Offshore Survey ? April 2006 by Christopher Owen
Gibraltar to apply EU Savings Tax Directive The UK and Gibraltar signed an agreement on 19 December 2005 to apply the EU Savings Tax Directive. It entered into force on 1 April 2006. Under the agreement, the UK will automatically provide information on the UK savings income of Gibraltar tax residents to the government of Gibraltar. Gibraltar will apply withholding tax to the Gibraltar savings income of UK tax residents during the transitional period provided for under the Directive. When the transitional period ends, Gibraltar will automatically exchange information with the UK. Although Gibraltar had fully implemented enabling legislation for the Savings Tax Directive when it came into force on 1 July 2005, it was found that it could not be applied in Gibraltar because Gibraltar and the UK are not considered separate member states under the Directive. The UK Revenue said that, as with its existing savings agreements with its Crown dependencies and Caribbean overseas territories, the agreement with Gibraltar would be implemented in the UK in the form of a tax information exchange agreement. A second agreement reached with the UK will enable investment services firms established in Gibraltar to passport, that is to market and sell, their products and services into the UK market. The investment services passporting agreement was expected to come into effect by March 2006 when Gibraltar has passed some necessary legislation. Chief Minister Peter Caruana said: ?The banks have been closely consulted during these negotiations. The tax agreement is not challenging to any significant on-going business of the finance centres. On the other hand the confirmation obtained that the Parent & Subsidiary, Interest & Royalties and Mergers & Acquisition EC directives do apply to Gibraltar companies, and also the agreement that Gibraltar firms can now sell and market their investment services and products into the UK market, will be very positive for our finance centre.? Hong Kong exempts Offshore Funds from Profits Tax The Revenue (Profits Tax Exemption for Offshore Funds) Bill 2006 to amend the Inland Revenue Ordinance so as to exempt offshore funds from profits tax was published in the official gazette on 10 March. Originally was announced in the 2003-2004 budget, the proposed exemption would apply with retrospective effect to the year of assessment 1996/97. Noting that other major international financial centres, such as New York and, London, all exempted offshore funds from tax, Frederick Ma, Secretary for Financial Services and the Treasury, said the proposed exemption was vital for Hong Kong to reinforce its status as an international financial centre and enhance its competitiveness. Under the proposal, an offshore fund entity (which covers individuals, partnerships, corporations and trustees of trust estates) will enjoy tax exemption by satisfying two conditions – it is a non-resident entity and it does not carry on any business in Hong Kong other than the qualifying transactions or transactions incidental to these. The common law rule of “central management and control” will be used to determine whether a non-individual entity is resident in Hong Kong or not for the purpose of the proposed exemption. The scope of the qualifying transactions includes those in securities, in futures contracts, in foreign exchange contracts, in the making of a deposit other than by way of a money-lending business, in foreign currencies and in exchange-traded commodities. The Bill contains deeming provisions to prevent residents taking advantage of the proposed exemption by transferring funds to non-resident companies, which in turn carry on securities-trading activities in Hong Kong and distribute non-taxable dividends to those residents. These would apply to a resident who, alone or jointly with associates, holds beneficial interest of 30% or more in an exempt offshore fund, or holds any percentage where the exempt offshore fund is an associate of the resident. The resident would be deemed to have derived assessable profits in respect of profits earned by such offshore funds in Hong Kong. The provisions would not apply where the fund concerned was authorised by the Securities & Futures Commission, or a bona fide widely held fund. The deeming provisions, which will apply from the year of assessment 2006/07, will not impose any new tax and will not be invoked in respect of offshore profits, capital gains or dividend income, which are and will remain tax-exempt in Hong Kong. UAE signs tax treaties with Spain and Malta The United Arab Emirates signed income tax treaties in Abu Dhabi with Spain and Malta on 5 March and 13 March respectively. The UAE is the first Gulf Cooperation Council (GCC) country to sign an income tax treaty with Spain. The treaties provide for the avoidance of double taxation on income and capital in both countries. EU to investigate Luxembourg?s 1929 holding regime The European Commission launched a formal investigation under state aid rules on 8 February 2006 into Luxembourg?s ?1929? legislation exempting holdings and financial companies from corporate taxation. It is concerned that the regime creates significant