Offshore Survey ? September 2005 by Christopher Owen
EU Savings Tax Directive comes into force The EU Savings Tax Directive finally came into effect on 1 July 2005, but the launch was clouded by the disclosure that the new rules do not apply between the UK and Gibraltar. Other UK-associated and dependent territories called for a suspension of the Directive because, without Gibraltar, there was no longer a “level playing field”. It is believed that the UK Foreign Office promised Brussels that the Directive would extend to all the UK dependent territories in the Caribbean, in the belief that these include Bermuda. At present, the new rules do not apply there; but it seems unlikely that this anomaly will continue. Dawn Primarolo, the UK Paymaster General, and the Government of Gibraltar issued a joint statement saying that the Directive was in place but that, as the UK and Gibraltar are not separate member states, the rules do not apply between them. ?The UK and Gibraltar Governments are in discussion and working together with a view to agreeing arrangements to close this gap between them as soon as possible during the next few months, on terms that would offer a choice between exchange of information and withholding tax,? it said. The 2003 Directive applies to all 25 EU member states, together with their associated and dependent territories, and has also been extended by agreement to key third countries. Of EU members, 22 are required to share information about interest payments regarding the identity of the benefactor, residence, the payer of the interest, account number and the type of debt on which the interest is being paid. Anguilla, Aruba,the Cayman Islands and Montserrat will also exchange tax information on interest payments made to EU residents. Although they will not participate in the exchange of information, Austria, Belgium and Luxembourg are to impose a withholding tax on interest income during a transitional period. The withholding tax, 75% of which will be paid to the country of the taxpayer’s residence, will be 15% until 2008, 20% until 2011 and 35% afterwards. Agreements have also gone into effect under which Andorra, Liechtenstein, Monaco, San Marino and Switzerland will apply similar arrangements. The British and Dutch territories of the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles, and the Turks & Caicos Islands will also apply the withholding tax over the same period. The European Commission’s head of tax policy Michel Aujean said the EU would continue to monitor its progress, in particular against the development of more sophisticated financial products or signs that investors are moving their savings elsewhere, particularly Asia. He also said the EU aimed to start talks with Singapore and Hong Kong.OECD issues new Model Tax Treaty The OECD published a new model income tax treaty and commentary on 7 September. The new model incorporates changes to the model that were released in draft form in March 2004 and approved by the OECD Council on 15 July this year. The principal changes include a revised article 26 on exchange of information, by which “foreseeably relevant” replaces “necessary” as the determining criterion for exchanging tax information in paragraph 1. The OECD commentary states that the change in wording is designed to “achieve consistency” with the OECD Model Agreement on Exchange of Information on Tax Matters. It further warns against “fishing expeditions” by tax authorities. A new paragraph 4 of article 26 provides that a treaty partner must use its information gathering measures to obtain requested information even if the treaty partner may not need the information for its own tax purposes. The new paragraph 5 provides that a treaty partner may not decline to provide tax information on the grounds that it is held by a financial institution, fiduciary, or because the information relates to ownership interests. The new model also includes changes relating to: the tax treatment of activities related to international shipping and air transport; cross-border income tax arising from employee stock-option plans; tax issues from cross-border pensions; and the treatment of multiple permanent establishments.ECJ opinion clears way for cross-border loss relief Marks & Spencer Plc, the UK clothing retailer, can claim group relief on losses incurred by subsidiaries in other EU member states, according to Advocate General Luíz Miguel Poiares Pessoa Maduro of the European Court of Justice in Marks & Spencer plc v. David Halsey (HM Inspector of Taxes) (C-446/03). In an opinion delivered on 7 April, Poiares Maduro found that the UK government’s rejection of M&S’s claim to offset the losses of its foreign subsidiaries under the UK group relief regime was incompatible with the EC Treaty principle of freedom of establishment. He recommended that the ECJ find in favour of the taxpayer. The UK group relief regime allows a subsidiary in a group to surrender its losses to another group company so that the latter company can deduct the losses from its taxable profits. The surrendering company forfeits any right to use the losses surrendered for tax purposes, and in particular, may not carry the losses forward for offset in future years. However, the group relief regime is available only if both companies are resident in the UK for tax purposes or, from 1 April 2000, if they were carrying on trade in the UK through a permanent establishment. In other words, the regime is not available to companies outside the UK. M&S expanded its overseas business in the 1990s, in particular by setting up subsidiaries (through UK and Dutch holding companies) in several EU member states, including Belgium, France, and Germany. These subsidiaries were resident in the countries in which they were established, and were neither resident nor trading in the UK. Following substantial losses during the years 1998-2001, M&S decided to close the subsidiaries and sought to offset the foreign losses against its UK profits. The UK Inland Revenue refused on grounds that UK group