Owen, Christopher: Global Survey – June 2021

11 May 2021, the Australian government proposed replacing the existing tax residency rules for individuals with a new primary ‘bright line’ test that deems individuals to be Australian tax residents if they are physically present in Australia for at least 183 days during the tax year.

Where the primary test is not met, secondary tests will apply based on a combination of physical presence and measurable, objective criteria.

In the Harding v Commissioner of Taxation [2019] FCAFC 29 judgment of 22 February 2019, the case focused on whether an individual who had left Australia and commenced living in a series of apartments in Bahrain had established a permanent place of abode outside Australia and had ceased being an Australian tax resident. The Federal Court had held that the maintenance of Harding’s fully furnished apartment overseas was not sufficient to satisfy the permanent place of abode test.

On appeal, however, the Full Federal Court of Australia determined that when assessing residency of an individual, the phrase ‘permanent place of abode’ should not be interpreted by reference to the permanence of a person’s specific house or dwelling, but rather should be interpreted more widely to consider whether a person was living permanently in a particular ‘country or state”.

Under the new proposals, an individual who was a resident for the previous year but spends less than 183 days in Australia during a year, may be treated as ceasing residency if they:

-Satisfy specific date count tests on the length of their overseas employment;

-Have accommodation available to them in the place of employment for the entire overseas employment period; and

-Spend less than a certain threshold number of days (e.g., 45 days) in Australia each year while they are away.

If the outcome of these tests is that an individual is treated as ceasing residency, then they would generally be treated as a non-resident from their date of departure. The new individual tax residency rules are intended to apply from 1 July 2021, after the budget legislation receives royal assent. The rules will also be subject to Australia's double tax agreements.

18 May 2021, the Bermuda Registrar of Companies announced that it will launch the first phase of its new online company registry system, which will allow the public to view all corporate registers maintained by the Registrar of Companies, on 7 June. Statutory filings and applications can also be made online.

Migration of data to the new system is to take place from 27 May to 4 June 2021, during which time, the Registrar of Companies said it would not be able to enter any further data or accept new applications. Existing accounts on the Economic Substance portal will be carried over to the new system.

26 May 2021, Brazilian President Jair Bolsonaro brought the double tax agreement between Brazil and the United Arab Emirates (UAE) into force by promulgation of Decree No. 10,705/2021. The tax treaty was signed in November 2018 and finally passed through the Brazilian National Congress in February.

The treaty entitles residents in both contracting states to a deduction of tax credits for taxes paid in the other contracting state. It also grants ‘tax sparing’ to UAE residents that receive dividend income from Brazilian residents that are entitled to certain income tax benefits.

The treaty contains provisions relating to the OECD Base Erosion and Profit Shifting (BEPS) initiative, including a principal purpose test and a limitation on benefits clause. It also introduces a specific article covering fees for technical services, which is based on the UN Model Double Taxation Convention. The withholding tax rate for such fees is 15%.

13 May 2021, the BVI government brought the Trustee (Amendment) Act 2021, which introduces a number of amendments to strengthen its trust law regime and modernise it in line with international trust law developments, into force. The Act includes provisions relating to the variation of trusts, court jurisdiction to set aside the flawed exercise of a fiduciary power, strengthening the existing firewall provisions and introducing extra reserved powers for settlors.

The most important amendment is the addition of rules empowering the High Court to vary the terms of a trust without the consent of adult beneficiaries, if the court considers the variation to be expedient in the circumstances. Safeguards are included in the section to ensure that it is not abused, in particular that the provisions will apply only if the settlor or trustees opt into them when establishing a trust or when changing the governing law of an existing trust to BVI law. The VISTA trust legislation has also been slightly amended, as a consequence of the new provisions on variations of trust.

Statutory rules are also being enacted allowing the High Court to set aside trustees' mistakes. This will preserve the Hastings Bass rule in BVI law, following the UK Supreme Court's 2013 decision in the Pitt v Holt case.

In respect of the BVI's existing firewall provisions, which protect BVI trusts and trustees against forced heirship and matrimonial claims in foreign countries, new provisions make it clear that all questions arising in regard to a trust are to be determined by BVI law. This should ensure that any disputes over BVI trusts are determined according to the relevant principles of its own trust laws and by its own courts, while ensuring that they cannot be used as a means for settlors to evade their legal obligations to others.

In respect of reserved powers, s.86 of the existing Trustee Act is amended to make explicit that a settlor's decision to reserve powers does not invalidate the trust or prevent its terms taking effect or cause any of its property to become part of the settlor's estate on death. A further amendment makes it clear that the grant of powers by the settlor to others will also not invalidate a trust.

The Probates (Resealing) Act 2021 further expands the regime for resealing of foreign grants of probate or letters of administration by the High Court. It provides a comprehensive list of more than 60 jurisdictions that the BVI will recognise for the purposes of resealing, including all Commonwealth countries, Hong Kong and the US. Previously it was limited to a small number of jurisdictions, including the UK and certain Overseas British Territories.

13 May 2021, the Cayman Islands Monetary Authority (CIMA) announced that it was imposing discretionary administrative fines totalling CI$4,232,607.50 on Intertrust Corporate Services (Cayman) Ltd for breaches of the Anti-Money Laundering Regulations (AMLRs).