distortions to competition and market efficiency, particularly in the financial sector, without contributing to any significant extent to economic development. The 1929 exempt holdings are companies established in Luxembourg that solely exercise certain activities such as financing, licensing, management and coordination services within the multinational groups to which they belong. They are exempt from Luxembourg?s business taxes on earnings, including dividends, interest and royalties as well as on payments, including dividends and royalty fees. The original objective of the scheme was to favour the distribution of profits within a multinational group without incurring multiple taxation, but the Commission, in parallel with the EU?s Code of Conduct on Business Taxation, decided to investigate on the grounds that the tax exemption may constitute a disguised subsidy in favour of multinational companies based in Luxembourg, and therefore may distort the European financial market. Following a three-year preliminary review, the Commission proposed appropriate measures to Luxembourg to gradually review the scheme on 21 October 2005. Luxembourg rejected these measures and the Commission has now launched an in-depth investigation to verify whether the tax exemptions granted to the 1929 holdings constitute state aid and are compatible with the Single Market. Competition Commissioner Neelie Kroes said: ?It is time to review this old-established regime favouring multinational groups setting up their financial activities in Luxembourg, as it appears it may unduly affect the functioning and competitiveness of the EU?s financial industry.? Corporate residence: UK Appeal Court upholds decision The UK Court of Appeal, on 26 January 2006, upheld a decision of the High Court that a Dutch company used as part of a tax planning structure was not resident in the UK for tax purposes. The High Court had reversed an earlier decision of the Special Commissioners that the Dutch company was resident in the UK. In Wood & Another v Holden (Inspector of Taxes), a complex scheme devised to avoid tax on substantial gains accruing to a husband and wife on the sale of their trading companies achieved its purpose. The transactions ensured that the disposal was made between members of a non-resident group of companies so that the gain was not to be attributed to the husband and wife under s13 of the Taxation of Chargeable Gains Act 1992 because of the excluding provisions in s14 of that Act. The Revenue had claimed under s13 of the Taxation of Chargeable Gains Act 1992 against the taxpayers in respect of the sale by a non-resident company to a newly-acquired Dutch subsidiary of a 49% shareholding in a holding company that had been formed to carry out certain steps in the scheme. The taxpayers, relying on provisions in s14 of that Act, contended that the relevant disposal was between members of a non-resident group of companies and, as such, was excluded from the s13 charge. The sole issue for decision was whether the commissioners were entitled to conclude that, under the common law of corporate residence, the taxpayers had failed to establish that the Dutch subsidiary was not resident in the UK for tax purposes. The Commissioners had found that the only acts of management and control by the Dutch subsidiary were board resolutions and the execution of documents effected without any decision-making. They concluded that the actual decision-making was taken in the UK, that being where central control and management actually abided. Their decision was flawed. The Court of Appeal found the High Court had been correct to hold that the only conclusion open to them was that the Dutch subsidiary was resident in the Netherlands. The directors of the Dutch subsidiary were not by-passed. There was no evidence that the taxpayer?s UK-based accountant had dictated their decisions. A management decision did not cease to be such because it might have been taken on fuller information. Ill-informed decisions by directors remained management decisions. On the basis of the ?central management and control test? the Commissioners? decision could not stand and the Revenue?s appeal failed. The decision is helpful in clarifying that the location of central management and control for corporate residence purposes is the place where the company?s board of directors or other organs make their decisions and not the place where persons who may have strongly influenced those decisions have arrived at their conclusions. Jersey tables Trusts Law amendment A draft Trusts (Amendment No. 4) (Jersey) Law was lodged au Greffe on 14 March by the Minister for Economic Development. The purpose of the Amendment, the most significant amendment since the Trusts (Jersey) Law came into force in 1984, is to clarify and simplify the existing Law, and to bring greater certainty to key questions concerning the validity of Jersey trusts and the powers that may be retained by the settlor of a Jersey trust. The Amendment will also remove a number of provisions in the principal Law, which were perceived as being a barrier to the use of Jersey trusts and Jersey trust companies. Specifically, the Draft Law, if passed, will: ? Modify provisions