relief is restricted to the losses of UK resident subsidiaries. M&S argued that restricting loss relief to domestic companies violated the principle of freedom of establishment in articles 43 and 48 of the EC Treaty because, had the loss claims been submitted for the losses of UK subsidiaries, they would have been allowed. M&S’s appeal to the UK Special Commissioners was rejected, and the company then appealed to the High Court, which referred the case to the ECJ for a preliminary ruling in 2003. Oral arguments before the ECJ were heard on 1 February 2005. Poiares Maduro said the UK group relief regime, by limiting the surrender of losses to UK resident companies, was tantamount to an “exit restriction? because it dissuaded companies established in the UK from setting up subsidiaries in other EU member states. It was therefore a restriction of the freedom of establishment. Such restrictions, he said, could potentially be justified as preventing companies from ?double dipping? ? that is deducting a loss in both the home country and the country where subsidiaries were established. Group relief could therefore be made subject to the requirement that the losses of foreign subsidiaries cannot receive advantageous tax treatment in the country in which they are established. But Poiares Maduro rejected arguments from several other EU member state governments that the UK rules could be justified by the potential major loss in tax revenue and the need to ensure cohesion of the tax system, and that the UK rules were in conformity with the territoriality principle. Citing previous ECJ case law, the advocate general said a reduction in tax revenue was not an overriding reason in the public interest that justifies a measure restricting the freedom of establishment. Cohesion of the tax system, he said, might justify restrictive rules, but provided that cross-border loss relief was made subject to the same conditions that apply to relief between UK companies ? namely, that a group cannot get relief for the same loss twice ? this would not apply. The territoriality principle could not justify the restriction in the current group relief rules because it did not require that the conferral of a tax advantage be subject to a corresponding power to tax. An ECJ decision upholding Poiares Maduro’s opinion would have significant ramifications, not just for the UK, but across the whole EU. Over 100 international groups have already made similar claims for loss relief in their UK tax returns, and many other EU member states have group relief regimes that contain elements that may not withstand a challenge before the ECJ. The ECJ decision is expected later this year.The Netherlands issues corporate tax reform proposals The Dutch government published a white paper on 29 April 2005 outlining proposed changes to its corporate tax system that are intended to make the Netherlands more competitive for corporate investment, as well as bringing it mores closely into line with EU law. The main proposal is to reduce the corporate income tax rate from 31.5% to 26.9%. An earlier proposal had called for a reduction to 30% by 2007. The Netherlands has supported moves for tax harmonisation within the EU, if combined with the establishment of a minimum tax rate, but wishes to establish a more attractive tax regime in the short term. Furthermore, the participation exemption would be simplified and would apply to all shareholdings of 5% or more, regardless of whether the shares are held as a passive portfolio investment or whether the subsidiary is taxed on its profits. The 0.55% capital tax would be abolished as of 1 January 2006. The white paper is to be discussed in parliament. Its proposals are expected to result in a draft bill that will be considered by parliament in 2006 and brought into force on 1 January 2007.Irish Finance Act changes holding tax regime Ireland’s Finance Act 2005, which passed into law 25 March, included changes to the holding company regime and a 50% reduction in the capital duty rate. The 2004 Finance Act introduced an exemption from the 20% capital gains tax on the disposal by a company of shares in qualifying companies which has generated significant interest from multinational, particularly US, companies. European Commission approval of the exemption regime was secured on 23 September 2004, subject to amendments that, although included in Finance Act 2005, will apply retroactively from 2 February 2004. The key change reflected in this year’s Finance Act is the removal of the €50 million and €15 million thresholds and the introduction of a 5% shareholding requirement, thereby broadening the range of participations that can potentially benefit from the exemption.New Zealand to introduce reporting for foreign trusts New Zealand is to introduce reporting requirements for New Zealand resident foreign trusts Revenue Minister Michael Cullen announced on 29 April. Under the proposal, foreign trusts with New Zealand resident trustees will be required in the future to report tax information to New Zealand’s Inland Revenue Department (IRD). Under current New Zealand law, foreign trusts that have New Zealand resident trustees but no New Zealand source income are not required to provide any information to the IRD. This, said Cullen, created difficulties when countries with which New Zealand has a tax treaty seek information on trusts with a New Zealand presence ? requests those countries are entitled to make under the treaties. In July 2004, Cullen agreed, in principle, to introduce legislation changes to impose some record-keeping and filing requirements on foreign trusts with New Zealand resident trustees, and two rounds of consultations have been held. As a result New Zealand will require resident trustees of foreign trusts to provide limited information to the IRD and maintain financial records in New Zealand for each trust. Also, at least one New Zealand resident trustee of each trust will be required to be a member of an IRD-approved organisation, such as an accounting or legal