CIMA said the fines were imposed due to the firm’s “pervasive and protracted history of non-compliance with the requirements of the AMLRs and its failure to remediate these significant breaches:

-The application of customer due diligence measures;

-Failure to verify source of funds

-Failing to obtain documentary evidence on the purpose and intended nature of business relationships

-Failing to adequately perform ongoing monitoring

-Failing to identify beneficial ownership

-Failing to accurately consider all relevant risk factors.

In a public notice, CIMA said the findings were as a result of an onsite inspection. Similar failings had also been identified during previous inspections. The regulator said it was important that firms had the necessary policies in place and complied with regulation to prevent Cayman-based entities being used as conduits for financial crime. CIMA said it would be vigilant in its enforcement of the AML rules.

In February, the Cayman Islands made a high-level political commitment to work with the Financial Action Task Force (FATF) and Caribbean FATF to strengthen the effectiveness of its AML/CFT regime. Since the completion of its mutual evaluation report (MER) in November 2018, the Cayman Islands has made progress on a number of its MER recommended actions to improve effectiveness

The Cayman Islands government said it would work to implement its action plan, including by applying sanctions that were effective, proportionate and dissuasive, and taking administrative penalties and enforcement actions against obliged entities to ensure that breaches were remediated effectively and in a timely manner. It would further impose adequate and effective sanctions in cases where relevant parties (including legal persons) did not file accurate, adequate and up to date beneficial ownership information.

Amsterdam-headquartered Intertrust NV said it recognised the seriousness of the matter and was committed to make every effort to fulfil its role as gatekeeper. The notice gave a period of 30 days in which to lodge an appeal against the administrative penalty and it was engaged with counsel to consider all available options in response.

19 May 2021, the Federal Council announced that significant amendments to Swiss inheritance law to provide for increased testamentary freedom will enter into force on 1 January 2023. The reforms were approved by the Swiss parliament on 18 December 2020 and no referendum had been requested before the referendum deadline expired on 12 April.

The main intent of the new inheritance law is to give greater testamentary freedom by reducing the elements of forced heirship and to provide more flexibility in the transfer of family businesses.

The statutory entitlement (réserve légale) of descendants is to be reduced from 75% to 50% of their succession rights, while the existing 50% statutory entitlement of parents is to be abolished entirely. The statutory entitlement of a surviving spouse and registered partner is maintained at 50% of their succession right. This will enable a testator to dispose of their assets more freely and to a greater extent to the persons of their choice.

The right to dispose where there is a usufruct in favour of the surviving spouse or registered partner is increased from 25% to 50% the estate. A testator will thus be able to grant a surviving spouse or partner half the estate in full ownership and the usufruct on the other half.

In the event of a testator’s death during divorce or partnership dissolution proceedings, the surviving spouse will under certain conditions lose his or her status as a forced heir and will not be entitled to a compulsory share of the estate.

Further legislative measures to remove some existing obstacles to the transfer of a business by succession are also under consideration. The Federal Council is expected to table the relevant Bill in parliament later this year, along with revisions to the Private International Law Act to reduce the risk of conflicts of jurisdiction and conflicting decisions with other EU Member States.

6 May 2021, Advocate General Juliane Kokott issued an opinion advising the Court of Justice of the European Union (CJEU) to rule that EU free movement of capital requirements do not require member states to tax non-resident and resident investment vehicles in the same way, providing that the differential tax treatment does not result in a heavier tax burden for the non-resident.

In Allianzgi-Fonds Aevn v Autoridade Tributária e Aduaneira (Case C‑545/19), Portugal levies withholding tax on dividends distributed by resident companies when those dividends are paid to non-resident collective investment undertakings that are not subject to corporate tax in their state of residence. For collective investment vehicles resident in Portugal, however, neither withholding nor corporate tax applies. Instead, the investment vehicles are subject to quarterly ‘stamp duty’ that is charged on net assets and the dividends are taxed when distributed under Portuguese revenue tax.

Since the fundamental freedoms in EU tax law prohibit discriminatory treatment of cross-border situations ‘only’, Portugal’s Tribunal Arbitral Tributário had requested a preliminary ruling as to whether the free movement of capital required a member state to tax non-resident and resident investment vehicles according to the same tax system.

Kokott AG said that there would be a restriction on EU movement of capital only if the differential tax treatment of dividends treated non-resident corporations less favourably than resident ones. It was for the referring court, with the facts of the case before it, to ascertain whether the tax treatment in question resulted in a heavier tax burden for non-residents. Since the tax legislature generally has a certain degree of leeway in the way it structures different taxation systems, it should be sufficient if the level of taxation is not exactly identical, but only roughly comparable.

“Article 63 TFEU does not preclude national legislation under which withholding tax is levied on dividends distributed by a resident company where those dividends are distributed to a non-resident collective investment undertaking which is not subject to corporation tax in the state of residence,” said Kokott.

“This also applies if no corporation tax is levied on those dividends when they are distributed to a resident collective investment undertaking, but another taxation technique is applied which is intended to ensure that no corresponding income tax is levied until they are redistributed to the investor, and, until that point, a quarterly taxation of the total net assets of the resident collective investment undertaking is levied instead.”

The full opinion can be accessed at https://curia.europa.eu/juris/document/document.jsf?text=&docid=240845&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=1956366#Footref10

12 May 2021, the General Court of the European Union annulled a European Commission decision finding that Amazon owed Luxembourg €250 million in unpaid taxes after determining that the Commission had failed to demonstrate that a Luxembourg tax ruling supporting Amazon’s transfer pricing methodology had created a selective advantage in favour of a Luxembourg subsidiary of the Amazon group under EU state aid law.

