Owen, Christopher: Offshore Survey Supplement - September 2013

29 May 2013, the OECD announced that 12 jurisdictions had signed, or committed to sign, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, while another six had deposited their instruments of ratification.

Austria, Belize, Estonia, Latvia, Luxembourg, Nigeria, Saudi Arabia, Singapore and the Slovak Republic signed the Convention; Burkina Faso, Chile and El Salvador signed a letter of intention to sign the Convention; and Belize, Ghana, Greece, Ireland, Malta, and the Netherlands – including its special municipalities Bonaire, Sint Eustatius and Saba and its constituent countries in the Kingdom of the Netherlands (Aruba, Curacao and Sint Maarten) – completed their domestic ratification procedures.

OECD Secretary-General Angel Gurria said: “In the past two years more than 60 countries have signed the Convention or stated their intention to do so, marking an important milestone on the road to closer cooperation and more transparency, towards making the international system fair to all taxpayers.”

Singapore’s Deputy Prime Minister and Minister for Finance, Tharman Shanmugaratnam said: “Signing the Convention reflects Singapore’s commitment to tax cooperation based on international standards, but the standards can only work if all financial centres come on board. Singapore will work with our international partners to achieve that, so that Switzerland, Luxembourg, Singapore, Hong Kong and offshore jurisdictions like the British Overseas Territories move together.”

The Convention provides a comprehensive multilateral framework for automatic exchange of information and complements other initiatives, such as the standardised multilateral automatic exchange model being developed by the OECD and its G20 partners and efforts underway in the European Union to improve automatic exchange. The Convention also provides for spontaneous exchange of information, simultaneous tax examinations and assistance in tax collection.

21 May 2013, Chief Justice Sir Michael Barnett granted a Bahamas-based trustee an Order declaring that the Rule Against Perpetuities (Abolition) Act 2011 (RAPAA), which governs dispositions in trusts, could be applied to the disposition of a trust created before the RAPAA commencement date of 30 December 2011.

For dispositions created on or after 30 December, 2011 the rule against perpetuity is abolished automatically, but for pre-existing dispositions the trustee must apply to the court for a declaration that the rule be abolished under the application of the RAPAA.

The Trustee Act provided for the perpetuity period to be extended up to 150 years, but the RAPAA provides for the abolition of the application of any applicable rule against perpetuity altogether.

22 July 2013, the Bahamas Cabinet approved a proposal by the Ministry of Financial Services to negotiate a Model 1 Intergovernmental Agreement (IGA) for implementation of the US Foreign Account Tax Compliance Act (FATCA). Negotiations in this respect are expected to begin immediately.

Minister of Financial Services Ryan Pinder said based on his Ministry’s “careful” review of the FATCA regulations, the Model IGAs, consultations with the US Treasury Department and the IRS and consultations with industry, the government had decided that The Bahamas adopt the Model 1 FATCA agreement without reciprocity because that would provide the greatest level of preferential treatment in terms of exemptions for key Bahamian products; and the Model 1 should result in lower costs and reporting burdens to Bahamian Foreign Financial Institutions (FFIs).

Pinder said that following a meeting with US officials on 8 April, the US Treasury had updated its FATCA exemption Annexes (Annex II) of both Model IGA agreements to include an exemption for “trustee sponsored trusts” with US interests such that a trust with a professional trustee would be exempt from the registration and FFI agreement requirements where the due diligence and reporting are carried out by the professional trustee which is an FFI under FATCA.

The Bahamas also had further bilateral consultations with the US Treasury on 10 April at which further exemptions were obtained under Model 1 for Private Trust Companies and certain Master Feeder Fund Structures under the “sponsored deemed compliant” categories.”

30 July 2013, a new Belgium law introducing reporting requirements for legal constructions set up by resident private persons was brought into force. The law covers foreign trusts, foundations, companies and partnerships and, from tax year 2014, Belgian resident taxpayers will have to disclose any such arrangements in their annual tax returns, even if the real beneficiary (or founder) is their spouse or minor children.