firm. Changes to the reporting requirements for foreign trusts will apply from April 2006.Guernsey introduces Qualifying Investor Funds regime The Guernsey Financial Services Commission has streamlined the approval process for both open and closed ended funds aimed at professional, experienced and knowledgeable investors. The new Qualifying Investor Funds Regime came into effect on 7 February 2005. Under the regime, the Commission undertakes to grant the required fund approval within three working days provided that an appropriately licensed Guernsey applicant has certified to the Commission that: ? the fund will be restricted to professional, experienced and knowledgeable investors (Qualified Investors); ?the applicant has conducted due diligence on the promoter and associated parties and has found them to be fit and proper; ? the applicant is satisfied as to the fund’s economic rationale and the disclosure of any risks associated with the investment vehicle.Chinese circular restricts offshore investment by PRC individuals The State Administration of Foreign Exchange (SAFE) issued a Circular (Circular 11) on 24 January 2005 that could have a severe impact on PRC individuals who make investments in offshore companies or acquire Chinese companies indirectly through an offshore company. Circular 11 introduces two approaches to monitoring the offshore investments of PRC individuals. First, overseas investments by PRC individuals are now subject to approval procedures similar to those that apply to Chinese companies so that all ?PRC residents? investing overseas for the purpose of establishing or controlling an offshore company must obtain the approval of the SAFE and the Ministry of Commerce (MOFCOM). The second approach outlined in Circular 11 restricts foreign exchange registration of certain foreign invested enterprises (FIEs). Circular 11 also requires that all PRC residents who intend to acquire any overseas equity or other property interests in exchange for domestic equity or assets must obtain certain additional SAFE approvals in forming the FIE. Although Circular 11 does not have a retroactive effect, the local SAFE is required to identify any existing FIEs that fall in the above category and to strictly monitor the foreign exchange-related activities of such FIEs.Hong Kong Court rejects Ramsay in estate duty case On 5 January 2005, the Court of First Instance held that the Ramsay principle could not be applied to disregard the round-robin finance and assess as gift inter vivos, the sale of two landed properties by the deceased to a Hong Kong company controlled by his son. The Ramsay principle allows the tax authorities to look at the intent of a transaction and ignore the transaction for tax purposes if it had no commercial reason other than the avoidance of tax. In Graceful Mark Ltd v The Commissioner of Estate Duty, the company acquired two properties with a total market value of HKD 15.3 million from the deceased (X) four days before his death. The company used a HKD 10.58m bank loan. X remitted the disposal proceeds to Macao where he gave the money to his son as a gift. The son was the director of Graceful Mark Ltd. The son lent the money he received from X to the company as a loan from a director and the company subsequently repaid the loan from the bank with the money injected. X’s son and daughter-in-law held 90% and 10%, respectively, of the shares in the company. The Commissioner contended that X?s round-robin transactions had no commercial purpose and should be ignored according to the Ramsay principle. The sale of properties was in substance a ?gift? to the company by X made within the three years preceding his death and the full value of the properties should be subject to estate duty. But the Court concluded there was a commercial purpose for X to dispose of the properties because X had shown an intent to dispose of the properties a year before his death but the disposal did not take place at that time because of an objection by the co-owner of the properties. It therefore held that the Ramsay principle was not applicable and the properties were not a gift within three years of death. The first successful application of the Ramsay principle against a taxpayer in Hong Kong took place in December 2003, in the Court of Final Appeal?s decision in The Collector of Stamp Revenue v Arrowtown Assets Ltd.US bill targets Tax Haven CFCs US Senators Byron Dorgan and Carl Levin introduced a bill on 12 April 2005 that would treat controlled foreign corporations (CFCs) set up in ?tax havens? as domestic corporations for US tax purposes. The Internal Revenue Code would be amended to include a new provision (§7875), which would treat a foreign corporation as a ?tax haven CFC? if it was organised under the laws of a ?tax-haven? country and was, under the rules of subpart F, a CFC for an uninterrupted period of 30 days or more during the taxable year. An exception would be provided if substantially all of the CFC?s income for the taxable year were derived from the active conduct of a trade or business within the ?tax haven? country. The move pre-empted the release of a General Accounting Office (GAO) study which found that 59 of the top 100 publicly traded federal contractors had set up subsidiaries in offshore jurisdictions. The list included some of the biggest names in American business, such as: Fluor Corporation, which received $932 million in federal contracts and had 27 offshore subsidiaries, including seven in Bermuda, five in Barbados, and three in Mauritius; Exxon-Mobil, which had $707 million in federal contracts and 11 offshore subsidiaries in the Bahamas; and Halliburton, which had $534 million in federal contracts and 17 offshore subsidiaries, including 13 in the Cayman Islands. As proposed, the bill would apply to taxable years beginning after 31 December 2007 and would include a ?blacklist? of tax haven countries that would be subject to the new rule. In conducting its analysis, the GAO used the list of 39 ?tax havens? compiled by the OECD in 2002. The bill would authorise the US Treasury to add or remove countries from the list to the extent such action was consistent with the purpose of the provision.Italy implements EU interest and royalty directive The Italian government has formally implemented the EU interest and royalty directive (2003/49/EC). Legislative Decree 143 of 30 May 2005, gazetted on July 26, provides that interest and royalty payments arising in Italy and paid to a company or permanent establishment resident in another EU member state are exempt from withholding tax or any other tax imposed on such payments in the other state, whether by deduction at source or by assessment. The list of companies covered by the directive includes those in member states that joined the European Union on 1 May 2004 ? Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.ECJ orders UK to implement Mutual Assistance Directive in Gibraltar In European Commission v United Kingdom (C-349/03), the ECJ ruled on 21 July that the UK is obligated to implement in Gibraltar exchange of information rules for VAT and excise taxes in Council Directive 77/799/EEC on mutual assistance in the field of direct and indirect taxation. The UK has been resisting European Commission calls for full cooperation, arguing that Gibraltar had no responsibility to comply given that EU rules on VAT and excise duties do not apply on the Rock. But the ECJ said Gibraltar needed to exchange information with other tax authorities to safeguard its own interests. ?The exclusion of Gibraltar from the (EU) customs territory does not mean (it) falls outside the requirement of mutual assistance,? ruled the court.Gibraltar Budget introduces new tax concessions The Gibraltar government announced several new tax concessions, designed to benefit both local and overseas investors, in the Budget on 22 June. The new tax measures, coupled with the fact that Gibraltar does not tax capital gains, are intended to strengthen Gibraltar’s position as an EU holding-company jurisdiction Tax on savings income has been abolished. The measure defines “savings income” as dividends arising from investments quoted on a recognised stock exchange and interest paid directly or indirectly by banks, building societies, or other financial services institutions licensed in Gibraltar or in any other recognised jurisdiction to undertake deposit-taking or investment business, or paid by the Gibraltar Government Savings Bank. Taxation of dividends paid by one Gibraltar company to another local company, and of dividends and interest paid by a company to nonresidents, has also been abolished, as has the requirement to withhold tax from dividends paid by a Gibraltar company to its non-resident shareholders. Other tax relief measures include the abolition of stamp duty on all transactions except real estate and share capital transactions, although the stamp duty on the latter (whether on the initial creation or a subsequent increase) will be a flat fee of £10.ECJ hands down ?most favoured nation? ruling The European Court of Justice, ruling in D v. Inspector of Taxes (C-376/03), rejected the argument of “most favoured nation” treatment in a Dutch-German tax case and held that differences in tax treaties are allowed within the European Union. The appellant, a German resident who owns immovable property in the Netherlands, appealed against the refusal of the Dutch tax authorities’ to grant him a wealth tax allowance. He argued that the Netherlands’ tax treaty with Belgium provided a wealth tax allowance for Belgian residents who own immovable property in the Netherlands. But the same benefit was not extended to German residents under the Netherlands-Germany tax treaty. In a preliminary opinion in October 2004, Advocate General Dámaso Ruiz-Jarabo Colomer held that the tax treaty between the Netherlands and Belgium did give rise to discrimination between taxpayers residing in Belgium and those residing in Germany. But in a judgment handed down on 5 July, the ECJ held that the appellant, as a resident of Germany, could not invoke the tax treaty between Belgium and the Netherlands because the reciprocal rights and obligations of that treaty applied only to persons resident in those two contracting states. As a consequence, taxpayers residing in Belgium were not in the same situation as taxpayers residing outside Belgium. A rule such as the one in the Belgium-Netherlands tax treaty granting residents of Belgium a Dutch wealth tax allowance could not be regarded as a benefit separable from the rest of the tax treaty, but was an integral part of the treaty and contributed to its overall balance, the ECJ held. The ECJ held that differences in tax treaties were permissible within the European Union.Isle of Man publishes proposed new company legislation The Isle of Man Government published draft legislation for the creation of a new Manx corporate vehicle, the ?NMV?, on 2 August. The new legislation has been prepared, after close examination of the vehicles available in other onshore and offshore jurisdictions and is designed to be simple and inexpensive to administer and to meet international obligations. In particular, the new structure will remove the requirement to have Isle of Man-based directors and company secretaries and, in some cases, for annual returns. It will also remove the requirement for overseas companies to register in The Isle of Man provided that they are administered by a licensed corporate service provider. The consultation document states: ?The conclusions to date are that corporate directors should be permitted within certain limitations, annual returns should only be required for companies undertaking business locally, and that the provision of corporate administration services to an overseas company should not result in a place of business being established in the Island.? Scheduled for introduction next year, to coincide with the Isle of Man?s move to a zero rate of corporate tax, NMV companies will be available in addition to existing Isle of Man companies, which will be retained.