concerning the applicability of Jersey law and the non-applicability of foreign law to Jersey Trusts and add a new Article (9A) providing that the validity of a trust is unaffected by the settlor reserving any beneficial interest or certain specified powers to himself or herself. Nor is a trustee who acts in accordance with the exercise of any such power, in breach of trust.? Replace the provisions in Article 10 concerning the disclaimer of a beneficiary?s interest with a simpler new Article (10A). This provision enables a disclaimer to be for a limited period only and to be of all or part of the beneficiary?s interest, irrespective of any benefit already received. The disclaimer may be revoked if this is allowed by the terms of the trust.? Revise Article 15 to enable a Jersey trust to exist in perpetuity and provide that unless the trust provides to the contrary, it is permissible to transfer assets, etc to another trust even if that other trust may continue in existence for longer than the first trust.? Revise Article 16 to require a trust to have at least one trustee (previously it was two), and provide that a trust shall not fail for having fewer trustees than required by the Law or the terms of the trust. Provision is also now made for appointment, in the absence of there being any other power to do so, not just where the terms of the trust do not provide for the appointment but also where the power of appointment has lapsed or failed or where the person who has the power is not capable of exercising it.? Modify Article 19 to cater for where several trustees might resign at the same time resulting in there being no trustee.? Provide that a trustee who resigns in order to facilitate a breach of trust is liable for the breach as if he or she had not resigned.? Clarify that a trustee may delegate any of his or her trusts or powers and the delegate may further delegate them, in each case if permitted by the terms of the trust.? Remove Article 35(3) and (4) which required provisions in trusts requiring a beneficiary?s interest to be held on a spendthrift or protective trust to be construed as a requirement to subject the beneficiary?s interest to restriction, diminution or termination.? Insert a new Article 47A, which sets out the court?s powers in the case of a trust for charitable or non-charitable purposes where the donor?s intention can no longer be fulfilled. It enables the property to be held for other purposes.? Repeal Article 56, which provided for directors of Jersey corporate trustees to be liable as guarantors in the event of a breach of trust by the corporate trustee.? Insert a new provision into Article 57 requiring any action founded on breach of trust brought by a trustee against a previous trustee to be made within three years of the previous trustee ceasing to be a trustee. New corporate tax regime in Isle of Man The Isle of Man Treasury issued, on 9 March, a practice note with guidance on the new corporate tax regime that came into effect on 6 April, and further changes that are expected to take effect a year later. A standard tax rate of zero percent for companies in the Isle of Man was introduced on 6 April 2006. The standard rate is generally applicable to all forms of income received by all companies with the two exceptions: licensed Manx banks pay a 10% tax on their business income, and income received by companies that is derived from land and property in the Isle of Man is also taxed at a rate of 10%. Resident companies pay an annual corporate charge of £250. The taxation of non-resident companies follows that of resident companies. The income of those companies registered under Part XI of the Companies Act 1931 (often known as ?F Register? companies) as being incorporated outside the Isle of Man, but having a place of business there, is taxed on their Manx-source income at the standard rate or at 10% depending on the type of income they receive. Companies incorporated outside the Isle of Man but having their management and control in the Island are normally tax resident there, and so their worldwide income is taxed at the standard rate or at 10% depending on its nature. Companies registered under Part XI of the Companies Act 1931 and companies incorporated outside the Isle of Man but having their management and control in the Island, also pay the corporate charge. Provisions contained in the Income Tax (Corporate Taxpayers) Bill 2006 also repeal the special regimes for exempt companies, exempt insurance companies, exempt managed banks, international business companies, and non-resident company duty. Following the repeals, which are due to take effect from 6 April 2007, companies in each of the special regimes will be deemed resident companies subject to the rules as above. New entrant applications for any of the special regimes are not accepted. The withholding tax system is also to be changed by further provisions contained in the 2006 Bill. From 6 April 2007, companies will no longer deduct dividends when computing their taxable income. In the tax year 2006/07 only, dividends paid from income subject to tax at 10% suffers a 10% withholding tax when the recipient is a non-resident company or individual. This is applicable only