It is common in China that most of the high-net-worth individuals send their children to study or work abroad, and some of those students end up obtaining foreign nationalities. However, due to various restrictions and policies, most of those HNWIs’ assets still remain in China, especially the securities of domestic listed companies which cannot be directly transferred to foreign individuals or entities. Thus, it is essential to know how the securities of listed companies could be passed on to the children outside China.
China Securities Depository and Clearing Corporation Limited (hereinafter as “CSDC”) issued the Detailed Implementation Rules for the Non-trade Transfer of Securities (Applicable to Inheritance, Donation, and Other Circumstances, 2020 Revision) (hereinafter as “Detailed Implementation Rules”) on April 30,2020, which stipulates the procedures of how to inherit listed securities. It doesn’t specifically address the inheritance by foreigners of listed securities, but captioned issue is covered therein.
As an experienced legal team focusing on the cross-border estate planning, here we summarized main points of Detailed Implementation Rules to provide you a brief introduction.
1. The Requirements of Submitting an Application
In accordance with Article 4 of Detailed Implementation Rules, for transfer of securities involved in inheritance, the transferee shall file an application for the transfer with CSDC.
The materials needed to be submitted when an application is filed involve:
a) The application form for transfer.
b) The valid death certificate of the deceased.
c) The certification of vesting of title of the securities concerned, which can be any of the following:
ii. Where a Mediation Agreement is concluded through the People's Mediation Committee, the agreement and the confirmation document issued by the People's Court shall be submitted.
iv. Other documents acceptable to CSDC.
d) The identification of the transferee.
From the requirements of materials above, the foreign heirs/beneficiaries should first confirm the heirship or the right of inheritance to the securities through notarization, litigation or civil mediation.  You will find more information in these regards in our past posts on this blog.
2. Other Specific Requirements
Given that the securities market in China is highly regulated, there are some information disclosure and approval requirements in some circumstances.
According to Article 10 of Detailed Implementation Rules, circumstances which require prior approval or filing before inheritance include:
a) Where the transfer involves state-owned shareholdings, the approval or filing procedures must be undergone with the state-owned assets supervision and administration to obtain prior consents.
b) Where the stock or other securities being transferred exceeds 5% of total securities of listed companies in banking or insurance, the approval documents of the China Banking and Insurance Regulatory Commission need to be submitted.
c) Where the transfer of a listed company in the securities industry reaches or exceeds 5% of the total capital stocks, the approval documents of the China Securities Regulatory Commission need to be submitted.
d) For other transfers that can be handled only after administrative approval or recordation, the approval or recordation documents of the relevant competent department need to be submitted.
In addition, the information disclosure obligation shall be performed according to relevant provisions. The applicant shall only apply to CSDC for handling after the information disclosure procedure.
3. The Restrictions for the Foreign Heirs
It is stipulated in the Notice of CSDC on Matters Concerning the Opening of A-Share Securities Accounts by Qualified Foreigner that a foreigner can only open an account in the A-share market if certain conditions are met.  Most foreigners are not eligible to open security account and trade China stocks.
Accordingly, Article 17 of Detailed Implementation Rules stipulates that if the transferee is not qualified for opening a securities account, the transferee needs to apply to CSDC for opening a securities account and shall pledge that the securities account so opened will only be used for disposal of securities transferred through inheritance. In other words, such a securities account opened for purpose of inheritance shall not be used for trading stocks or other securities, unless as otherwise prescribed by laws and regulations.
Despite such a restriction, from an estate planning perspective, this is still significant, as it allows foreign heirs or beneficiaries to own and hold stocks of China listed companies which further enables them to exercise influence and control over the operation of the listed companies, or at least givens them opportunity to benefit from China booming economy as a passive stockholder.
Under the Detailed Implementation Rules, it also makes clear that other restrictions imposed by China Company Law or China Securities Law such as lockup periods or sale volume and instalments encumbering such stocks and securities shall continue to run despite the transfer thereunder.
4. Payment of Fees and Taxes
After the application, CSDC will conduct formal review on the materials submitted. If the materials are qualified, the transferee shall handle the following transfer registration procedures.
In accordance with Article 20 of Detailed Implementation Rules, an applicant applying for handling the transfer shall pay the transfer fee according to the fee rates prescribed by CSDC. The transfer-related taxation shall be governed by the related law and regulations. In practice, if the stocks and securities are inherited by certain designated family members, generally there are no taxes.
What We Propose
From all above, the procedures of securities inheritance are quite complicated since there are various documents required in different stages. What’s more, the guide of Detailed Implementation Rules is not clear enough given that there are only 23 articles in it. Failure to comply with the requirements of CSDC may result in adverse consequence. In order to lower the risks and handle all the legal issues, it is essential to consult an experienced Chinese inheritance lawyer before you get things going.
 In accordance with Article 5 of Detailed Implementation Rules.
 At this stage, it is often necessary to confirm whether the inheritance of shares or securities by foreign heirs will affect the nature of the company through litigation. The conclusion is currently inconclusive and varies from case to case.
 According to Notice of CSDC on Matters Concerning the Opening of A-Share Securities Accounts by Qualified Foreigners, the qualified foreigners include:
- foreign employees who work in China and the securities regulatory authorities in their country of domicile have established a regulatory cooperation mechanism with the CSRC.
- foreign employees of domestic listed companies working overseas apply for account opening due to participation in the equity incentive plan.
Post time: Mar-18-2021