In Cases T-816/17 Luxembourg v Commission and T-318/18 Amazon EU Sàrl and Amazon.com, Inc. v Commission, the Amazon group had pursued its commercial activities in Europe through two companies established in Luxembourg – Amazon Europe Holding Technologies SCS (LuxSCS)and Amazon EU Sàrl (LuxOpCo). LuxSCS was a Luxembourg limited partnership of which the partners were US entities of the Amazon group, while LuxOpCo was a wholly owned subsidiary of LuxSCS.

Between 2006 and 2014, LuxSCS held the intangible assets necessary for the Amazon group’s activities in Europe. It concluded various agreements with US entities of the Amazon group, including licence and assignment buy-in agreements for pre-existing intellectual property with Amazon Technologies, Inc. (ATI) and a cost-sharing agreement for the development of those intangible assets with ATI and a second entity, A9.com, Inc.

Under these agreements, LuxSCS obtained the right to exploit certain IP rights, consisting of technology, customer data and trademarks and to sub-licence those intangible assets. LuxOpCo, as the principal operator of the Amazon group’s business in Europe, undertook to pay a royalty to LuxSCS in return for the use of the intangible assets.

On 6 November 2003, the Amazon group requested confirmation from the Luxembourg tax authorities that the ‘arm’s length’ royalty to be paid by LuxOpCo to LuxSCS should be calculated according to the transactional net margin (TNM) method, using LuxOpCo as ‘the tested party’. The Luxembourg tax authorities issued a tax ruling confirming that LuxSCS was not subject to Luxembourg corporate income tax because of its legal form and endorsing the TNM method.

In 2017, the European Commission held that the tax ruling, and its annual implementation from 2006 to 2014, constituted State aid. Specifically, the Commission found that the royalty paid by LuxOpCo to LuxSCS during the relevant period – calculated in accordance with TNM method – was too high, such that LuxOpCo’s remuneration and, consequently, its tax base had been artificially reduced. Having found that the tax ruling had been implemented by Luxembourg without having been notified to the Commission in advance, the Commission ordered the recovery from LuxOpCo of the aid that was unlawful and incompatible with the internal market.

Luxembourg and the Amazon group each brought an action seeking annulment of the decision and contesting, inter alia, each of the findings on which the Commission had based its reasoning as regards the existence of a selective advantage.

The General Court upheld these appeals. It noted that it was settled case law that to determine whether there was a tax advantage, the position of the recipient as a result of the application of the measure at issue should be compared with his or her position in its absence and under the normal rules of taxation. It further noted that, in examining the method of calculating an integrated company’s taxable income endorsed by a tax ruling, the Commission would have to demonstrate that methodological errors had prevented a reliable approximation of an arm’s length outcome being reached.

The Court found the Commission’s analysis that LuxSCS was merely a passive holder of the intangible assets was incorrect in several respects: it had not taken due account of the functions performed by LuxSCS for the purposes of exploiting the intangible assets in question or the risks it had borne; nor had it demonstrated that it was easier to find undertakings comparable to LuxSCS than undertakings comparable to LuxOpCo, or that choosing LuxSCS as the tested entity would have made it possible to obtain more reliable comparison data. The Commission, it held, had failed to establish that the Luxembourg tax authorities had incorrectly chosen LuxOpCo as the ‘tested party’ in order to determine the amount of the royalty.

Secondly, the Court held that, even if the ‘arm’s length’ royalty had been calculated using LuxSCS as the ‘tested party’ in the application of the TNM, the Commission had not established the existence of an advantage. Its assertion that LuxSCS’s remuneration could be calculated on the basis of the mere passing on of the development costs of the intangible assets borne in relation to the Buy-In agreements and the cost sharing agreement, without in any way taking into account the subsequent increase in value of those intangible assets, was unfounded.

Thirdly, the Court considered that the Commission was mistaken in evaluating the remuneration that LuxSCS could expect, in the light of the arm’s length principle, for the functions linked to maintaining its ownership of the intangible assets at issue. These functions, it said, could not be treated in the same way as the supply of ‘low value adding’ services, such that the Commission’s application of a mark-up was inappropriate.

In view of all these considerations, the General Court concluded that the Commission had failed to establish that LuxOpCo’s tax burden had been artificially reduced as a result of an overpricing of the royalty. After examining the three subsidiary findings of an advantage, the Court also concluded that the Commission had failed to establish that the methodological errors identified had necessarily led to an undervaluation of the remuneration that LuxOpCo would have received under market conditions.

Although the Commission could validly consider that certain functions performed by LuxOpCo in connection with the intangible assets went beyond mere ‘management’ functions, this did not demonstrate that LuxOpCo’s functions, as identified by the Commission, should necessarily have led to a higher remuneration for LuxOpCo. Likewise, even if they were erroneous, the Commission had failed to satisfy the evidential requirements in respect of both the choice of the most appropriate profit level indicator and the ceiling mechanism endorsed by the tax ruling for the purposes of determining LuxOpCo’s taxable income.

The General Court therefore concluded that none of the findings set out by the Commission in the contested decision were sufficient to demonstrate the existence of an advantage for the purposes of Article 107(1) TFEU and, as a consequence, it annulled the contested decision in its entirety.

