implemented a series of tax incentives and fiscal subsidies to promote development. These policies empower GBA enterprises to cultivate value-creation. They aim to improve the business environment in the GBA, offer convenient tax services, reduce tax liabilities, encourage technological innovations, encourage talent retention, and liberalize the financial markets, thereby promoting talent flow, logistics, capital flow and information flow. The eventual goal is to promote organic integration at the regional level, and present viable opportunities for entrepreneurs to pursue their personal careers, for enterprises to develop sustainable businesses, and for individuals to invest their private wealth and fulfill their aspirations.

In this article, we will provide an overview on the tax framework and tax incentives applicable to family enterprises in the nine mainland cities2, the Hong Kong Special Administrative Region (SAR) and the Macao SAR. We will furthermore illustrate the applicability of these policies with a case study. 

people crossing road in busy downtown
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1

Chapter 1

An overview of the tax framework and tax incentives in the GBA

Including the nine mainland cities, Hong Kong SAR and Macao SAR.

  • General concepts on taxation

    1. The nine mainland cities
    • Worldwide basis
    • Resident taxpayer must pay income tax on all income sources, whether they were derived from inside or outside of Mainland China
    2. Hong Kong SAR
    • Territoriality basis
    • Only profits derived in Hong Kong are subject to taxes
    • Profits derived outside of Hong Kong are not subject to Hong Kong profits tax3
    3. Macao SAR
    • The income derived from industry and commerce in Macao is subject to taxes in Macao
  • Corporate Income Tax (CIT)

    1. The nine mainland cities

    CIT 

    • Statutory CIT rate: 25%4
    • Items exempt from CIT: qualified dividends, bonuses and income from equity investment between resident enterprises, etc. 
    • For Qianhai in Shenzhen (Qianhai)5, Hengqin in Zhuhai (Hengqin)6 and Nansha in Guangzhou (Nansha)7: qualified enterprises are subject to a reduced rate of 15%.8
    2. Hong Kong SAR

    Profits tax

    • Rate: 16.5% (corporations) and 15% (unincorporated businesses)
    • Non-taxable/exempt items: capital gains, dividends, offshore income3
    3. Macao SAR

    Complementary tax

    • Tax exemption allowance for the first MOP$600,000
    • Progressive rates: 3%-12%
  • Individual Income Tax (IIT)

    1. The nine mainland cities

    IIT

    • Consolidated income: Progressive rates 3%-45%
    • Income from business operation: Progressive rates 5%-35%
    • Interest income, dividends and bonuses, rental income, property conveyance and contingent income: 20% 

    In the nine mainland cities9: (1) Overseas high-end talent and critically lacking talent: any tax liability from individual taxable income above 15% will be covered by subsidy. The said subsidy is exempt from IIT.10

    Hengqin in Zhuhai11: (1) Macao residents: IIT burden in Hengqin exceeding their IIT burden that would have been arisen in Macao shall be exempted.

    Nansha in Guangzhou7: (1) Hong Kong and Macao residents: IIT burden exceeding their IIT burden that would have been arisen in Hong Kong/Macao shall be exempted.

    2. Hong Kong SAR

    Salaries tax

    • Salaries, wages or director’s fees or other earned income

    i. Standard rate: 15%

    ii. Progressive rate: 2%-17%

    3. Macao SAR

    Professional tax

    • Income derived from employment or self-employment: 

    i. Progressive rate: 7%-12%

  • Gift tax or estate duty

    1. The nine mainland cities

    NA

     

    2. Hong Kong SAR

    NA

     

    3. Macao SAR

    NA

  • Other main tax categories

    1. The nine mainland cities
    • Value-added Tax, Consumption Tax, Stamp Duty, City Construction Tax, Education Surcharge, Real Estate Tax, Land Appreciation Tax, etc.
    2. Hong Kong SAR
    • Property tax, stamp duty, betting duty, etc.
    3. Macao SAR
    • Consumption tax, gaming tax, stamp duty, property tax, etc.
  • Other taxes and supportive measures

    1. The nine mainland cities
    • Continued to modernize tax administration, such as the Golden Tax project, the VAT Invoice Management System, big data analytics for tax risk management, and introduction of electronic VAT invoices.
    • Rolled out reforms for tax handling to improve taxation efficiency for businesses, for example, the Guangdong Provincial Tax Service, State Taxation Administration was the forerunner in testing the 10 specific measures to improve tax handling by instituting the list of “One-Stop Handling of Tax Affairs.”
    • Introduced the innovative tax service of advance tax rulings in pilot areas   
    • Created the GBA tax service cooperation initiative to facilitate tax data sharing and coordinated tax services
    • Local governments implemented fiscal policies to promote talent flow, logistics and capital flow, by offering economic contribution subsidy, corporate headquarter subsidy, registration subsidy, public listing subsidy, office rental/purchase subsidy, and talent subsidy, etc., to important major industries such as high-tech, logistics and advanced manufacturing.   
    2. Hong Kong SAR
    • Enhanced eTAX capabilities, including eTAX for filing tax return, e-payment and the Electronic Tax Reserve Certificates Scheme to transition to the digitization of tax administration.
    • Provided tax incentives for technological innovations: the tax deduction for qualified R&D is an example of preferential tax policy.
    • Promoted the positioning of Hong Kong as an international offshore wealth management center, such as rolling out the Unified Fund Exemption to support development of private equity funds and the proposed tax concessions for family-owned investment holding vehicles managed by single-family offices, which is expected to be implemented soon.
    3. Macao SAR
    • Improved measures of convenience in tax handling, such as e-payment of stamp duties, the Macao One Account, and GovPay, are ways in which Macao introduces the e-administration of taxes.
    • Provided tax incentives for technological innovations: introduced preferential tax policies for technology and innovation enterprises.
    • Advocated for preferential tax policies for Macao enterprises and their employees in the GBA.

