Offshore Survey – January 2006 by Christopher Owen
Dubai brings Trust Law into force The Trust Law, DIFC Law No. 11 of 2005, which provides a fundamental framework for the creation of trusts in the Dubai International Financial Centre, was enacted by His Highness Sheikh Maktoum Bin Rashid Al Maktoum, Ruler of Dubai, on 14 November 2005. The Law comprises ten major parts and provides for matters such as choice of governing law, place of administration, creation, validity and modification of a DIFC trust, office of trustee, and duties and powers of trustees. ‘The adoption of a legal framework for the creation of trusts will add an important new business dimension to the DIFC,? said Dubai Financial Services Authority (DFSA) chief executive David Knott. ?This proposal was issued for public comment in August and the new Trust Law reflects positive comments received from the financial and professional services sectors. Those sectors can now develop their trust services with additional certainty and flexibility within the DIFC.? The DFSA also released, on 16 October, a consultative draft Collective Investment Law to provide a comprehensive framework for the regulation of collective investments in the DIFC. This Law has 14 parts dealing with general law, collective investment funds, operators of domestic funds, oversight of domestic funds, auditors of domestic funds, prospectus requirements for domestic funds, registration of domestic funds, exemption of domestic funds, alteration to a domestic fund, transfer schemes and winding up of domestic funds, DFSA powers in relation to a fund, the regulatory appeals committee, the financial markets tribunal and miscellaneous affairs. ?The adoption of a legal framework for the regulation of collective investments will add clarity and certainty, and provide the financial and professional services sectors with additional flexibility in client service delivery,? said Knott.Luxembourg signs tax treaty with United Arab Emirates Luxembourg Minister of Economy Jeannot Krecke and United Arab Emirates Minister of Finance & Industry Mohammad bin Kharbash signed an income tax treaty in Dubai on 21 November 2005. The signing of the treaty, initialed on 5 May, coincided with the opening of the Dubai office of the Luxembourg Board of Economic Development, Trade & Investment.UK approaches Bermuda on EU Savings Tax Bermuda’s Minister of Finance Paula Cox told the island’s parliament that her department had been approached by the UK government to begin discussions about Bermuda adopting measures to apply the EU Savings Tax Directive, which came into force on 1 July 2005. Bermuda was the only British overseas territory not to be included in the Directive for the purposes of exchanging information on EU citizen’s savings accounts with their home member state’s tax authorities. It is understood that Bermuda was left out only because EU draftsmen thought that it was in the Caribbean. While Bermuda and other financial centres such as Singapore and Hong Kong remain outside the Directive, Cox said the long process of negotiation resulted in a ?complex set of rules which have had unanticipated outcomes? for funds and collective investment schemes. ?The upshot is that even though Bermuda is outside of the Directive, the manner in which some countries have applied ?their home rules? which give effect to the Directive has impacted negatively on funds domiciled in Bermuda but whose paying agents are located in a country subject to the Directive.? Some European countries, notably Switzerland and Ireland, have included Bermuda in the scope of the Directive and are withholding 35% tax, putting Bermuda funds at a considerable disadvantage. Bermuda?s opposition leader Grant Gibbons told the House that up to 100 funds had already moved out of Bermuda and called for clarity on the government?s policy.Hong Kong and China open tax treaty talks Officials from Hong Kong’s Inland Revenue Department met with their People’s Republic of China (PRC) counterparts in September for preliminary discussions to expand and update the 1998 Income Tax Memorandum & Arrangement between China and Hong Kong. Hong Kong is seeking to negotiate a comprehensive tax treaty in order to clarify the tax rules and ease the tax burden for the growing number of companies based in the territory, which are doing business with the mainland. Under the existing 1998 tax agreement, Hong Kong firms with manufacturing operations in China are permitted to split their profits equally between the two jurisdictions, while individuals are granted relief from double taxation. But the tax agreement does not currently apply to firms in the service industry, nor does it extend to withholding taxes on interest, royalties and dividends. While this is likely to result in considerable tax savings for Hong Kong-based firms doing business in China, a comprehensive new agreement is likely to include a tax information exchange