to those companies having income taxed at a rate of 10%. From 6 April 2007, dividends paid from income subject to tax at 10% will carry a 10% tax credit. This tax credit will not be refundable where the recipient is a non-resident company or individual and no withholding taxes will apply to any dividends from the same date. Except for dividends in the single tax year 2006/07, the Isle of Man does not charge withholding taxes on payments made by companies to non-residents. The only exceptions are for rents paid by a company to a non-resident company, which suffer a withholding tax of 10%, and rents and other taxable payments (such as remuneration) paid by a company to a non-resident individual, which suffer a withholding tax of 18%. Companies having Manx members may, in certain circumstances, be required to pay a Distributable Profits Charge (DPC) on behalf of those members. The DPC has been put in place to deter tax deferral or avoidance by Manx-resident individuals through the use of companies subject to the standard rate. The 2006 Bill will also introduce, from 6 April 2007, a current year accounting period basis of assessment for companies to replace the existing preceding year basis. Treasury Minister Allan Bell said, ?First and foremost the Isle of Man Government wishes to provide businesses with a fiscal environment that provides stability and that enables them to grow. We are now in the final stages of implementing a taxation strategy that delivers both factors. At the same time we will fulfil our international commitments; further enhancing our reputation for competitiveness coupled with responsibility.? Singapore-Malaysia tax treaty comes into force The new Singapore-Malaysia tax treaty, signed in Putrajaya on 5 October 2004, was brought into force on 13 February 2006. It replaces the 1968 tax treaty under which interest and royalties were taxed at the prevailing domestic tax rates, ranging from 10% to 15%. The new treaty reduces the withholding tax rates on interest and royalties to 10% and 8%, respectively. The provisions will apply from 1 January 2007, except in relation to petroleum income tax in Malaysia, which will apply from 1 January 2008. Privy Council finds trustee liable of dishonest assistance The Privy Council upheld an Isle of Man High Court ruling against a trustee involved in the misappropriation of millions of pounds of Barlow Clowes funds in the 1980s. The proceedings were brought by the Barlow Clowes receivers, PwC and Ernst & Young, against Peter Henwood, a director of Isle of Man-based offshore financial services provider International Trust Corporation (ITC), subsequently known as Eurotrust International. The decision of 10 October will enable the receivers to pursue Henwood for over £9.3 million. Barlow Clowes operated a fraudulent offshore investment scheme that purported to invest funds in UK gilt-edged securities. But most of the money funded personal business ventures and high living by chairman Peter Clowes and his associates. Clowes was imprisoned after the scheme collapsed in 1988 with losses in excess of £100m. In 1987 about £6.8m of investors? funds were paid through bank accounts, maintained by companies administered from the Isle of Man by ITC. In Barlow Clowes International (in liquidation) & Ors v Eurotrust International & Ors, the Isle of Man High Court found Henwood liable for payments after 1987 because ” … by that time Henwood knew enough about the origins of the money to have suspected misappropriation and that he acted dishonestly in assisting in its disposal”. Liability for dishonest assistance, it held, requires a dishonest state of mind on the part of the person who assists in a breach of trust. Such a state of mind may consist of knowledge that the transaction is one in which he cannot honestly participate or a suspicion combined with a conscious decision not to make enquiries which might result in knowledge. Henwood successfully appealed the decision. Barlow Clowes then appealed to the Privy Council. Counsel for Henwood at the Privy Council argued that it needed to be shown that Henwood was aware that his state of mind would by ordinary standards be regarded as dishonest – only then could it be said to be consciously dishonest. The Privy Council disagreed, holding that the High Court judge had had sufficient evidence to decide that Henwood gave dishonest assistance. It said that it was not necessary that Henwood should have concluded that the disposals were of moneys held in trust ? having a clear suspicion was sufficient. The money in Barlow Clowes either belonged to the company, and was subject to fiduciary duties of the directors, or was held in trust. International Narcotics Control Strategy Report International efforts against money laundering were stronger and more effective in 2005, according to the International Narcotics Control Strategy Report issued by the US Bureau for International Narcotics & Law Enforcement Affairs on 1 March 2006. It found the 17 more countries had promulgated anti-money laundering and counterterrorist financing laws for the first time, or updated their existing statutes to comply with revised international norms and standards. The capacity for information and intelligence