The full judgment can be accessed at https://curia.europa.eu/juris/document/document.jsf?text=&docid=241188&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=519707

12 May 2021, the General Court of the European Union found the existence of a tax advantage in tax rulings granted by Luxembourg to companies in Engie group, the French multinational energy utility, which was predominantly the result of the non-application of a national measure relating to abuse of law.

In Luxembourg v Commission T-516/18 and Engie, Engie Global LNG Holding Sàrl and Engie Invest International SA v Commission T-525/18, the Luxembourg tax authority had, between 2008 and 2014, adopted two sets of tax rulings in connection with intra-group financing structures relating to the transfer of activities between companies of the Engie group resident in Luxembourg.

The transactions carried out under each structure were implemented in three successive stages: the holding company transferred shares to a subsidiary; the subsidiary took out an interest-free mandatorily convertible loan (ZORA) with an intermediary to finance the share transfer; the intermediary financed the loan by entering into a prepaid forward sale contract with the holding company under which the holding company paid an amount equal to the nominal amount of the loan to the intermediary in exchange for the acquisition of the rights to the shares that the subsidiary would issue on conversion of the ZORA.

If the subsidiary made profits during the life of the ZORA, the holding company would own the right to all the shares issued, which would incorporate the value of any profits made as well as the nominal amount of the loan. Under the contested tax rulings, only the subsidiary was taxed on a margin agreed with the Luxembourg tax administration.

After requesting information about the contested tax rulings from the Luxembourg authorities, the European Commission opened a formal investigation procedure and determined that, as a result of the structures, almost all of the profits made by the subsidiaries established in Luxembourg had not been taxed.

It concluded, in a decision adopted in 2018, that the tax rulings therefore constituted illegal State aid that was incompatible with the internal market and had to be recovered from the recipients by the Luxembourg authorities The Luxembourg government and the Engie group companies brought an action before the General Court seeking annulment of the Commission’s decision.

In its judgment, the General Court approved the Commission’s approach of looking at the economic and fiscal reality of a complex intra-group financing structure. It also found that the Commission was right to determine that a selective advantage was conferred as a result of the non-application of national provisions relating to abuse of law.

The General Court noted that, when examining whether the contested tax rulings complied with State aid rules, the Commission was not engaging in any ‘tax harmonisation in disguise’ but was exercising the power conferred on it by EU law to ensure compliance with Article 107 of the Treaty on the Functioning of the European Union (TFEU).

It also noted that the Commission had sought to demonstrate that the contested tax rulings led to a reduction in the amount of tax which would normally have been payable under the ordinary tax regime and that, consequently, those measures constituted a derogation from tax rules applicable to other taxpayers in the same factual and legal situation.

The General Court said it was important to go beyond the legal form of such a sophisticated financing structure in order to look at the economic and fiscal reality. It noted that the contested tax rulings approved various transactions that constituted a system for implementing, in a circular and interdependent fashion, the transfer of a business activity and its financing between three companies belonging to the same group.

The Commission was therefore entitled to determine that the Luxembourg tax administration had derogated from the reference framework by confirming the exemption, at the level of the holding companies, of participations that corresponded, from an economic perspective, to an amount that was deducted, as part of an intra-group financing structure, as expenses at the level of the subsidiaries.

In view of the links established by the Commission within that structure, the General Court found that the Commission did not err in law by looking at the combined effect, at the level of the holding companies, of the deductibility of income at the level of a subsidiary and the subsequent exemption of that income at the level of its parent company.

After rejecting arguments alleging, first, that the Commission had not established an infringement of the national tax provisions and, secondly, that no companies had been identified which would be refused identical tax treatment for an identical financing structure, the General Court concluded that the Commission had demonstrated the selectivity of the contested tax rulings in the light of the narrow reference framework.

In the contested decision, the Commission also investigated the selectivity of the contested tax rulings in the light of the provision relating to abuse of law, as an integral part of the Luxembourg corporate income tax system. In view of the unprecedented nature of the reasoning seeking to demonstrate the selectivity of the contested tax rulings, the General Court considered it appropriate to examine the merits of the arguments that were put forward against it.

In so far as the Commission ascertained that the criteria laid down by Luxembourg law in order to find that there has been an abuse of law were met, the General Court found that it could not be disputed that the Engie group had received preferential tax treatment owing to the non-application, in the contested tax rulings, of the provision relating to abuse of law.

In the light of the objective pursued by the provision relating to abuse of law – to combat abusive practices in tax matters – Engie and, in particular, the holding companies were in the same factual and legal situation as all Luxembourg taxpayers, who could not reasonably expect to benefit as well from the non-application of the provision relating to abuse of law in cases where the conditions for its application had been satisfied. The General Court therefore held that the Commission had demonstrated to the requisite legal standard a derogation from the reference framework comprising the provision relating to abuse of law.

The full text of the judgment can be accessed (in French) at https://eur-lex.europa.eu/legal-content/FR/TXT/HTML/?uri=CELEX:62018TJ0516&from=en

4 May 2021, the European Commission issued a recommendation that the UK should not be allowed to rejoin the Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

The Lugano Convention applied to the UK until 31 January 2020 via its EU membership. For the duration of the transition period, which ended on 31 December 2020, the other parties to the Lugano Convention had been notified by the EU that the UK was to be treated as a member state for the purposes of international agreements to which the EU was a party. On 8 April 2020, the UK applied to accede to the Convention in its own right. It also proposed to extend the application of the Convention to Gibraltar.