The law applies to two classes of structure. The first class is defined as legal relationships under which an administrator owns and manages assets for a beneficiary or some other goal. The second includes any non-resident entity in which a Belgian resident has a beneficial interest and which pays substantially less tax in its jurisdiction of establishment than it would in Belgium. The tax authorities are to publish a list of relevant jurisdictions.

Failure to disclose a relevant arrangement could bring criminal penalties including fines of up to €3 million and up to two years in prison. A voluntary disclosure facility is currently operating in Belgium and will remain open until the end of this year.

15 August 2013, the Cayman Islands government announced that it has concluded negotiations with the US for a Model 1 intergovernmental agreement (IGA) and a new tax information exchange agreement (TIEA). The agreements will enable automatic exchange of information under the US Foreign Account Tax Compliance Act (FATCA).

Cayman Minister for Financial Services Wayne Panton said: “As an international financial centre that contributes to the efficient functioning of global markets, the initialing and subsequent signing of the IGA and new TIEA with the US will again demonstrate Cayman’s commitment to engage in globally accepted tax and transparency initiatives.”

Following the signing with the US, the Cayman government will have further discussions with the UK’s HM Treasury in order to finalise the terms of the UK Model 1 IGA FATCA agreement.

Bermuda’s finance minister Bob Richards announced, on 4 August, that negotiations between Bermuda and the US Treasury over the US FATCA Intergovernmental Agreement (IGA) Model 2 had been completed. The agreement still needs to be endorsed by the UK Foreign and Commonwealth Office in accordance with the UK’s Letter of Entrustment to Bermuda for tax information related matters dated 15 July 2010. Bob Richards said he was confident that the FCO would move quickly so that Bermuda’s financial institutions are not disadvantaged during the US FATCA registration process.

Malta and the US also concluded negotiations for an Intergovernmental Agreement (IGA) in July. The IGA was negotiated on the basis of the latest Model 1 IGA (reciprocal version) issued by the US. The basic purpose of this IGA is to ensure financial institutions that are resident or carrying on business in Malta or the US, will comply with certain prescribed reporting obligations. The IGA will require financial institutions in both Malta and the US to submit the required information to their own tax authorities, which in turn will share such information automatically with the other tax authority.

On 20 August, BVI Premier Orlando Smith announced that the BVI had also opened talks on an IGA with the US Treasury to comply with FATCA.

5 June 2013, the Cayman Islands Court of Appeal confirmed the availability of “free-standing” freezing injunctions in support of foreign legal proceedings, including against Cayman Islands entities against which no wrongdoing is alleged.

In VTB v Universal Telecom Investment Strategies Fund (UTISF), UK-registered bank VTB had sued Russian businessman Konstantin Malofeev in the English courts for alleged, among other things, fraud. VTB then came to the Cayman Islands and sought a freezing injunction against UTISF, a Cayman Islands-domiciled corporate fund, the participating shares of which were beneficially held by Malofeev through a BVI company. No wrongdoing was alleged against UTISF itself, or against its directors, who were independent of Malofeev.

The freezing injunction was sought against UTISF on the basis of so-called “Chabra” jurisdiction which permits the court to grant a freezing injunction against a “non-cause of action defendant” (NCAD) where it can be shown that its assets could ultimately be used to satisfy a judgment against an alleged wrongdoer and the evidence shows a real risk that assets may be dissipated.

The Cayman Court of Appeal was therefore asked to consider whether the court had jurisdiction to grant a “free standing” freezing injunction against an NCAD. It held that the Cayman Islands court does have this jurisdiction provided that:

The person against whom the freezing injunction is sought is subject to the jurisdiction of the court;
Where there is no cause of action alleged against the person against whom the freezing injunction is sought, it is not necessary that the substantive claim against the cause of action defendant has been brought in the Cayman Islands court;
The substantive claim against the CAD, wherever it is brought, must be founded on a cause of action which would be recognised by the Cayman Islands court;
If those requirements are met, there is no reason in principle why the cause of action defendant should itself be a party to the proceedings in which the freezing injunction is sought against the NCAD.

