Richard Hay reviewed six Canadian structures useful to international financial planners. The first three planning opportunities reviewed were designed to enhance international plans which otherwise have no Canadian dimension; the second three identified planning to avoid potential Canadian exposures through the use of an offshore structure.
The structures reviewed were as follows:-
1. The creation of non-resident Canadian companies which have no exposure to Canadian taxation by continuing foreign companies into Canada. Proposed amendments to the Canadian Income Tax Act will, if implemented, restrict the creation of new non-resident companies but should not adversely affect existing companies. 2. The establishment of Canadian “transnational” trust companies for tax-free administration of offshore trusts. Such a company is incorporated by private Act of the legislature of a Canadian province. Its foreign branch is treated as non-residential for Canadian tax purposes. The use of such a Canadian corporation as a trustee enhances political security at no additional tax cost. 3. The use of the Canadian uplift in cost base for capital assets of incoming individuals or trusts to avoid a capital gains tax exposure either in Canada or elsewhere on the property of the immigrant. 4. The use of trusts for new immigrants to Canada to avoid Canadian tax on the income and gains on the trust’s offshore portfolio for the first five years. (The period may be extended by careful planning.) 5. The use of non-resident trusts to avoid a Canadian tax exposure on income or gains arising on a gift or bequest to a Canadian resident from a non-resident donor or testator. 6. Changes to the Canadian Income Tax Act in 1991 permit the management of international shipping companies from a Canadian base without exposing profits to Canadian tax.
MALTESE COMPANIES All Maltese companies are fiscally resident in Malta. Holding Companies can be used to hold any asset, movable or immovable. They are chargeable to tax at the normal rate of 35%, but non-resident shareholders receiving a dividend from the Malta company are entitled to a full refund of tax paid by the company in the case where the company’s income is derived from dividends or capital gains arising out of a “participating holding”, or a 2/3 refund of tax paid by the company in other cases (e.g. when income arises by way of royalties, interest, dividends or capital gains not from a “participating holding”). The refunds are not taxable.
A “participating holding” by a Maltese company is one where it holds at least 10% of the equity shares of a company not resident in Malta, or holds shares which are worth not less than the equivalent of LM500,000 (app.US$1.5 million), or has a certain level of control or other rights or the shares are held by the Malta company in furtherance of its business.
The effective rate of tax varies between nil (where dividends are paid out of a participating holding) and 6.25% (maximum rate assuming no deductible expenses).
An International Trading Company is a company which is engaged solely in trading activities, conducted from Malta but not in Malta, and with persons outside Malta who are not resident in Malta. Like a Holding Company it is taxed in Malta at the regular rate of 35% and upon a dividend distribution to its non-resident shareholders the shareholders are entitled to refunds, leaving a net tax liability in this case of 4.2%. Again, the refunds are not taxable. The above-mentioned Holding and Trading Companies are exempted from exchange control.
MALTESE TRUSTS Every Maltese trust must be registered with the Malta Financial Services Centre. A copy of the trust deed or a unilateral declaration of trust is filed with the Centre, but it is not available to the public. A Maltese trust can last for up to 100 years.
Under Maltese law, it is possible to establish bare, fixed interest, discretionary, accumulation and maintenance, protective, unit and charitable trusts. The settlor may not be a resident of Malta, though he may be an individual ordinarily residing in Malta by virtue of a Permanent Residence Permit.
Every Maltese trust must have as one of the Trustees or as the sole trustee, a Maltese nominee company licensed by the Malta Financial Services Centre. Maltese law affords to trustees all the powers of a natural person having the absolute title to property. Property of any kind may form part of the trust property except immovable property situated in Malta. None of the beneficiaries can be resident in Malta, although if the trust is a charitable one, Maltese residents can benefit from it.
A Maltese trust pays LM200 (US$600) upon registration, and subsequently a fixed sum of LM200 (US$600) as tax per year. There is no liability to any income, capital gains, inheritance, gift, wealth, withholding or other taxes. There are exemptions from stamp duties on transfers and from payment of customs duties when property held by a Maltese trust is imported into Malta.
A Declaration is submitted annually to the Commissioner of Inland Revenue by the nominee company acting as trustee of the Maltese trust confirming that the settlor and beneficiaries are qualified to be so, that the trust property does not contain any immovable property in Malta and that the trust does not stand to lose any of its rights, exemptions or privileges under the Trusts Act. The trusts are free from any exchange control restrictions.
PERMANENT RESIDENCE In order to qualify for a permit, the applicant must have a minimum yearly income of at least LM10,000 (app. US$30,000) or capital of LM150,000 (app. US$450,000). A minimum of LM6,000 (app.US$18,000) must be remitted annually to Malta. If only this amount is remitted, then he pays tax at the minimum of LM1,000 (app.US$3,000) and there is no further liability to Maltese tax. The intending resident must either own a house in Malta which costs not less than LM30,000 (app.US$90,000) or a flat costing LM20,000 (app.US$60,000) or he must lease premises with a rent of not less than LM1,200 (app.US$3,600) per annum. The resident may not work in Malta.
