CHINA Law and Practice Contributed by: Chengchen Gan (Mark), Commerce & Finance Law Offices
These methods not only effectively protect personal or family assets but also provide professional and pre - cise arrangements for inheritance. 4.2 Succession Planning In mainland China, family businesses typically use a structure combining family trusts and limited partner - ship enterprises for inheritance planning. The settlor (beneficiary) establishes a limited partner - ship (LLP) enterprise to indirectly hold equity in the target company. The trustee of the family trust acts as a limited partner in this LLP, while the settlor or their designated institution serves as the general partner. • In this structure, the family trust indirectly holds shares in the target company through the LLP. The trustee’s role is primarily to participate in decision- making on significant matters but without day-to- day operational management obligations (which are typically handled by the settlor for the partner - ship enterprise). • This set-up reduces the management responsi - bilities of the trust company towards the target company while still ensuring its right to information and oversight. • It further meets the settlor’s need to maintain con - trol over the operations, decisions, and manage - ment of the target company. • This use of the limited partnership structure also According to the administrative measures issued by the State Taxation Administration, the Chinese tax authorities regulate the “reasonable value” of par - tial interest transfers. When an individual transfers a partial interest in an entity to another person or a legal entity at an obviously undervalued price, the tax authority is entitled to assess the transaction based on the fair value of the equity. offers certain deferred tax benefits. 4.3 Transfer of Partial Interest Fair value is primarily determined with reference to the per-share net assets or the net asset proportion corresponding to the equity recorded on the financial books, or by comparing the income from other equity transfers under the same or similar conditions by the same or other shareholders of the enterprise.
Therefore, the fair value of equity is assessed by stand - ardised methods and will not be adjusted for factors such as lack of marketability or discounts related to the transfer of control. Even if the transaction occurs at a lower price, the reasonable fair value for tax pur - poses will, in the majority of cases, be determined based on the book value.
5. Wealth Disputes 5.1 Trends Driving Disputes
Currently, trust disputes are less common in Mainland China, and are typically resolved through litigation in courts with enforceable judgments. On the other hand, disputes related to testamentary inheritance occur all the times in China. Key challeng - es in these cases include four main points: • determining whether the will truly reflects the inten - tions of the deceased; • assessing the legality when executing the will; • defining scope of the will; and • determining whether heirs accept the bequest. The Chinese judicial system consistently promotes diversified approaches to resolving such disputes, including facilitating negotiation and mediation between parties. 5.2 Mechanism for Compensation According to China’s Trust Law, in a dispute involving a trust, the trustee may be required to compensate the beneficiary for losses mainly due to the following. Breach of Duty of Loyalty According to Articles 25 and 26 of the Trust Law and the Administrative Measures on Assembled Funds Trust Schemes of Trust Companies for the pooled Funds of the Trust Company, trustees are prohibited from seeking benefits for themselves or third parties, and they must refrain from engaging in actions that conflict with the interests of the beneficiary. Breach of Duty of Care Though PRC law does not specify detailed provisions regarding duty of care, according to relevant cases
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