The final decision on the UK’s application rests with the European Council, but the Commission’s assessment is significant. Three members of the European Free Trade Association (EFTA) – Switzerland, Norway and Iceland – had already said they were willing to support the UK’s application.

In making its non-binding, the Commission said: ‘For the European Union, the Lugano Convention is a flanking measure of the internal market and relates to the EU-EFTA/EEA context. In relation to all other third countries the consistent policy of the EU is to promote cooperation within the framework of the multilateral Hague Conventions.

“The UK is a third country without a special link to the internal market. Therefore, there is no reason for the EU to depart from its general approach in relation to the UK. Consequently, the Hague Conventions should provide the framework for future cooperation between the EU and the UK in the field of civil judicial cooperation. Stakeholders concerned, and in particular practitioners engaged in cross-border contractual matters involving the EU, should take this into account when making a choice of international jurisdiction.”

The Commission has now informed the European Parliament and the Council of its assessment, and will give them an opportunity to express their views, before it will inform the Lugano Depositary of the final decision.

18 May 2021, the European Commission adopted a Communication on Business Taxation for the 21st century to promote a new business tax system in the EU. It sets out both a long-term and short-term vision to support Europe's recovery from the COVID-19 pandemic and to ensure adequate public revenues over the coming years. The Communication takes account of the progress made in the G20/OECD discussions on global tax reform.

First, the Commission will present by 2023 a new framework for business taxation in the EU, which will reduce administrative burdens, remove tax obstacles and create a more business-friendly environment in the Single Market. The Business in Europe: Framework for Income Taxation (BEFIT) will provide a will provide a single corporate tax rulebook for the EU, based on a formulary apportionment and a common tax base.

BEFIT will replace the pending proposal for a Common Consolidated Corporate Tax Base, which will be withdrawn. The Commission will launch a broader reflection on the future of taxation in the EU, which will culminate in a Tax Symposium on the ‘EU tax mix on the road to 2050’ in 2022.

The Communication also defines a tax agenda for the next two years, with measures that promote productive investment and entrepreneurship, better safeguard national revenues and support the green and digital transitions. This builds on the ambitious roadmap set out in the Tax Action Plan, presented by the Commission last summer and will include:

-Supporting business, and particularly SMEs, in their recovery, by recommending member states to allow loss carry back for businesses to at least the previous fiscal year;

-Addressing the debt-equity bias in the current corporate taxation, which treats debt financing of companies more favourably than equity financing. This proposal will aim to encourage companies to finance their activities through equity rather than turning to debt;

-Ensuring greater public transparency on tax paid by businesses, by proposing that certain large companies operating in the EU should have to publish their effective tax rates;

-Introducing new monitoring and reporting requirements for shell companies, so that tax authorities have better oversight and can better respond to aggressive tax planning through these entities.

Trade Commissioner Valdis Dombrovskis said: “Taxation needs to keep up to speed with our evolving economies and priorities. Our tax rules should support an inclusive recovery, be transparent and close the door on tax avoidance. They should also be efficient for businesses big and small. Today's Communication will set the foundations for a corporate tax system in Europe that is fit for the 21st century, helping us to build a fairer and more sustainable society.”

In addition to the corporate tax reforms set out in the Communication, the Commission will soon present measures to ensure fair taxation in the digital economy. It will also soon come forward with a review of the Energy Taxation Directive and the Carbon Border Adjustment Mechanism (CBAM), in the context of the ‘FitFor55’ package and European Green Deal.

The Commission launched an initiative on 20 May to address the use of ‘shell companies’ in international arrangements to reduce income taxes. The initiative hopes to define substance requirements for arrangements operating in the EU.

The initiative defines shell companies as “legal entities with no or only minimal substance, performing no or very little economic activity continue to pose a risk of being used in aggressive tax planning structures.”

The Commission said that while there are measures addressing the substance of legal entities in the context of specific preferential tax regimes, there are no EU legislative measures defining substance requirements for tax purposes within the EU.

In addition to reviewing current national practices and the role of EU “soft law” instruments, the Commission said it was considering “several options” for a new legislative initiative in this area, which would define tax-related substance requirements for legal entities and arrangements operating in the EU. It would also include mechanisms for enhanced cooperation, monitoring and enforcement. Comments were invited by 17 June.

29 April 2021, the US Financial Crimes Enforcement Network (FinCEN) announced the renewal of its Geographic Targeting Orders (GTOs) that require US title insurance companies to identify the natural persons behind shell companies used in all-cash purchases of residential real estate. The terms began on 5 May and will end on 31 October.

The GTOs are identical to those introduced in November 2020 and cover certain counties within the following major US metropolitan areas:  Boston; Chicago; Dallas-Fort Worth; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco and Seattle.

FinCEN said the GTOs continued to provide valuable data on the purchase of residential real estate by persons possibly involved in various illicit enterprises and their renewal would further assist in tracking illicit funds and other criminal or illicit activity, as well as informing FinCEN’s future regulatory efforts in this sector.

31 May 2021, Israel and the UAE signed a double tax agreement (DTA) to enable further influx of investment and trade between the two countries, in line with the aim to unlock economic potential in the region. It is expected that, following ratification, the treaty will come into effect on 1 January 2022.