provision, which could mean increased scrutiny from the Chinese tax authorities.India-Mauritius tax treaty may be reviewed India and Mauritius held a first round of discussions on a Comprehensive Economic Co-operation Partnership Agreement (CECPA) in August. As part of the ensuing talks, India has proposed a re-negotiation of the existing India-Mauritius tax treaty so as to include safeguards against third country residents from enjoying benefits under the treaty. India has informed Mauritius that all aspects of the CECPA relating to preferential trade agreement, free trade agreement, tax treaty, customs co-operation agreement and investment protection agreement should be taken up for discussion. The move follows the recent signing of the India-Singapore (CECA), which threatens to reduce the importance of Mauritius as the investment gateway to India. If Mauritius agrees to the re-negotiation of the tax treaty, India may push to incorporate the “limitation on benefits” clause to regulate the usage of conduit companies for claiming treaty benefits. The recently amended India-Singapore tax treaty provides for a limited version of “limitation on benefits” clause.Canadian Court uses treaty tiebreaker rules for residence The Tax Court of Canada has applied treaty tiebreaker rules to determine an individual taxpayer’s country of residence in two recent decisions. In Allchin v The Queen of 8 April 2005 and Yoon v The Queen of 22 July, it considered residency under the 1980 Canada-US tax treaty and the 1980 Canada-Republic of Korea treaty, respectively. The main issue in each case was whether the taxpayer was resident in Canada during the years in question, and was therefore subject to the Canadian tax on worldwide income. In both decisions, residency was determined on the basis of the relevant treaty’s third tiebreaker rule ? the location of the individual’s “habitual abode.” In Allchin, the taxpayer, a Canadian citizen and US green card holder, was reassessed for her 1993-1995 tax years on the basis that she was a resident of Canada. During the years in question, she was living and working in the US and filed US tax returns as a US resident, but maintained substantial connections with Canada. The Tax Court of Canada affirmed the assessments. But on appeal, the Federal Court of Appeal held that the Tax Court judge failed to consider that, as a green card holder, Allchin could also have been a resident of the US. An analysis under the treaty tiebreaker rules was therefore required. The matter was referred back to the Tax Court for redetermination. The first two tiebreaker rules in the treaty ? determining a taxpayer?s permanent home and centre of vital interests ? were deemed to be inconclusive. The Tax Court therefore moved to the third tiebreaker rule and having considered the number of days the taxpayer spent in Canada and the US, along with the nature of the taxpayer’s lifestyle and activities in the US, it concluded that the taxpayer’s habitual abode during the years in question was in the US. In Yoon, the taxpayer was born and raised in South Korea. In 1975, she moved to Canada, married, and became a Canadian citizen. In 1984 she and her two children moved back to South Korea, where she rented a home. Her husband remained in Canada, where they had bought a home and planned to retire. During the tax year in question, Yoon was employed in South Korea and had social, cultural, and religious connections there. The Tax Court maintained that a finding that she was not resident in Canada during that period was sufficient to dispose of the appeal but, because both sides raised the possibility of dual residency, the tiebreaker rules in the Canada-Republic of Korea treaty were addressed. The OECD commentary states that habitual abode means “the State where (the individual) stays more frequently.” Because Yoon spent more days in South Korea than in Canada during the year in question, her habitual abode was found to be in South Korea.Hong Kong signs tax treaty with Thailand The Hong Kong SAR and Thailand signed a tax treaty on 7 September 2005. The treaty, a full scope Double Taxation Agreement (DTA) based on the OECD model, will enter into force after it has been ratified by both governments, and will apply in Thailand from 1 January and in Hong Kong from 1 April, in the next calendar year. Under the agreement, profits remitted by a branch office in Thailand to a Hong Kong head office will not be taxed by the Thai Government. Such remittances are currently subject to a 10% withholding tax in Thailand. Thai withholding tax for royalties that are received from Thailand by a Hong Kong resident and that are not attributable to a permanent establishment will be reduced to 5% if paid for the use of, or the right to use, any copyright of literary, artistic or scientific work (films taxable under this head); and 10% if paid for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process. The