Across-border family trust is an institutional arrangement in which a settlor, typically a high-net-worth individual, transfers domestic and overseas assets to an offshore financial centre such as the Cayman Islands, British Virgin Islands (BVI), Hong Kong or Singapore. These assets are then held and managed by a trustee (either a trust institution or a private trust company) in accordance with offshore laws, with income distributed to beneficiaries as stipulated.
The primary purposes of cross-border family trusts are wealth management, succession planning and asset protection. Settlors often establish mechanisms to retain control, such as appointing a protector to supervise the trustee, directly intervening in matters like changing beneficiaries or vetoing investment decisions, or maintaining autonomy over asset management through a private trust company acting as trustee.
Zhou Le
Partner
Blossom & Credit Law Firm
The core feature of cross-border family trusts is the use of the unique legal and tax environments of offshore jurisdictions to achieve asset segregation, tax optimisation and privacy protection.
The proportion of shares in Hong Kong-listed companies held through cross-border family trusts continues to rise. The distinctive structure of these trusts is increasingly eroding the transparency of corporate governance in domestic companies, particularly by obscuring the identification of actual controllers and undermining the effectiveness of governance mechanisms. The secrecy and control retention mechanisms inherent in cross-border trusts are giving rise to systemic risks within the corporate governance chain of domestic companies.
Identifying controllers
Practical difficulties in penetrating control structures. Cross-border family trusts often allow settlors to retain core powers such as the right to appoint or remove directors and the authority to dispose of assets, making it difficult for domestic regulators to effectively penetrate and verify these arrangements.
For example, the BVI trusts permit settlors to retain control without invalidating the trust, enabling the settlor to indirectly control the appointment of directors of domestic companies through a BVI trust protector. This concealed control mechanism results in the “actual controller” disclosed by the company being merely a nominal entity, while the true decision maker remains hidden behind the trust structure.
Wang Yidan
Associate
Blossom & Credit Law Firm
Amplification of regulatory gaps. In practice, when settlors use protectors to exert indirect influence over corporate decisions, domestic courts often struggle to gather crucial evidence, hindered by legal conflicts across jurisdictions and the slow pace of cross-border judicial co-operation. This allows settlors to exploit the trust “firewall” to evade legal liability.
In 2014, the Organisation for Economic Co-operation and Development released the Common Reporting Standard (CRS), a framework designed to enhance tax transparency and information exchange among national tax authorities, establishing a new basis for cross-border tax supervision.
Tax authorities in many regions of China have already implemented CRS audit mechanisms in practice. However, the CRS mainly targets abnormal cross-border fund flows and still has blind spots in identifying the actual control relationships of non-financial assets, such as company equity.
Hollow corporate governance
Nominal shareholders’ voting rights rendered ineffective. Under cross-border family trust structures, the nominal shareholders registered with company authorities are typically trustees, protectors, or shell companies controlled by the settlor. Although nominal shareholders legally possess shareholder rights, their actions are often constrained by the trust agreement and must be carried out according to the settlor’s wishes or the terms of the trust.
In such cases, the true decision makers are the settlor or beneficiaries, while nominal shareholders become mere “puppets” in shareholder meetings, severely undermining the effectiveness of the corporate governance mechanism.
Diminished independence of board decision making. In cross-border family trust structures, the nomination and appointment of board members are also subject to the influence of the settlor or trustee, making it difficult for directors to maintain independent decision-making.
For example, the settlor may indirectly control board members appointment through the trust structure to align board decisions with personal or family interests, rather than the overall interests of the company. Such circumstances seriously affect the transparency and fairness of board decisions and challenge directors’ duties of loyalty and diligence.
Furthermore, directors controlled by the settlor must also consider the interests of trust stakeholders when making decisions, due to the constraints of foreign laws and trust agreements. This may cause their decisions to deviate from the principle of acting in the best interests of the company, further weakening the independence of the board.
Transparent governance
The tension between cross-border family trust structures and corporate governance reflects, at its core, a recalibration between legal boundaries and commercial confidentiality. To mitigate, and ultimately prevent, the functional weakening of governance arising from such offshore arrangements, a co-ordinated strategy should be pursued across three interrelated dimensions.
(1) Implementation of the principle of substantive penetration.
Domestic regulators may conduct look-through examinations of ultimate controllers, adopting functional control in place of formal shareholding as the criterion for determining actual control.
Shareholder agreements and other governing legal instruments should explicitly require cross-border trust structures to disclose ownership information on a fully penetrated basis through to the ultimate beneficial owner. This ensures identity transparency and clear defines rights and obligations.
(2) Establishment of cross-border collaborative governance mechanisms.
Authorities should actively promote cross-border regulatory co-operation and establish mechanisms for information sharing and joint review. By means such as a “regulatory whitelist”, regulators can facilitate reviews in offshore jurisdictions that co-operate with information verification, effectively reducing the time and institutional costs of cross-border evidence collection.
At the same time, they should explore the establishment of a full-process traceability mechanism, from core trust terms to major corporate decisions, to enable real-time tracking of changes in control and risk warnings, enhancing the visibility and controllability of the governance process.
(3) Advancement of professional compliance reform.
Professionals such as lawyers should play a role in building compliance in corporate governance, assisting enterprises in systematically reviewing control arrangements under trust structures and clarifying the scope and content of information disclosure.
For example, they can help enterprises design a “trust control rights checklist” to clarify the rights and responsibilities between settlors and trustees, eliminate “shadow decision making” and hollow governance caused by trust barriers, and effectively enhance the efficiency and credibility of corporate governance.
Wang Yidan is an associate and Zhou Le is a partner at Blossom & Credit Law Firm
Blossom & Credit Law Firm
12/F, 15/F, Tower A, Xinzhongguan Building
No.19, Zhongguancun Street, Haidian District
Beijing 100086, China
Tel: +86 10 8287 0263
Fax: +86 10 8287 0299
E-mail: wangyidan@baclaw.com
zhoule@baclaw.com
www.baclaw.cn