The treaty follows the ‘normalisation agreement’ – officially the Abraham Accords Peace – that was agreed between the two countries last August, which opened diplomatic relations for the first time since the creation of Israel, and a Mutual Economic Cooperation Memorandum of Understanding signed in Tel Aviv in October.

The agreement, which is in line with the OECD Model Convention, contains tax information exchange and anti-abuse provisions, and provides for withholding tax rates as follows:

-Dividends generally 15%, but only 5% for dividends paid to a corporate shareholder that held at least 10% of the payor for the preceding 365 days;

-Interest generally 15%, but only 5% for interest paid to a corporate or individual shareholder holding at least 50% of the payor;

-Royalties generally 12%.

The UAE Ministry of Finance said the tax treaty would assist: the promotion of development goals and diversification of sources of national income; the removal of barriers relating to cross-border trade and investment flows; the elimination of double taxation, additional taxes and fiscal evasion; and the encouragement of the exchange of goods, services and capital.

18 May 2021, the Jersey government tabled a draft of the Taxation (Partnerships – Economic Substance) (Jersey) Law with the intention of bringing certain partnerships carrying on a relevant activity within scope of the economic substance framework.

The move follows commitments made to the EU Code of Conduct Group to extend the economic substance requirements that currently apply to certain Jersey companies to partnerships carrying on a relevant activity. Partnerships that are collective investment funds continue to be out of scope.

The term partnerships includes: general partnerships formed in Jersey; Jersey limited partnerships; Jersey limited liability partnerships; and non-Jersey limited partnerships that have their place of effective management in Jersey.

Where a Jersey partnership has its effective place of management in a jurisdiction where the highest company or individual income tax rate is lower than 10% or where the partnership is not required to satisfy a test that is substantially the same as the Jersey economic substance test, it will also be in scope of the new law.

The relevant activities of a partnership in scope are: banking business; distribution and service centre business; financing and leasing business; fund management business; headquarters business; holding partnership business; insurance business; intellectual property business; or shipping business.

Any person who is a (non-managing) partner of a partnership is not required to meet the economic substance requirements: rather substance compliance will be considered at the partnership level and largely by reference to the activities of the governing body of the partnership, such as the general partner of a limited partnership.

The substance requirements are broadly similar to those for relevant companies. Partnerships in scope will be required to be managed in Jersey and to carry on their core income generating activities in Jersey, with an adequate number of people, expenditure and physical assets in the island.

Partnerships in existence as at 30 June 2021 will be in scope for accounting periods commencing on or after 1 January 2022 and partnerships formed on or after 1 July 2021 will be in scope from the date of their formation.

14 May 2021, Switzerland's largest insurer Swiss Life Holding agreed to pay USD77.4 million and enter into a three-year deferred prosecution agreement (DPA) to resolve a US criminal case in which it was accused of helping wealthy American clients evade taxes by concealing around USD1.5 billion in offshore insurance policies.

The US Department of Justice filed a criminal information charging Swiss Life Holding and three subsidiaries – Swiss Life (Liechtenstein), Swiss Life (Singapore) and Swiss Life (Luxembourg) – with conspiring with US taxpayers and others to conceal from the IRS more than USD1.452 billion in offshore insurance policies, including more than 1,600 insurance wrapper policies, and related policy investment accounts in banks around the world and the income generated in these accounts.

It said that between 2005 to 2014, Swiss Life and its subsidiaries maintained approximately 1,608 Private Placement Life Insurance (PPLI) policies, known as ‘insurance wrappers’, that were structured to assist US taxpayers to evading US taxes and reporting requirements and to conceal the ownership of offshore assets.

After 2008, when the PPLI carriers became aware that UBS and other Swiss banks were terminating or re-evaluating their business relationships with US clients, certain management and sales personnel within the Swiss Life PPLI Business Unit viewed these developments as a business opportunity to onboarding US clients without regard to whether they were declared or undeclared.

Because Swiss Life would be identified as the owner of the policy investment accounts rather than the US policyholder and/or ultimate beneficial owner of the assets, the insurance wrapper policies could be and were used to hide undeclared assets and income and to evade taxes. In turn, Swiss Life grew its PPLI business and earned fees on those policies.

“Swiss Life and its subsidiaries sought out and offered their services to US taxpayers to help them become US tax evaders,” said US Attorney Audrey Strauss for the Southern District of New York. “The Swiss Life entities offered private placement life insurance policies and related investment accounts to US customers and provided services that concealed the policies and other assets from the IRS. Indeed, the Swiss Life entities saw US authorities’ stepped-up offshore tax enforcement as an opportunity to pitch themselves to tax-evading US customers as an alternative to Swiss banks.”

The Swiss Life entities agreed to pay a total of $77,374,337 to the US Treasury, which includes $16,345,454 restitution for unpaid taxes, $35,782,375 in forfeiture of all gross fees and a penalty of $25,246,508.

Under the DPA, the Swiss Life entities agreed to accept responsibility for their criminal conduct, refrain from all future criminal conduct, take enhanced remedial measures and continue to cooperate fully with further investigations into hidden insurance policies and related policy investment accounts.

They are also required to disclose information consistent with the Department of Justice’s Swiss Bank Programme relating to accounts closed between 1 January 2008 and 31 December 2019. The DPA provides no protection from criminal or civil prosecution for any individuals.