If a resident is not domiciled or ordinarily resident in Malta, Maltese tax is payable only on any income (and not capital) which is received in or remitted to Malta, unless the permanent resident chooses to be taxed on world-wide income. Tax is payable at the reduced flat rate of 15% subject to a minimum payment of LM1,000 per annum (app. US$3,000). The normal tax rate for Maltese residents is on an ascending scale from 10% to 35%. There are no capital, wealth or inheritance taxes, and no capital gains tax is payable on any capital gains arising outside Malta. Permanent residents enjoy some exemptions from customs duty.
The practitioner should have available to him some general information about Cyprus, about Cyprus offshore entities – offshore companies, partnerships and branches, about how they are incorporated or registered, what tax advantages they enjoy and what restrictions they have about the audit and other requirements and the tax regime applicable to such entities. Cyprus became a centre for shipping companies in 1963. The combination of exemption from taxation and application of tax treaties to shipping profits is highly advantageous.
The Cyprus treaty network provides for reduced or nil rates on dividends, royalties and interest. The treaties with Russia and the other Eastern European countries are particularly useful.
Cyprus offshore trusts are governed by the new Cyprus International Trust Law of 1992. Provision is made for asset protection and the non-applicability of the inheritance and bankruptcy laws of other countries. There is no taxation of trust income or assets.
1992 was largely a year of consolidation.
All operators of financial services are now regulated and supervised, and the infrastructure works especially in terms of office accommodation are largely in place. The Gibraltar International Business Development Board was also formed to bring together the marketing efforts of both the public and private sector. A number of interesting developments took place in the various aspects of finance centre activities. In particular the first open ended investment company consisting of an umbrella fund was launched. Furthermore the possibility of using Gibraltar as a territory benefiting from the Generalised Systems of Preferences (GSP) was highlighted. GSP status means that certain goods may be imported into the EC on a no quota restrictions basis once they have a minimum local content.
Extension of interest from Switzerland was also seen including the establishment of a number of entities by Swiss institutions.
In response to EC requirements, the Banking Ordinance 1992 was passed. This has introduced a revised regime for banks. In particular, it implements various EC directives relating to banking including the second banking directive. On the UCITS front progress has been slower. Although the rules have been in place for some time, discussion as to the mechanics of regulation continue. These exchanges with the UK form part and parcel of a wider debate on how financial products launched in Gibraltar aimed at the whole European Community should be regulated. On the one hand is the fact that Gibraltar’s membership of the EC is through the UK whilst on the other hand Gibraltar is keen to preserve its legislative and regulatory independence.
Gibraltar is confident that a workable arrangement with the UK will shortly be finalised with regard to UCITS and other EC-related financial services and products.
In conclusion, we now have a well-established and fully regulated centre, capable of undertaking a wide range of the traditional offshore centre activities. It is expected that the Rock’s wider ambitions as an EC centre will allow it to rival other similar jurisdictions such as Luxembourg and Dublin.
In 1993, Greece passed special incentives legislation in order to realise the foreign investment potential. The latest and most comprehensive law is the Development Law (892/90) which offers incentives for the establishment and development of productive units in Greece. For the purposes of the Law, the country is divided into four areas on the basis of their degree of economic and regional development. Productive investments are assisted either
a) by growth, interest rate subsidy and increased depreciation rates; or b) tax allowances and increased depreciation rates.
The legal entities commonly used for doing business in Greece are:
a) Societe Anonyme; b) Societe a Responsabilite Limitee; c) Unlimited Partnership (OE) d) Limited Partnership (EE) e) Shipping Company (NE) f) Branch offices of a foreign bank or other company.
In addition to the above “normal” forms of business enterprise, a foreign trading, industrial, banking or shipping enterprise may establish a branch in Greece which, provided it engages exclusively in offshore business, will be fully exempted from tax, levy or withholding tax. Such a company will have to cover its expenses in foreign currency and put up a guarantee that it will comply with the terms of the permit for its establishment.
Business activities are protected by laws relating to patents, trade marks, unfair competition and trade names and distinctive titles.
The movement of capital between Greece and other countries is being liberalised. By the 1st July 1994, no restrictions will exist. At present, there are almost no restrictions for movement of funds to and from EC countries. Greece has introduced in recent years modern legislation relating to financing and other business relationships such as leasing, factoring and forfeiting, venture capital and time sharing.
Since 1988, the capital market has been transformed into a modern stock market. All checks and balances which exist in more developed European stock exchanges are now applicable in Greece.