exchanges among countries in support of criminal investigations had also improved as seven more Financial Intelligence Units (FIUs) had joined the Egmont Group of FIUs, raising global membership to 101. For further information click here. BVI tops IBC registrations league Over 57,000 new International Business Companies (IBCs) were registered in the British Virgin Islands in 2005, more than any other offshore jurisdiction, according to figures released by the BVI International Finance Centre on 24 January. It is the third highest annual number of new incorporations in the BVI in 20 years, and took the total number of BVI IBCs to almost 700,000 since their introduction in 1984. The BVI also witnessed significant growth in the registration of BVI Business Companies since the enactment of the BVI Business Companies Act (BVI BCA) in January 2005. The BVI BCA provides for the incorporation of both internationally operating companies and companies doing business in the BVI under one statute. Over 1,100 companies were registered under the new Act in 2005. The BVI BCA has been introduced over a two-year transitional period and, as of January 2006, all new companies incorporated in the BVI will be registered under the new statute. Humphry Leue, Chief Operating Officer at the BVI International Finance Centre, said: ?A sustained period of growth has seen over 270,000 new businesses register in the BVI in the past five years, demonstrating the high level of confidence that the international business community has in the BVI as a leading centre for conducting business.?Hong Kong revises anti-avoidance guidelines The Hong Kong Inland Revenue Department (IRD) issued, in January, a revised Departmental Interpretation & Practice Note (DIPN No. 15) on the interpretation and treatment of those provisions in the Inland Revenue Ordinance relating to tax avoidance and tax evasion. The general anti-avoidance provision (section 61) empowers an assessor to disregard certain transactions or dispositions and to assess taxpayers accordingly. It serves to protect the liability to tax established under other sections of the Ordinance. The essential factors for it to apply are: ? There must be a transaction; ? The transaction has the effect of reducing the tax payable by the taxpayer concerned; and ? The transaction is artificial or fictitious, or any disposition is not, in actual fact, given effect. When the transaction is disregarded pursuant to section 61, the Assessor must look at the reality of the payment and the relationship of parties to the transaction and then proceed to raise an assessment on the person concerned. A ?transaction? is interpreted to include the whole of a particular transaction and not merely part of it. A transaction will therefore be considered from the inception of an idea to final completion, and although a part of the transaction may be real, the transaction as a whole may be held as both artificial and fictitious. The second general anti-avoidance provision, section 61A, applies to any transaction entered into for the sole or dominant purpose of enabling a person to obtain a tax benefit. It provides for an assessment to be made as if the transaction or any part thereof had not been entered into or carried out or in such other manner as is considered necessary to counteract the tax benefit that would otherwise be obtained. Modelled on the Australian general anti-avoidance provision, in order that section 61A may apply to a taxpayer there are three factors which, if satisfied, will cause the tax benefit to be cancelled: ? There must be a transaction as defined; ? The taxpayer must obtain a tax benefit as defined; and ? Having regard to seven specific matters, the transaction must be entered into or carried out for the sole or dominant purpose of enabling the taxpayer to obtain a tax benefit. The application of the two sections is not mutually exclusive. Where a tax avoidance arrangement has been made to exploit a specific relief or exemption afforded by a particular section of the Ordinance in such a way that is not intended by the legislature, the general anti-avoidance provisions can be applied to deny the favourable tax consequences even if the taxpayer has complied literally with the requirements of the particular section. The guidance clarifies that, as an approach to interpretation, the Ramsay principle can operate in conjunction with the anti-avoidance provisions. This principle was developed by UK courts to strike out intermediate steps in a series of transactions or a composite transaction entered into for no commercial purpose, so as to subject the end result of the transaction to scrutiny for tax purposes. The Commissioner is therefore entitled to look at the substance of transactions and not merely their legal form. Where there is a single preordained, composite transaction intended to be carried out in its entirety, the Commissioner is entitled to ignore the composite character and apply the legislation to the individual constituent steps separately. If the intermediate steps in the composite transaction were fiscally motivated, the Commissioner would disregard the steps and bring the composite transaction within the charging provision.