27 May 2021, Malta was re-rated from ‘partially compliant’ to ‘largely compliant” and ‘compliant’ in respect of nine Financial Action Task Force (FATF) Recommendations to improve measures to combat money laundering and terrorist financing, according to a follow-up report published by the EU Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL).

As a result of assessment in 2019, Malta was requested to report to MONEYVAL under the enhanced follow-up procedure. Deficiencies with technical compliance were identified with respect to application of some of the preventative measures, the transparency of legal entities, supervision and international co-operation.

MONEYVAL said it had examined a range of legislative, regulatory and institutional measures implemented by Malta to address these deficiencies and the positive steps taken by the authorities had prompted it to assign Malta higher international compliance ratings in these areas.

The follow-up report also covered implementation of new international requirements for virtual assets, which cover the most prominent virtual currencies and the providers of these assets. Malta was among the first MONEYVAL countries to implement the regulatory and institutional framework and conduct assessment of ML/TF (Money Laundering and Terrorist Financing) risks in this area. Malta’s rating on the implementation of this Recommendation has also been upgraded from ‘partially compliant’ to ‘largely compliant.

As a result, MONEYVAL said that Malta had met the general expectation for countries to have addressed most, if not all, of the technical compliance deficiencies after the adoption of the mutual evaluation report, within a two-year period.

Malta had achieved full compliance with 12 of the 40 FATF Recommendations constituting the international AML/CFT (Anti-Money Laundering and Countering the Financing of Terrorism) standard. Malta retained minor deficiencies in the implementation of 28 Recommendations where it had been rated ‘largely compliant’ but it no longer has ‘non-compliant’ or ‘partially compliant’ ratings.

The MONEYVAL follow-up report assesses legislative, regulatory and institutional reforms but does not assess the degree to which the implemented reforms have been effectively implemented. MONEYVAL said Malta would therefore remain in enhanced follow-up and would report back to MONEYVAL on further progress to strengthen its implementation of AML/CFT measures in two years.

MONEYVAL is a permanent monitoring body of the Council of Europe entrusted with the task of assessing compliance with the principal international standards to counter money laundering and the financing of terrorism and the effectiveness of their implementation, as well as with the task of making recommendations to national authorities in respect of necessary improvements to their systems.

11 May 2021, the OECD published a new report assessing the role of inheritance, estate and gift taxes across the 37 OECD member states, particularly in the context of persistently high wealth inequality and new pressures on public finances linked to the COVID-19 pandemic.

The report highlights the high degree of wealth concentration in OECD countries as well as the unequal distribution of wealth transfers, which further reinforces inequality. On average, the inheritances and gifts reported by the top 20% wealthiest households are close to 50 times higher than those reported by the bottom 20% of households.

The report points out that inheritance taxes – particularly those that target relatively high levels of wealth transfers – can reduce wealth concentration and enhance equality of opportunity. But while a majority of OECD countries – 24 in total – currently levy inheritance or estate taxes, only 0.5% of total tax revenues are sourced from inheritance, estate and gift taxes on average across the countries that levy them.

High tax exemption thresholds and tax reliefs on transfers of specific assets – main residence, business and farm assets, pension assets and life insurance policies – are the key factor limiting revenue from these taxes, according to the report. In a number of countries, inheritance and estate taxes can also largely be avoided through in-life gifts, due to their more favourable tax treatment.

These provisions reduce the number of wealth transfers that are subject to taxation, sometimes significantly so. For instance, across eight countries with available data, the share of estates subject to inheritance taxes was lowest in the US (0.2%) and the UK (3.9%) and was highest in the Swiss canton of Zurich (12.7%) and the Brussels region of Belgium (48%).

“While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives.”

The report underlines the wide variation in inheritance tax design across countries. The level of wealth that parents can transfer to their children tax-free ranges from close to USD17,000 in Belgium to more than USD11 million in the US. Tax rates also differ widely.

The report proposes a range of reform options to enhance the revenue potential, efficiency and fairness of inheritance, estate and gift taxes, while noting that reforms will depend on country-specific circumstances.

Levying an inheritance tax on the overall amount of wealth received by beneficiaries over their lifetime through both gifts and inheritances would be particularly equitable and reduce avoidance opportunities but could increase administrative and compliance costs. Scaling back regressive tax reliefs, better aligning the tax treatment of gifts and inheritances and preventing avoidance and evasion are also identified as policy priorities.

“Inheritance taxation is not a silver bullet, however,” said Saint-Amans. “Other reforms, particularly in relation to the taxation of personal capital income and capital gains, are key to ensuring that tax systems help reduce inequality. The OECD will be undertaking new work in that area, in particular as the progress made on international tax transparency and the exchange of information is giving countries a unique opportunity to revisit personal capital taxation.”

26 May 2021, President Vladimir Putin signed a law denouncing Russia’s tax treaty with the Netherlands, which was signed in Moscow in 1996 and entered into force in 1998. Assuming Russia gives notice by 30 June, termination will be effective as of 1 January 2022.

Putin announced in March 2020 that Russia was seeking to increase withholding tax rates on dividends and interest to 15% in respect of transactions through conduit jurisdictions that are used to shift capital from Russia – Cyprus, Luxembourg, Malta, the Netherlands, Switzerland, Hong Kong and Singapore. If this was not agreed, Russia would unilaterally terminate its treaties.