Greece has an extensive system of Double Tax Treaties.
Finally, Greece is a member of the EC and will be one of the major beneficiaries of the Delors II package.
It is possible for the same investment to get incentives from the Greek State and at the same time from the EC.
A. Some relevant aspects of the Spanish market:
(a) Low conceptual sophistication of the possible users of international tax planning products and structures, due to:
(i)Past exchange control regulations (up to 1.1.’93) (ii) Youth of present tax regulations. Personal Income and Wealth and Corporate Tax Laws were passed in 1979; the Inheritance and Donations Tax Law in 1988 and the VAT Law was enforced in 1986.
(b) Tendency to identify international tax planning with the structures aimed at fiscal black money situations.
B. Some relevant aspects relating to the law and practice of the Spanish fiscal systems:
(a) Spain has a modern fiscal system with well-drafted legislation. (b) Residents and non-residents are subject to the same taxes. Direct taxes are determined by worldwide income and capital gains in the case of residents and by Spanish income and gains in the case of non-residents. (c) It has a wide treaty network. (d) Anti-offshore legislation:
(i) Offshore jurisdictions are identified in Royal Decree 1980/91 (ii) The special tax on real estate owned by non-resident companies may be considered as part of this legislation.
(e) But the system is not yet completely implemented:
(i) Difficulties in determining applicability of fiscal laws to particular cases. (ii) Criteria not consistent (iii) No possibility of obtaining advance rulings from the Fiscal Authorities (iv) No special Fiscal Courts.
(f) Little enforcement of fiscal rules:
(i) Little tax inspection albeit very tough (ii) In practice, few criminal prosecutions for tax offences.
C. Hints on how to enter the Spanish market:
(a) Sell solutions: identify a general need, develop a product suited to it and sell the need together with the product. (b) Go local: develop a stable relationship with the market. (c) Spread the word: teach the Spanish market the concepts on which international tax planning is based.
IrelandThe legislation which established the Shannon Airport Tax Free Zone ensured that the 10% of tax will apply if trading operations are carried on within the defined airport zone and the activity falls within one or more of a number of permitted kinds.
The Dublin Custom House Dock Site was introduced by the Irish Finance Act 1987. Again the prevailing rate of tax is 10% so long as the activities are in the financial sector. An application must be made before 31 December 1994 for the appropriate licence and benefits to be derived from the licence will last until 31 December 2005.
Manufacturing relief was brought in by the Finance Act 1980 whereby a special corporation tax rate of 10% was introduced and will continue until 31 December 2010. The 10% rate also applied to film production companies providing that not less than 75% of the work is carried out on the production of the film in Ireland.
Singapore has a modified territorial type of tax. A resident company is liable to tax (at 30%) on its income derived in Singapore plus any foreign source income remitted from outside.
Operational Headquarters Incentives legislation exempts a Singapore headquarters company from tax on its foreign income. A new section 13E has been introduced so that any foreign tax credit which reduces Singapore tax on foreign income received in Singapore can in effect be used to exempt dividends declared from that income.
Exchange control regulations have been relaxed and South Africa has become more interesting. It is essentially a source based tax jurisdiction. Subject to certain tax treaties royalties paid are subject to a 48% withholding tax. There is however an exemption which exists in respect of copyright of printed material.
The costs of operating an offshore activity from South Africa are extremely competitive.
You can incorporate a company in Swaziland and have it managed and controlled elsewhere and incur no local taxation on its foreign income.
If you are dealing in activities particularly trading activities in Central Africa you will get exchange control consent to make payments much quicker if you are making the payment to a neighbouring country. Bank accounts can be operated in Swaziland with no income tax repercussions and you can have your registered office and Company Secretary based in Swaziland.
Israel is essentially a common law based jurisdiction. Its Company Law follows the 1929 English Companies Act, with modern amendments. A private company can be formed with simplicity and speed, requiring a minimum of two shareholders, individual or corporate, and one director, individual or corporate. There are no residence requirements for directors of private Israeli companies.
Israel enjoys an extensive and growing tax treaty network, currently with Austria, France, Norway, Belgium, Germany, Poland, Canada, Italy, Singapore, Denmark, Jamaica, South Africa, Finland, Netherlands, Sweden, U.K.. Treaties with the US and Japan have been signed and await ratification, whilst further treaties are in advance negotiation stages with the Philippines, Hungary and Thailand.
Current legislation offers an innovative and little-known international facility in the form of the non-resident Israeli company, which requires and will generally receive Bank of Israel authorisation, and which, if owned and controlled by non-residents and fully engaged in its activities outside of Israel, would not be liable for Israeli income tax.
International Trading Companies and foreign investors are eligible for a wide range of tax and investment concessions and facilities under the Encouragement of Capital Investments Law, 1959 and associated legislation.
