Soon after Chen Fashu, chairman of New Huadu Group, announced in October that he would set up China’s largest foundation, worth US$1.2 billion, local media started asking questions: Was Chen’s investment a ploy to evade tax?
The New Huadu Philanthropic Foundation issued denials, but it quickly became an exercise in damage limitation.
Much of Chen’s wealth derives from his investments in Zijin Mining. When the lock-up on his A-share holding in the company expired in April, Chen liquidated two-thirds of his stake, netting US$410 million. Li Xin, the foundation’s assistant executive director, told CHINA ECONOMIC REVIEW that Chen was unaware he should pay tax on these earnings.
"China’s tax regulation in this area should be improved… Mr Chen is not the first one who hasn’t paid this tax," she said. Li also claimed that the media was tipped off about the situation by individuals who wished to hurt Chen’s reputation and the share price of New Huadu’s Shenzhen-listed subsidiary.
The tax evasion allegations may indeed be baseless. A registered charitable foundation is levied 33% on all capital gains and disbursements – hardly a model for tax efficiency. "If people want to [avoid taxes] there’s probably a million easier ways to do it than going down the foundation route," said Mark Yu-Ting Chen, managing director of New Philanthropy Partners, a consultancy.
Chen’s biggest headache might turn out to be the process of donating funds to his foundation. He invested most of his Zijin windfall in Tsingtao Brewery and Yunnan Baiyao, a traditional Chinese medicine firm, and the foundation’s assets will comprise Zijin and Tsingtao stock. As the rules stand, though, Chen could only sell the shares and donate the profits to the foundation – which would then have to give 33% to the taxman.
Cao Dewang, who wants to transfer 60% of his holdings in Fuyao Glass Group to his He Ren Foundation, is in a similar bind and is seeking to overturn the legislation in court. Cao’s action is expected to have significant implications for the future of private foundations in China.
"The outcome will also speak largely as to what the government attitude is," said Grace Chiang, managing director of Social Venture Group, a consultancy.