The Netherlands was offered similar terms to those already agreed last year by Cyprus, Luxembourg and Malta, but the Dutch government insisted that the list of benefits should be extended to include companies carrying out real business, as well as public companies, while implementing anti-abuse measures to prevent treaty abuse.

The current tax treaty allows for a 5% dividend withholding tax rate as a general rule. If the treaty is terminated, dividend payments from Russia to the Netherlands will instead be subject to 15% withholding tax, while interest and royalties will be taxed at a rate of 20% instead of 0%.

4 May 2021, the Saudi Cabinet approved a measure to merge the General Authority of Zakat & Tax (GAZT) with the General Authority of Customs to form an umbrella authority named the ‘Zakat, Tax and Customs Authority’ (ZTCA). The move forms part of Saudi efforts to restructure government agencies to speed the implementation of the ‘Vision 2030’ national transformation plan.

“Saudi Arabia’s newly formed ZTCA will boost security and enhance the business environment while facilitating trade and procedures for Zakat, taxes, and customs transactions,” said Minister of Finance Mohamed Al Jadaan. “The merger of the Zakat and customs entities will raise the integration level between the two sides and develop a unified platform that is based on modern technologies to save time and cost for customers.”

3 May 2021, Singapore and Serbia signed an agreement for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance to boost trade and economic flows between the two countries. It will enter into force after ratification by both countries.

The treaty clarifies the taxing rights of both countries on all forms of income flows arising from cross-border business activities in order to minimise potential double taxation and lower barriers to cross-border investment.

Withholding tax rates for dividends are 5% if a shareholding is 25% or less, and 10% in all other cases.

Withholding tax rates are 10% in respect of interest and 5% or 10% in respect of royalties depending on the nature of the royalties.

25 May 2021, Austrian banker Peter Weinzierl was arrested in the UK at the request of the US on criminal charges related to his alleged participation in a conspiracy to launder hundreds of millions of dollars through the US financial system as part of a massive money laundering scheme involving Brazil-based global construction conglomerate Odebrecht SA.

Weinzierl is a former chief executive of Meinl Bank, later renamed Anglo-Austrian Bank (AAB), and deputy chairman at the House of Julius Meinl.  Co-defendant Austrian Alexander Waldstein, an officer at Meinl Bank, remains at large. Both were also directors of an affiliated bank in Antigua, Meinl Bank Antigua.

According to the indictment, between approximately 2006 and 2016, Weinzierl and Waldstein conspired with Odebrecht and others to launder money in a scheme to defraud Brazil’s tax authority of more than $100 million in taxes and to create off-books slush funds used by Odebrecht to pay hundreds of millions of dollars in bribes for the benefit of public officials around the world.

Shell company bank accounts involved in the scheme and used to pay bribes to foreign officials were held at the Antiguan bank that Weinzierl, Waldstein, and their co-conspirators controlled and used to promote the scheme. They also caused millions of dollars in criminal proceeds to be transferred from the Antiguan bank to a US brokerage account to purchase US Treasury securities and corporate stocks and bonds on US exchanges.

Weinzierl and Waldstein are charged with one count of conspiracy to commit money laundering and two counts of international promotional money laundering. Weinzierl is also charged with one count of engaging in a transaction in criminally derived property.

Bank Meinl had rebranded as AAB in June 2019. The European Central Bank terminated the banking licence of AAB in November 2019 amid ongoing concerns over compliance failures and allegations of money laundering. It filed for insolvency at the Vienna commercial court in March 2020.

20 May 2021, the US Department of the Treasury issued the American Families Plan Tax Compliance Agenda, a 22-page report that includes a proposal that would require taxpayers to report cryptocurrency transactions with a fair market value of USD10,000 or more to the Internal Review Service (IRS), in accordance with the current tax reporting requirements for cash transactions. This would apply to cryptocurrency and cryptoasset exchange accounts, as well as payment-service accounts that accept cryptocurrency.

Published in support President Biden’s ‘American Families Plan (AFP), the report noted that the IRS has already identified cryptocurrency transactions as an enforcement priority and recently included a virtual currency reporting question on the individual tax return, Form 1040.

The report observed that virtual currencies, which have grown to USD2 trillion in market capitalisation, were a significant concern to the IRS. It also noted that cryptocurrency poses a significant detection problem for the IRS by facilitating tax evasion.

While cryptocurrency transactions currently constituted a relatively small portion of business income, cryptocurrency transactions were likely to rise in importance in the next decade. The report recognised that comprehensive tax reporting on cryptocurrency was necessary to minimise the incentives and opportunity for taxpayers to shift income out of the current information reporting requirements.

To address this, the Biden Administration is proposing “additional resources for the IRS to address the growth of cryptoassets”, as well as enhanced reporting requirements for domestic and foreign financial accounts that specifically address cryptocurrency. Financial institutions, including “cryptoasset exchange accounts and payment service accounts that accept cryptocurrencies” would be required to submit third-party annual reports of all “gross inflows and outflows” from business and personal accounts to the IRS.

The Biden Administration is seeking USD80 billion in additional funding so that the Treasury and IRS can, among other things, hire “new specialised enforcement staff” and “revitalise the IRS’s examination of large corporations, partnerships, and global high-wealth and high-income individuals.” It also plans to upgrade the IRS’ IT systems to develop “machine learning capabilities [that] will enable the IRS to leverage the information it collects to better identify tax returns for compliance review.”