Having found that the jurisdiction existed, however, the Court of Appeal held that VTB’s action fell short of meeting the test for Chabra relief and discharged the injunction. In particular, it doubted there was any real prospect that Malofeev could be compelled to cause the assets of UTISF to be used to satisfy the judgment that it sought. The UK Supreme Court had, on 16 February 2013, upheld the English Court of Appeal’s decision to set aside permission for VTB to serve its writ in the English proceedings, so there were no longer any proceedings extant in which VTB was seeking substantive relief against Malofeev.

17 April 2013, the DIFC Authority announced a public consultation on a proposed DIFC Laws Amendment Law, DIFC Law No. 1 of 2013, to amend a number of DIFC laws to achieve compliance with the requirements set out by the OECD Global Forum and aligning the Arbitration Law, DIFC Law No.1 of 2008 to the New York Convention.

To meet best standards on tax transparency, the DIFC intends to make amendments to the Companies Law, the General Partnership Law, the General Partnership Regulations, the Limited Partnership Law and the Limited Liability Partnership Law.
The DIFC Authority is also proposing to include transitional provisions in the Non-Profit Incorporated Organisations Law, DIFC Law No.6 of 2012 to allow existing non-profit organisations to become Non-Profit Incorporated Organisations without having to dissolve and re-incorporate.

31 May 2013, EU financial regulator the European Securities and Markets Authority (ESMA) announced that it has approved co-operation agreements between the 34 financial regulators in and all 27 EU member states, plus Croatia, Iceland, Liechtenstein and Norway. Operators of alternative investment funds from these territories outside the EU will therefore be able to market their funds in the EU from 22 July.

The new Alternative Investment Funds Management Directive (AIFMD) restricts the ability of managers of non-EU funds to market in the EU. Marketing is allowed for funds that comply with the AIFMD and associated rules and where an agreement is in place between EU member state financial regulators and the financial regulators of the country in which the fund is based.

ESMA has agreed the arrangements, known as memorandums of understanding (MoUs), with securities regulators in the following countries: Albania; Australia; Bermuda; Brazil; the British Virgin Islands; Canada; Cayman Islands; Dubai; Hong Kong; Guernsey; India; Isle of Man; Israel; Jersey; Kenya; Labuan; Mauritius; Montenegro; Morocco; Pakistan; Republika Srpska; Singapore; Switzerland; Tanzania; Thailand; the UAE; and the US.

The agreements mean that EU and non-EU authorities will be able to supervise fund managers that operate on a cross-border basis. They open the way for co-operation between authorities on the exchange of information. Although ESMA has negotiated the arrangements centrally, they are bilateral agreements that must be signed between each EU securities regulator and each non-EU authority.

12 April 2013, the six largest EU member states – France, Britain, Italy, Poland, Spain and Germany – presented a new plan, at a meeting of European Union finance ministers in Dublin, to exchange all relevant data on capital income with each other automatically.

German Finance Minister Wolfgang Schäuble stressed that the initiative would not be limited to returns on interest. Companies would also apply it to all forms of capital income and tax systems that encouraged creative tax avoidance would come under scrutiny. French Finance Minister Pierre Moscovici said: “Our mission is to create momentum. When these six major capitals of Europe move together, it creates a strong signal which nobody can resist.”

The six EU members have written to the EU Commission to invite other EU member states to join the initiative. The timing of the letter is intended to influence the EU’s work in this area, specifically the 34 proposals contained in the Commission’s Action Plan and Recommendations to tackle tax fraud and evasion.

9 April 2013, HMRC issued a statement warning taxpayers with “hidden” investments and assets in the Isle of Man, Guernsey or Jersey to settle their tax affairs before an automatic exchange of information programme comes into force on 30 September 2013. Voluntary disclosure facilities were agreed as part of Intergovernmental Agreements (IGAs) signed by the Isle of Man in February and Jersey and Guernsey in March.

