Offshore Survey ? April 2007 by Christopher Owen
EU requests Ireland to amend remittance base rules 30 March 2007, the European Commission formally requested Ireland to amend its discriminatory taxation of income sourced in the UK. Ireland applies remittance base taxation to foreign sourced income of persons who are not Irish domiciled or who are Irish citizens who are not ordinarily resident in Ireland. Ireland does not generally tax income received by such persons from money invested abroad if the interest is left on the foreign bank account. But Irish legislation excludes from this rule income sourced in the UK and thus treats such income less favourably than income arising elsewhere in the EU. The Commission considers that this is contrary to the EC Treaty and to the EEA Agreement, as it restricts the free movement of capital. If Ireland does not reply satisfactorily to the reasoned opinion within two months, the Commission may refer the matter to the European Court of Justice. At the same time the Commission has sent a request for information in the form of a letter of formal notice to the UK about similar remittance base taxation rules, which in turn appear to discriminate against income sourced in Ireland. Cayman permits Arabic language registration The General Registry of the Cayman Islands has introduced an Arabic language facility to enable registration and other certificates to be issued bearing a company?s name in both Arabic and English. The Cayman Islands is one of the leading offshore jurisdictions for Islamic finance structures, which have a current estimated market size of between USD 250 billion and USD 500 billion. In particular, ?sukuks? ? bond issues that comply with Shari?a law ? developed and marketed in the Middle East are predominantly using Cayman Islands-domiciled issuers.BVI brings in private trust companies 15 January 2007, amendments to the Financial Services Commission Act were brought into force to provide for private trust companies by enabling certain categories of company to apply, on a fast-track basis, for exemptions from the licensing requirements and other provisions of the BVI Banks & Trust Companies Act. Unremunerated BVI private trust companies that do not offer their services to the general public will be able to apply for these exemptions. Private trust companies enable family-controlled structures to be established, offer trustees the benefits of limited liability and perpetual existence that are usually the features of corporate vehicles, and can lessen the tax burden by moving the liability from the settlor to the trust company. The BVI government is planning to develop the first Commercial Court in the Caribbean, as part of the Eastern Caribbean Supreme Court, and has also introduced a Legal Profession Bill, which provides for the fusion of the barrister and solicitor branches of the legal profession and which promotes legal education and the discipline of legal practitioners.Gibraltar gives evidence to ECJ 14 March 2007, Gibraltar Chief Minister Peter Caruana gave evidence to the European Court of Justice in support of his government?s challenge to the European Commission?s 2004 decision that led Gibraltar to postpone several planned tax changes and to scrap plans to move to a zero-tax regime in place of the exempt company regime that is being phased out because it was found to be in violation of the EU state aid rules. The two issues identified for adjudication by the ECJ are whether a new corporate tax regime proposed for adoption by Gibraltar to replace the existing exempt-company regime is in compliance with EU state aid rules and whether Gibraltar, which is regarded as part of the UK for purposes of some aspects of EU membership, is to be permitted to have a tax regime separate from that of the UK. The ECJ has already received full written submissions from both sides, and the oral hearing is expected to be the final stage. Gibraltar had hoped the ECJ would hand down its decision in time for the new regime to be incorporated in the 2007-2008 fiscal year that begins in July, but an unexpected intervention by Spain extended the hearings and may lengthen the deliberations. The Spanish government said it was concerned about the possible effect of any court ruling on tax regimes already operating in areas such as the Basque region of Northern Spain. The Gibraltar’ government believes its case has been strengthened by a decision handed down by the ECJ last year, which confirmed Portugal’s right to make separate tax arrangements for the Azores without infringing EU state aid rules. Gibraltar argues that while the Azores is an integral part of the Portuguese state, Gibraltar is not part of the UK and, under its new constitution that came into effect at the beginning of this year, enjoys a non-colonial relationship with the UK. If Gibraltar obtains a favourable ruling in time for the 2007 budget, it is also expected to reduce personal tax levels significantly. If not, the government may have to reconsider its tax plans and postpone the introduction of new structures for another year.Italian Budget addresses tax for trusts 27 December 2006, the first provisions that specifically address the tax regime applicable to trusts were contained in the Budget, which came into effect as of 1 January 2007. The non-fiscal issues regarding the recognition of trusts under Italian law were substantially resolved by Italy’s ratification of the Hague Convention in 1989. In general, trusts qualify as taxpayers for corporate income tax purposes. In case of non-discretionary trusts where the beneficiaries can be identified, the income of the trust is attributed to the beneficiaries pro rata to their respective participations. And in case of trusts incorporated in a country with which Italy does not have an adequate exchange of information, the trust is deemed to be resident in Italy for tax purposes if either, one of the beneficiaries and one of the settlors is a resident of Italy for tax purposes, or a resident of Italy contributes real property to the trust. Distributions from trusts to beneficiaries are subject to tax as ordinary income.US-Netherlands Antilles TIEA brought into force 22 March 2007, the Netherlands Antilles-US tax information exchange agreement (TIEA), which has been pending since 2002, entered into force following an exchange of letters between the respective governments. Former US Treasury Secretary Paul O’Neill and former prime minister of the Netherlands Antilles Miguel Pourier signed the TIEA on 17 April 2002. The agreement is the latest US TIEA to enter into force. The British Virgin Islands-US TIEA entered into