Due to the impact of the pandemic and the political and economic developments home and abroad, many traditional enterprises felt the profit crunch and they must undergo transition. At the same time, the global trend in tax information transparency and the digitization of tax administration have also resulted in much rethinking on the part of the entrepreneurs. Many are revisiting their approaches in enterprise tax planning, asset security, estate planning and succession, and wealth management. The distinctive advantages of the GBA and its policy incentives have sparked keen interests in how one can best leverage these opportunities to benefit family enterprises. Needless to say, tax planning is vital in this process.

three generation asian family walking in park
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2

Chapter 2

A case study on a family enterprise in the GBA

Practical insights from EY Private team on tax considerations for the transition of traditional family enterprises and the succession of family legacy.

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.
spacious tunnel captured in daylight
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3

Chapter 3

How EY may help maintain sustainability in your family legacy and business

Discover our three pillars of services: family, business and legacy.

The EY Private Team consists of professionals that are dedicated to providing you with three pillars of services, family, business and legacy, that will suit your unique needs, including tax and structure advisory, governance, compliance, asset preservation, succession planning and next generation development. With thorough consideration of the family and business background, we will assist you in designing and implementing structures and frameworks, and we will continue to provide operation support thereafter.

We welcome any inquiries you may have. Please contact us for more details.

  • Show article references#Hide article references

    1. http://www.gov.cn/xinwen/2021-10/21/content_5644004.htm
    2. The nine mainland cities refer to the cities of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing. 
    3. To address the European Union’s concerns about Hong Kong’s FSIE regime for passive income, the Hong Kong Government has recently proposed to amend Hong Kong’s FSIE regime by the end of 2022 with a view to bringing the refined regime into force from 1 January 2023.  Under the proposal, while Hong Kong will continue to adhere to the territorial source principle of taxation, Hong Kong constituent entities of an MNE group will be subject to a refined FSIE regime in respect of in-scope offshore passive income “received in Hong Kong”.  In-scope offshore passive income includes interest income, income from intellectual properties (IP) (i.e., IP income), dividend income and disposal gains in relation to share or equity interest (disposal gains).  Such passive income will be deemed as onshore sourced and chargeable to Hong Kong profits tax unless the economic substance requirements (for interest income, dividend income and disposal gains), or the nexus approach (for IP income), or the participation exemption conditions (for dividends and disposal gains) are satisfied.
    4. Certain eligible enterprises, such as High and New Technology Enterprise, Technologically Advanced Service Company, small- and micro-enterprises, etc. are eligible for preferential tax rates and preferential tax policies.
    5. Notice of Ministry of Finance and State Taxation Administration on the Continuation of CIT Preferential Policies in Shenzhen Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone, effective from 1 January 2021 to 31 December 2025.
    6. Overall Plan of Constructing the Guangdong-Macao In-depth Cooperation Zone in Hengqin.
    7. Guangzhou Nansha's Overall Plan for Deepening Guangdong-Hong Kong-Macao Comprehensive Cooperation Facing the World.
    8. For the preferential directory of qualified industries and the relevant conditions to be met, see Notice of Ministry of Finance and State Taxation Administration on the Continuation of CIT Preferential Policies in Shenzhen Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. The specific regulations, the encouraged industry catalogue and legal requirements for the qualified industries under the preferential tax policies of Hengqin have not been released yet. The details for Hengqin are announced via关于横琴粤澳深度合作区企业所得税优惠政策的通知.The specific regulations, the encouraged industry catalogue and legal requirements for the qualified industries under the preferential tax policies for Nansha have not been released.
    9. For further details, please refer to Notice on Preferential IIT Policies in Guangdong-Hong Kong-Macao Greater Bay Area, Notice on the Continuous Implementation of Preferential IIT Policies in Guangdong-Hong Kong-Macao Greater Bay Area. It is worth noting that certain local governments may have set a cap for the financial subsidies, e.g., for the application of financial subsidies for 2020, Shenzhen has set the maximum amount of subsidy at RMB5 million per person.  
    10. For the legal requirements on high-end talent or critically lacking talent, please refer to the respective regulations issued by each of the nine mainland cities.
    11. Overall Plan of Constructing the Guangdong-Macao In-depth Cooperation Zone in Hengqin.
    12. CEO A is a pseudonym. We have combined the backgrounds of different cases to come up with this case study. It is a hypothetical example and for reference only. The specifics of the proposed solutions vary depending on the actual circumstances of the enterprise and the family. Please contact us for professional advice. 

Summary

In spite of the transformation of traditional industries, the transparency and digital management of tax information, family enterprises in the GBA should consider tax planning and wealth succession from the perspectives of family, family enterprises and legacy with a view to achieving sustainability.

About this article

Authors
Carrie Tang

EY Greater China Family Enterprise Leader, Greater China EY Private Tax Leader and EY Greater China Business Tax Advisory Services Leader

Loves meeting new friends and building long-term relationship. Passionate about developing new business and practice. Enjoys music and ball games.

Joy Chen

Partner, Family Enterprise and Family Office Advisory, Greater China EY Private, Ernst & Young Tax Services Limited

Trusted advisor to entrepreneurial families, their businesses and family offices. Passionate about lifelong learning, diversity and inclusion. Supporter of next generation leaders around the world.

Ivy Sun

Partner, EY Private Tax, Ernst & Young (Shanghai) Certified Tax Agency Company Limited

Enjoy reading, traveling, exercising and making new friends. Like challenging and innovative work and look forward to growing with entrepreneurs and their family businesses. Love dogs.