current rate is 15% on the gross amount of royalties. In the case of interest received by a Hong Kong resident (when the interest arises in Thailand and is not attributable to a permanent establishment) the current Thai withholding tax is 15% of the gross amount. Under the agreement, the Thai withholding tax rate will be reduced to 10% if interest is paid to a financial institution or insurance company, or if interest is paid with respect to indebtedness arising from the sale on credit of equipment, merchandise or services. The treaty also provides capital gain exemption in relation to gains derived by a Hong Kong resident from the alienation of shares in a Thailand company which does not derive more than 50% of its asset value directly or indirectly from immovable property situated in Thailand. Currently, a gain derived by a foreign investor on the sale of shares in a Thailand company is generally subject to a rate of 15% if the gain is paid “in or from” Thailand. As with the Hong Kong-Belgium treaty, the exchange of information article follows the more restrictive 1995 OECD model and contains a restriction that information received by the competent authorities of Thailand can only be released to a third party with the consent of the competent authorities of Hong Kong. It goes further than the Belgium treaty in that the exchange of information does not extend to non-residents of Hong Kong.Seychelles and Vietnam sign tax treaty A tax treaty was signed in Hanoi by Vietnamese Deputy Minister of Finance Nguyen Thi Bang Tam and Seychelles Foreign Affairs Minister Claude Morel, on 4 October 2005. The two officials said the agreement would provide businesses in both countries with more favourable conditions by establishing a legal framework for economic, trade, and investment activities. The Seychelles-Mauritius tax treaty entered into force on 22 June 2005. The provisions will be applied in Mauritius as of 1 July 2005, and in Seychelles from 1 January 2006.Netherlands and South Africa sign tax treaty A new tax treaty was signed in Pretoria by South African Finance Minister Trevor Manuel and Dutch Foreign Affairs Minister Rudolph Bot on 10 October 2005. Bot said that business owners from both countries had expressed the need for a treaty to strengthen bilateral trade relations. Manuel said the treaty provides the certainty that Dutch investors need to invest confidently in South Africa.Isle of Man signs TIEA with The Netherlands The Isle of Man and the Netherlands signed a Tax Information Exchange Agreement (TIEA) to facilitate exchange of information on tax matters on 12 October 2005. It covers a wide range of taxes, including the Netherlands’ income, wages, company, dividend, gift, and inheritances taxes, and the Isle of Man taxes on income or profit. Under the TIEA, when the competent authority of a contracting state requests information, the responding state must provide information that is “foreseeably” relevant to the assessment and collection of civil tax claims and to the investigation or prosecution of criminal tax matters. Each competent authority must provide the information available. If that is insufficient, the competent authority will, at its own discretion, take all relevant information gathering measures to supply the requested information. The agreement protects the confidentiality of any exchanged information by preventing disclosure to third parties. The agreement covers information held by financial institutions and fiduciaries. It also covers information regarding the beneficial ownership of companies, partnerships, and trusts. The competent authorities are not required under the agreement to provide ownership information regarding publicly traded companies unless the information can be obtained without “disproportionate” difficulties. The agreement will enter into force when each party has notified the other of the completion of its necessary internal procedures.EU Council adopts Third Money-Laundering Directive The EU Council adopted the controversial Third EU Money Laundering Directive on 20 September 2005. The directive was adopted at first reading under the co-decision procedure. It is to be implemented by 2007. Its stated aim is to include terrorist financing within the money laundering provisions, but it requires tax advisors and other financial service professionals to report cash transactions in amounts of €15,000 or more by individuals or companies. The first Money Laundering Directive of 1991 required the imposition of an obligation on financial institutions to establish customers? identity and report any suspicion of money laundering. It was based on the 40 recommendations of the FATF, of which the EU is a member. The second Directive of 2001 extended the number of crimes to which the provisions applied and widened the range of professions who had to observe it to include lawyers, auditors, accountants, notaries, casinos and estate agents. It