force on 10 March 2006; the Cayman Islands-US TIEA entered into force on 10 March 2006; and the Jersey-US TIEA entered into force on 26 June 2006. The Netherlands Antilles signed TIEAs with Australia and New Zealand on 1 March 2007 and is due to sign a TIEA with Spain later this year.UK Revenue confirms no change to ?91-day? test HM Revenue & Customs has confirmed it has not changed its rules relating to the time UK non-residents can spend in the UK, following the Gaines-Cooper ruling. Suggestions that the decision in Gaines-Cooper meant that HMRC had changed the basis on which it calculated the 91-day test was, it said in a brief, incorrect. HMRC said that, based on a ?wide range of evidence? Gaines-Cooper had been continuously resident in the UK, and therefore the 91-day rule did not apply to him. ‘Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first,? said the HMRC.EU targets Swiss cantons 19 January 2007, Swiss cantonal tax officials agreed to a six-month review comparing their arrangements for wealthy foreigners with those applied by other tax heavens, such as Luxembourg and Monaco. Although there are wide variations between Switzerland?s 26 cantons, the general tax formula is based on the annual rental value of the foreigner?s home and their living expenses. Some 3,600 foreigners currently pay an average of CHF 75,000 each in tax, earning Switzerland CHF 300 million a year. The catalyst for the move was the announcement by French singer Johnny Hallyday that he was moving to Gstaad to escape French taxes. A spokesman for French presidential candidate Ségolène Royal likened Switzerland’s cantonal tax system to “banditry”, and called for the European Union to crack down. Swiss President Micheline Calmy-Rey dismissed the demand, saying it was up to the Swiss voters to decide if there should be a change. But this stance was undermined when Swiss Economics Minister Doris Leuthard criticised as “discriminatory” a system that, despite similar earnings, permitted Hallyday to pay only one-tenth as much tax as Swiss tennis player Roger Federer. In February, the EU also attacked Switzerland?s corporate tax system, which permits cantons the discretion to operate preferential tax regimes for management, holding and mixed companies, under which profits derived from foreign activities, including foreign sales, are partially exempted from the cantonal corporate tax. This has encouraged multinational companies to base headquarters, coordination and distribution centres in cantons such as Zug and Schwyz, where they can also benefit from privileged access to the EU under the 1972 EU-Swiss free trade agreement. The Commission contends that the special tax regimes amount to a form of state aid that is incompatible with the 1972 agreement. EU member states have also instructed the Commission to negotiate with Switzerland for the modification of cantonal regimes that exempt, or apply more favourable tax treatment to, foreign-source income from general Swiss corporate tax levels. Such discrimination has been outlawed under the EU?s initiative to eliminate harmful tax competition. Switzerland has rejected the Commission’s criticism, arguing that the free trade agreement does not provide a sufficient basis for assessing corporate taxation.OECD adds arbitration to tax dispute menu 7 February 2007, OECD members agreed to broaden the mechanisms available to companies and individuals involved in cross-border tax disputes by introducing a mechanism for arbitration if other attempts to resolve disagreements fail. The decision applies to both companies investing outside their home country and to individuals living and working in more than one country. Cross-border tax disputes can arise when two states assert conflicting rights to tax an individual or company. As cross-border trade grows and more and more people work abroad, such disputes are likely to become more frequent. The OECD?s Committee on Fiscal Affairs has agreed to modify the OECD Model Tax Convention, which serves as a basis for most negotiations between countries on tax matters, by including the possibility of arbitration in cross-border disputes if they remain unresolved for more than two years.UK banks ordered to disclose offshore records 1 February 2007, the Special Commissioner ordered four UK High Street banks ? understood to be HSBC, HBOS, Royal Bank of Scotland and Lloyds TSB ? to hand over details of their clients’ offshore bank accounts. Barclays was the subject of a similar ruling in April last year, which Revenue & Customs (HMRC) estimated would yield GBP 1.5 billion on unpaid tax. Revenue officials will now search the records of an estimated 100,000 customers for information on UK-domiciled individuals who have not declared income on money kept in offshore centres such as the Channel Islands. The move is expected to yield GBP 275 million in unpaid tax. Special commissioner John Avery Jones said: “In my view, the information that the Revenue has already obtained raises serious questions that merit investigation and cannot be investigated by any other means.? HMRC is proposing to reduce the burden on its investigators by encouraging individuals with undeclared offshore accounts to come forward in a partial amnesty which would offer reduced penalties of 10% of the maximum for a limited period. Investors could still face a bill for up to 20 years of unpaid tax and interest. Under the proposals, investors would be given six weeks to disclose the existence of an offshore account, with a further four months to make a complete disclosure and pay the tax bill. HMRC is expected to announce the concession once it has received information from the banks. ECJ strikes down Danish pension breaks 30 January 2007, the European Court of Justice struck down Danish pension tax relief measures that apply to payments to Danish pension institutions but not to payments to pension institutions established in other member states. In European Commission v Denmark (C-150/04), the ECJ held that Denmark’s limitation of tax relief for life insurance and pension payments to ?payments under contracts entered into with pension institutions established in Denmark? violates articles 39, 43, and 49 of the EC Treaty. EU Tax Commissioner László Kovács said: “The Court clearly rules against national tax rules not allowing tax deductibility of pension contributions paid to foreign funds, while they allow such tax deductibility for contributions paid to national funds.” Kovács said seven member states had already complied with requests to change their pension tax laws and that the remaining member states should now ?also modify their legislation?.