After 30 September 2016, HMRC will begin to receive information from Crown Dependency banks identifying all account holders. HMRC stresses it will then target those “who refuse to comply,” threatening criminal prosecution, significantly higher penalties and the possible publication of names.

HMRC Director General for Enforcement and Compliance Jennie Granger said: “People with overseas assets or investments who have correctly declared income to HMRC and paid tax have nothing to fear. Those who haven’t, and who do not make use of the disclosure facilities, face the prospect of a criminal investigation or a significant financial penalty, and the risk of having their name published, once the new information sharing agreement kicks in.”

HMRC estimates that the disclosure opportunities and release of information should bring in over £1 billion in previously unpaid tax over the next five years.

16 May 2013, the Royal Court of Jersey dismissed the first appeal brought concerning a request for information issued under an agreement (TIEA) between Jersey and a third country for the exchange of information relating to tax matters.

In Volaw Trust & Corporate Services Ltd & Berge Gerdt Larsen v The Office of the Comptroller of Taxes [2013]JRC095, a request was made by the Norwegian Tax Authority (NTA) under the 2009 TIEA with Jersey seeking the production of various documents and records held by Volaw in relation to its dealings with Mr Larsen and four companies administered by Volaw in which the NTA suspected that Mr Larsen had an interest. Information was requested for the period from 1 January 1996 to 31 December 2008.

The Comptroller subsequently issued a notice under the Taxation (Exchange of Information with Third Countries) (Jersey) Regulations 2008 requiring Volaw to produce documents and records that it held in relation to its dealings with Mr Larsen.

The appellants appealed against the decision on the grounds that: there was no power under the Regulations to require the production of information that pre-dated the entry into force of the TIEA; there were no reasonable grounds for believing that Mr Larsen may have failed to comply with the domestic law of Norway concerning income tax; and the true purpose of the request was to assess Mr Larsen’s civil tax liability rather than for the purposes of a criminal investigation or prosecution.

The Court dismissed the appeals and ordered that Volaw be required to comply with the terms of the Notice. It agreed with the Comptroller that such information could be obtained if it related to a “criminal tax matter”, that the Comptroller had good grounds for believing that the Tax Authority’s suspicions were well-founded and concluded that information obtained for the purposes of a criminal investigation could be subsequently used for any of the other purposes set out in the TIEA with the effect that the information obtained could also be used to conduct a civil tax assessment.

5 August 2013, the European Council of Ministers requested the States of Jersey to make regulations that will make it mandatory, from 1 January 2015, for Jersey to exchange tax information automatically under the EU Savings Tax Agreements. The regulations will repeal the present retention tax provisions for the Savings Tax agreements that were entered into in 2005.

The Regulations will also enable those who wish to do so to change over to the automatic exchange of information in advance of it becoming mandatory. This option has been included in response to the wishes of those financial institutions in Jersey that have offices in Guernsey and the Isle of Man and who wish to harmonise their systems at the earliest possible date.

Jersey Chief Minister Senator Ian Gorst said: “We have been waiting for the position of the European Union to be clarified. Having regard for the outcome of the European Union Council meeting in June this year, and the call of the G20 Finance Ministers at their meeting in July on all jurisdictions to commit to automatic exchange of information, we consider this is now the right time to announce the proposed change from the retention tax. Also of relevance is that, with the increase in the retention tax rate to 35% in July 2012, a significant majority of those subject to the tax have already taken advantage of the voluntary disclosure option in the agreements.”

31 July 2013, Liechtensteinische Landesbank (LLB), the oldest bank in the principality, signed a Non-Prosecution Agreement (NPA) with the US authorities and agreed to pay USD23.8 million after admitting it had helped US clients evade taxes. Under the terms of the agreement, the US consented to end its investigations into LLB.