also provided for the establishment of financial intelligence units in each member state to which suspicious transactions reports (SRTs) were to be made. The third Directive will incorporate into EU law revisions made to the FATF recommendations in June 2003. It will also extend the provisions to any financial transaction that might be linked to terrorist activities. Further provisions include identity checks on customers opening accounts, checks apply to any transaction over €15,000, stricter checks on ?politically exposed persons? and penalties for failure to report suspicious transactions to national financial intelligence units. It should be noted that in July 2005 the Council also adopted a regulation providing a system for controls of cash entering and leaving the Community. This regulation sets at €10,000 threshold above which natural persons will be required to declare cash when crossing the EU’s external borders.Jersey provides for protected cell companies The States of Jersey approved substantial amendments to the Companies (Jersey) Law 1991, including provisions that will allow protected cell companies (PCCs) to be incorporated in Jersey, on 1 September 2005. An important development from the model used in other jurisdictions is the right of a company to elect, at the time a cell is established, for that cell is to be incorporated with separate legal identity. This will be an irrevocable election that can only be made at the time the cell is established. The amendment to the Companies Law also provides that Jersey PCCs will be required to elect a board for each cell of the PCC, regardless of whether the PCC has elected to have separate legal personality. It was felt that this would assist in resolving disputes concerning whether a liability falls to be met by a particular cell or by the PCC itself. This amending legislation has now been passed to the Privy Council for Royal Approval, and is expected to come into force in the early part of this year.OECD Global Forum on Taxation Government officials from 55 OECD and non-OECD economies gathered in Melbourne for a two-day meeting of the OECD Global Forum on Taxation on 15 November 2005. Set up to work towards a global level playing field based on high standards of transparency and effective exchange of information in tax matters, the two key aspects of this process were to invite other significant financial centres to participate in the dialogue and to carry out a review of countries? legal and administrative frameworks in the areas of transparency and exchange of information in tax matters. According to a statement, the review undertaken suggested that both OECD and non-OECD countries have implemented or made considerable progress towards implementing many of the standards that the Global Forum wished to see achieved. There was no longer any OECD country where a domestic tax interest, of itself, was an impediment to exchange of information. A growing number of non-OECD economies were negotiating agreements that provide for exchange of information, many countries had improved transparency by implementing the FATF customer due diligence requirements and several countries had recently required bearer shares to be immobilised or held by an approved custodian (e.g., the British Virgin Islands, the Cook Islands, Saint Kitts & Nevis). The Global Forum welcomed these developments but said further progress was needed if a global level playing field was to be achieved. In particular, to address constraints placed on international co-operation to counter criminal tax abuses and those instances where countries required a domestic tax interest to obtain and provide information in response to a specific request for information related to a tax matter. Further progress was also required in the area of access to bank information for tax purposes, ensuring that competent authorities had appropriate powers to obtain information for civil and criminal tax purposes, opening access to legal ownership information and requiring the keeping of accounts by companies and partnerships.Isle of Man considers tax cap The Isle of Man government is considering the introduction of a “tax cap” for high earners. First announced by Treasury Minister Allan Bell in his Budget this spring, it has not yet been announced whether this will be introduced from 6 April 2006 when the island moves to a zero corporation tax regime. “We have not yet decided the level of the cap,? said Assessor of Tax Malcolm Couch. ?But the scheme will work on two principles: it will be a cap, not just a tapering level of tax and it will apply to everyone, existing residents as well as newcomers.” According to Treasury calculations if the cap was £100,000, then people would benefit if their taxable income exceeded £570,000 a year. But if it were set at £200,000 they would have to make £1.25m taxable income per year to benefit. But it would have short-term revenue implications. A