Foreign Inheritance Under the Chinese Law and Succession of Shares in BVI Companies

1.Application of Law

According to Article 31 of the Law of the People's Republic of China on the Application of Laws to Foreign-related Civil, “For legal successions, the laws of the regular residence of the ancestors when deceased shall apply. However, for the legal inheritance of immovable assets, the laws in which the immovable assets are located shall apply.” If the deceased was in China and his or her habitual residence at the time of death is in China, the succession in this case shall be governed by the laws of China. According to Article 14 of Law of the People's Republic of China on the Application of Laws to Foreign-related Civil, “For the capacity for legal acts, capacity for legal acts, structure and organization, shareholder rights and obligations of the legal persons, the law of the place of registration shall apply. If the major venues of business of the legal persons and the places of registration are different, the laws of the former shall apply and the places of the legal persons' regular residence are their major venues of business.” Therefore, the rights and obligations of an enterprise registered in BVI and the successor process shall be governed by BVI law.

2.Succession

According to Article 5 of Law of Succession of the People's Republic of China,”(the Law of Succession) Succession shall, after its opening, be handled in accordance with the provisions of statutory succession; where a will exists, it shall be handled in accordance with testamentary succession or as legacy; where there is an agreement for legacy in return for support, the former shall be handled in accordance with the terms of the agreement.” In the absence of a valid will or legacy, the succession shall be dealt with in accordance with statutory succession provisions. Under statutory succession, the estate of the decedent shall be inherited in the following order: First in order: spouse, children, parents. Second in order: brothers and sisters, paternal grandparents, maternal grandparents. When succession opens, the successor(s) first in order shall inherit to the exclusion of the successor(s) second in order. The successor(s) second in order shall inherit in default of any successor first in order.

3.Disposition of the Estate

According to the Law of Succession, successors same in order shall, in general, inherit in equal shares; successors may take unequal shares if an agreement to that effect is reached among them. At the same time, it should be noted that it is necessary to clarify whether the equities owned by the decedent are the property jointly owned by the couple during the existence of the marital relationship. According to the Article 26 of Law of Succession, “If a decedent's estate is partitioned, half of the joint property acquired by the spouses in the course of their matrimonial life shall, unless otherwise agreed upon, be first allotted to the surviving spouse as his or her own property; the remainder shall constitute the decedent's estate. If the decedent's estate is a component part of the common property of his family, that portion of the property belonging to the other members of the family shall first be separated at the time of the partitioning of the decedent's estate.”

4.Proof of succession to foreign estates

Generally, inheritance of a foreign estate shall be conducted in the country where the estate is located. Whoever intends to inherit an estate outside the territory generally needs to apply to the domestic notary organ for a series of certificates. If a Chinese person is the legal successor, such person shall provide the following certifications:

1. Identity documentation of the applicant: including the original of his/her ID card, household register, passport and other relevant documents.

2. The certification document concerning the kinship between an inheritor and a decedent: generally it shall be issued by the personnel department of the entity where the applicant works, or, if there is no entity, by the sub- district office or the people's government of the township (town) where the permanent residence of the decedent is registered.

3. The death certificate of the decedent: where the decedent dies in China, the death certificate and the certificate of cancellation of household registration issued by the hospital and the public security department shall be submitted; where the decedent dies in foreign country , the death certificate notarized by the local notary office shall be submitted; where the decedent is missing, the judgment of death declaration issued by the court shall be submitted.

4. The marital status of the decedent, the proof of the circumstances of his parents and children, and the proof of the kinship of his relatives, mainly in relation to the identity of the heir who has the right to inherit.

5. If any of the heirs renounce their inheritance rights, they must provide the notary public with a declaration of renunciation.

6. Other certification materials that the notary deems necessary to be submitted.

If the above documents are from abroad, they must be notarized by the local notary office and authenticated by Chinese embassy or consulate.

5.Equity succession path for BVI companies

The official website of the BVI government states that foreign notary certificates can be used in the BVI after being certified by the Hague (Apostille). Since mainland China has not acceded to the Hague Convention on Certification, cross-border certification of documents cannot be achieved through the simple "Apostille" procedure, and onerous and time-consuming "consular dual certification procedure" (i.e. the dual certification procedure for the Chinese Ministry of Foreign Affairs and the British Embassy) can only be carried out. The procedure is as follows: first of all, the documents that need to be double-consularized must be made into a foreign-related notary certificate, and then the original notary certificate and other documents must be submitted to the Ministry of Foreign Affairs for certification through a representative (the MFA). After submitting the notary certificate to the MFA through a representative, the MFA will examine and certify the document. The MFA will then submit the original Notary Certificate to the British Embassy for verification and authentication, and the MFA will collect the original Notary Certificate from the British Embassy. Finally, the representative will collect the original notarization certificate from the MFA. In the case of statutory succession, a Grant of letters of administration from the BVI Court is eventually obtained through the Probate process. The process is complex and involves six main steps1. Firstly, the value of the estate (i.e. BVI shareholding) should be estimated; then the value of the estate needs to be reported to HM Revenue and Customs (HMRC) (standard rate of inheritance tax is 40% with a threshold of £325,000. If tax is payable, at least part of the tax will usually need to be paid in order to obtain probate); then the probate application documents need to be completed; the Grant of Letters of Administration are received after 3-6 months; all debts or outstanding payments are repaid, including Outstanding bills, tax arrears, etc., as well as publication of an estate notice in the London Gazette (involving disclosure of information and further recourse, if any, by interested parties); and finally, the estate will be distributed differently according to the presence or absence of a will (and income tax will be payable if the inherited estate generates income).