LLB-Vaduz admitted that it used foundations, trusts or other legal structures to help hide the true owners of accounts from the IRS. It held bank statements in Liechtenstein, rather than mailing them to the US, and also kept records “in which U.S. taxpayers expressly instructed LLB-Vaduz not to disclose their names to the IRS”.

LLB undertook to pay the gross profit of USD16.3 million earned from 2001 to 2012 on transactions with undeclared assets held by US clients. Of that amount, USD15.9m was paid to the US authorities and USD0.4m to the Liechtenstein tax authorities for their costs in connection with the US requests. In addition, LLB Vaduz paid USD7.5m to compensate the US for lost tax revenue during the same period.

The NPA includes an explicit agreement by the US not to impose a fine or criminal penalty on LLB Vaduz. The NPA further acknowledges LLB Vaduz’s extraordinary cooperation in 2012 to obtain a change in law – the so-called “2012 Law” – in the Liechtenstein Parliament that permitted the Department of Justice to request and obtain the bank files of non-compliant US taxpayers from Liechtenstein without having to identify the taxpayers by name. No further legal steps are to be taken against the bank.

10 April 2013, Luxembourg Prime Minister Jean-Claude Juncker announced plans to lift bank secrecy rules with effect from 2015. The move, which followed lobbying by Germany and the European Commission, will bring Luxembourg into line with other EU countries in sharing information within the EU about bank depositors in its territory.

“We can, without great damage, introduce automatic exchange of information as of 1 January 2015,” Juncker told the Luxembourg parliament. “We are following a global movement … we are not caving in to German pressure,” he said, adding that 25 EU countries as well as the US wanted such data sharing.

The announcement ends decades of bank secrecy in Luxembourg, which helped it establish one of the biggest financial centres in Europe and to make its citizens the region’s wealthiest in terms of per-capita income. However, with a banking industry about 22 times the size of its economy and with deposits 10 times its GDP, Luxembourg has recently come under heavy pressure to change following the failure of the financial sector in Cyprus.

When Luxembourg adopts the legislation, it will facilitate automatic exchange of data about EU citizens holding bank accounts in Luxembourg. It will not apply to foreign companies based in the country, which is a popular headquarters for major corporations. Juncker said Luxembourg would not increase corporation tax.

Luxembourg is also set to sign an intergovernmental agreement with the United States to implement the US FATCA regime. “We cannot deny to the Europeans all that we will have to concede to the Americans in a bilateral treaty,” said Juncker.

On 22 May 2013, Austria also finally agreed to exchange bank data with other countries provided that similar rules also applied to third party countries – Switzerland, Andorra, San Marino, Monaco and Liechtenstein.

The five third party countries already have an agreement with the European Union to apply measures equivalent to those in the EU’s Savings Tax Directive 2003/48/EC – reporting interest payments to the saver’s home country so they can be taxed there. The European Commission is currently attempting to negotiate and extension to cover more types of payment and paying institutions, and also forcing institutions to take “reasonable steps” to establish the identity of beneficial owners of trusts and nominee companies.

Previously Austria and Luxembourg had opposed the negotiations because it would have necessitated that they also comply with the disclosure provisions of the EU Savings Tax Directive rather than continuing to impose withholding taxes instead of automatic information exchange.

“We will act jointly, and I believe we will manage the exchange of data by the end of the year,” said Austrian chancellor Werner Faymann, speaking ahead of a meeting of EU leaders. “The wording we have now is good. I can agree with that and it’s an important step for Europe.”

8 August 2013, company Incorporation activity in the major offshore markets fell by 3.6% in the second half of 2012, compared with the same period in 2011, with a deeper decrease of 11% on the preceding six months in 2012 according to Appleby’s On the Register Report. However while jurisdictions including the Isle of Man, Mauritius, Cayman and the BVI were approximately 10% down compared to the previous six months, the law firm said there were grounds for optimism in 2013 with both Bermuda and Hong Kong reporting 7% increases in activity.