cap of £50,000 of income subject to tax would lead to a potential loss of revenue of £4.53 million, while a cap of £200,000 would produce a loss of £1.67 million. The aim is to encourage wealthy residents to relocate in the island who are prepared to invest in the local economy. The greater the number of new residents the greater is the future investment potential. The highest individual tax rate is currently 18%, and there is no capital gains or inheritance tax.TCI to upgrade offshore regime The Turks & Caicos Islands (TCI), following a change of government in late 2003, indicated that there would be a renewed commitment to the financial sector in respect of non-regulatory legislation.The government has since announced its intention to introduce, in the short term, legislation to provide for the introduction of protected cell companies and charitable foundations, an overhaul of the Mutual Funds Ordinance to include an expert funds regime and amendments to the Insurance Ordinance. In the longer term the government has promised that there will be a restructuring and modernisation of the TCI’s Companies Ordinance and Trusts Ordinance. The legislative framework will also be kept under ongoing review to ensure that the jurisdiction’s financial sector continues to develop. Negotiations on the constitutional modernisation of the Turks & Caicos Islands (TCI) were concluded successfully on 4 October 2005. Chaired by UK Foreign Office Minister Lord Triesman, agreement was reached on all outstanding issues from a 2002 Report of the Constitutional Modernisation Review Body. The final text will be published early in the new year. This will be followed by a consultation period and concluded by a debate in Legislative Council. The TCI is a British Overseas Territory. The constitution establishes an executive council comprising the Governor, a Chief Minister and five other ministers, responsible for the main functions of government, and an elected legislative council. Other OTs in the Caribbean are Anguilla, British Virgin Islands, Cayman Islands and Montserrat.Switzerland and Austria publish draft treaty protocol Switzerland and Austria released a draft protocol to the current treaty for consultation. The 1974 treaty was most recently revised by a protocol of 2000. The new protocol seeks to abolish the taxation at source of cross-border royalties, adopt new rules on capital gains from the sale of shares when migrating to a contracting states, abolish the cross-border commuter regulations, and provide administrative assistance regarding holding companies and fraud. The protocol has still to be ratified, but in principle the amendments were scheduled to enter into force on 1 January 2006. The proposed rule on the taxation of capital gains, however, would cover changes of residence since 1 January 2004. For taxpayers who would be subject to a larger tax burden as a result of the protocol, the effective date would be 1 January 2007.Hong Kong Abolishes Estate Duty Hong Kong’s Legislative Council passed the Revenue (Abolition of Estate Duty) Bill 2005 on 2 November 2005. The Ordinance, which seeks to implement the proposal announced in the 2005-06 Budget to abolish estate duty, is due to commence operation on 11 February 2006. Frederick Ma, Secretary for Financial Services & the Treasury, said that apart from removing the unfairness and obstacles arising from the collection of estate duty, another key objective of the proposed abolition was to facilitate the further development of Hong Kong as an important asset management centre and, as a result, make it more competitive as an international financial centre. “The abolition of estate duty is not only a tax concession but also a long term strategic investment in Hong Kong’s financial services industry and the overall development of the economy,” said Ma. “As asset management services can foster growth in other financial activities and a series of high value-added professional services, other industries will also benefit indirectly. The community, and hence members of the public, will enjoy the subsequent economic benefits.” It is estimated that the abolition of estate duty will cost the government annual revenue of around HK$ 1.5 billion (US$ 193.55 million). But the government estimated that the move would help promote trading in Hong Kong’s financial and property markets, and contribute additional revenue from stamp duty and other taxes.Pinochet charged with tax fraud and other crimes The former Chilean dictator Augusto Pinochet was formally charged in Chile with tax fraud, passport forgery, the use of fake documents and making misleading statements about assets on 23 November 2005. Judge Carlos Cerdan issued the indictment, put Pinochet under house arrest, and set bail at US$23,000. The investigation was initiated last year after a US Senate report revealed a secret web of US accounts used by Pinochet to move and hide his fortune.