“There are signs that 2013 will be a watershed year in terms of seeing a universal return to pre-2009 activity levels across the offshore jurisdictions,” said Farah Ballands, Appleby partner and Global Head of Fiduciary & Administration Services.

The BVI continues to dominate offshore new company registration activity by volume and has consistently maintained a six-fold lead ahead of its nearest comparator, the Cayman Islands. Year on year, Guernsey was the only offshore jurisdiction revealing growth in new company registration activity with a 1% increase between 2011 and 2012.

Mauritius is the offshore economy witnessing the greatest growth rate in total number of companies on its register. Between 2011-2012 it grew its company registrations by 3%. Although the level of new incorporations remains subdued in the jurisdiction, the registry has started to grow, indicating fewer companies are leaving and/or being dissolved here. The next biggest growth came from Cayman, which grew by 1% between 2011-12.

The UK and Hong Kong, as comparators, continue to show signs of recovery. Hong Kong, in particular showed significant growth between H1 and H2 2012 with a 7% increase in registrations. Both Hong Kong and the UK registers are now well above those recorded in 2009.

6 August 2013, President Ricardo Martinelli signed Law No. 47 to introduce a new custody regime for share certificates issued to the bearer, which requires owners to appoint an authorised custodian in order to maintain a record of the final beneficiary of the instruments. The law also permits a competent authority, such as a foreign tax authority, to receive information about the owners of bearer shares.

Bearer shares issued after the entry into force of the Law must be delivered to a custodian together with an affidavit from the owner of the shares including specific identification information. If the owner of the shares does not appoint a custodian within 20 days from the issuance approval, the company will void the issuance.

A three-year transition period will also apply from 6 August 2015 in respect of bearer shares issued prior to the law’s entry into force. If such bearer shares are not delivered to a custodian during the three-year transition period, the owner will not be entitled to exercise the voting and economic rights of the shares.

Local individuals and entities authorised to act as custodians include regulated banks, trustees, brokerage firms and central securities depositaries established in Panama, as well as registered Panamanian lawyers who meet the specific requirements set out in the law.

In addition, foreign licensed banks, trustees and financial intermediaries in jurisdictions that are members of the Financial Action Task Force on Money Laundering (FATF) and registered with the Banking Supervisory Authority of Panama in a special registry will also be authorised to act as custodians.

16 August 2013, Swiss lawyer Edgar Paltzer pleaded guilty in the Southern District Court of New York to helping US clients conceal millions of dollars in offshore accounts to conspiracy to commit tax fraud. He was formerly a partner of Swiss law firm Niederer Kraft & Frey who is licensed to practice in New York.

Paltzer, a dual US-Swiss citizen, admitted to opening bank accounts in Switzerland in the name of entities he formed for US citizens, knowing they intended to evade taxes. He was first charged in April alongside Stefan Buck, then head of private banking at Bank Frey & Co., of one count of conspiring with US taxpayers from 2000 to 2012 to help them hide their Swiss accounts from the Internal Revenue Service.

Pleading guilty to newly filed criminal charges as part of a plea agreement, Paltzer said: “I was aware that this conduct was wrong.” As part of his plea, he agreed to forfeit any fees he earned and cooperate with the US government.

Prosecutors said that Bank Frey gained US clients as the Justice Department pursued other banks. By the third quarter of 2012, about 44% of the bank’s $1.54 billion assets under management last year were for US taxpayers.

9 May 2013, the tax authorities of the US, Australia and the UK announced a plan to share tax information involving trusts and companies holding assets on behalf of residents in jurisdictions worldwide.

The Internal Revenue Service (IRS), the Australian Taxation Office and HM Revenue & Customs (HMRC) are each said to have acquired a substantial amount of data revealing extensive use of such entities organised in a number of jurisdictions including Singapore, the BVI, Cayman Islands and the Cook Islands. The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.

The three tax offices have been working together to analyze this data and have uncovered information that may be relevant to tax administrations of other jurisdictions. Thus, they have developed a plan for sharing the data, as well as their preliminary analysis, if requested by those other tax administrations.