Foreign nationals, non-residents of Israel, new immigrants and returning Israeli residents have extensive exemptions from Israel’s Exchange Control Regulations.
There is no inheritance tax in Israel.
An extra-territorial free trade zone is to be created.
ADDENDUM (May, 1998)
The Treaties with the USA, Japan, Hungary and Thailand have been ratified. Further Treaties have been ratified with India and Switzerland.
The non-resident Israel company was in the main frozen due to Bank of Israel policy over the last three years. With the lifting of Israel exchange control, this vehicle may receive some resuscitation.
The Israeli southern port and resort city, Eilat, has been declared a Free Trade Zone and the ports of Haifa, Ashdod and Eilat have been declared Free Ports. Direct and indirect tax benefits have been conferred under those Free Trade Zone and Port facilities.
The improvement of the political climate has brought Lebanon into focus as an offshore centre.
It was the first Arab country with a Mediterranean outlook to provide legislation governing offshore and holding companies.
This legislation has now been brought up to date – to some extent at least – by the two Legislative Decrees nos. 45 and 46 of June 1983 governing respectively Holding and Offshore companies.
Two features of Lebanon’s legal system make the country particularly suited to the development of offshore business. Territoriality of the tax is one of them. Pursuant to that concept only profits generated in Lebanon are taxable. Profits generated abroad and brought into Lebanon are not. The second feature is banking secrecy. With the law of 3 September 1956 banks established in Lebanon and bank accounts are subjected to and protected by a notion of secrecy which is deemed among the most comprehensive in the world.
The requirements for an offshore company may be summarised as follows:-
1. The Board of Directors of an Offshore Company should comprise a minimum of 3 members and maximum of 12. At least two of the members ought to be Lebanese nationals. 2. The company should retain the services of a lawyer who may be at the same time one of the members of the Board. 3. The company should retain the services of one auditor who should be independent of the Board. 4. The minimum capital of a joint-stock company – which is the necessary form for an Offshore – is LP 30,000,000.00 ie US$ 15,000 providing an average exchange rate of LP 2000 to one dollar is retained, and bearing in mind that the dollar’s exchange rate may vary enormously up or down according to economic or political circumstances. 5. The capital of an Offshore Company should be entirely subscribed for but only a quarter paid in, ie US$ 3750. When the company is finally constituted that quarter will remain at the Board’s disposal. 6. An Offshore Company must maintain bookkeeping and must file full accounts with the Ministry of Finances. It is, however, subject to a lumpsum tax of LP 1,000,000.00, ie US$ 500. The lumpsum tax paid by a Holding Company accounts to US$ 2,500. 7. If we disregard the one quarter of the capital which must be paid in but will anyhow remain at the Board’s disposal, the costs for setting up an offshore company are approximately US$ 2700, including the lumpsum tax and the fees of the two Lebanese Directors and of the Auditor. The annual recurring costs will be around US$2000. 8. An offshore company could be operational within 48 hours provided no major changes from the standard forms and procedure are required.
The presentation focused on two main subjects:
– The new regime of tax incentives
– The recent developments of the Financial Services sector
The new fiscal regime was approved by Lisbon after an analysis of the system, carried out in 1992, based on the actual experience and on the need to adapt it to the Single European Market. It clearly approves the future development of the system and reaffirms its basic principles. Some charts were displayed which illustrated how the fiscal benefits apply to the main activities carried out in Madeira. Two major developments have occurred in this field:
The admission of a new type of holding company (the SGPS) subject to a small taxation, which qualified for the EU Parent-Subsidiary Directive;
The decision to also grant benefits to a number of financial companies and vehicles not covered by the previous legislation.
For the second subject – Financial Services – the presentation highlighted the firm support of the Portuguese Central Government to the development of this sector of the Madeira’s International Business Centre, namely through locally incorporated subsidiaries or new financial institutions in general (not only branches, as in the first phases of establishment of the Centre).
In this respect it was also explained that the operation of financial institutions must comply with all laws and regulations applicable to those activities at both EU and Portuguese levels, namely with the EU’s second banking Directive and with the Portuguese “General Regime of Credit Institutions and Financial Societies”, coupled with the special fiscal regime of the International Business Centre.
Monaco emerged as an offshore centre when Onassis came there in the 1950’s, and began to manage his ships there.
It is possible to become a tax-free resident in Monaco. An application must be made to the French Consul in the place where the individual lives. It takes 2 or 3 months to process the form. The approved form, together with a lease or sale contract for a property and a bank reference (evidence of income at least 5 times his rent) must be presented to the Monaco authorities. A residence permit is initially for one year for the first three years. On renewal, the applicant must show that he lives in Monaco most of the time. A work permit may be obtained.
Only 16% of the population are Monegasque. The Principality is exceedingly well-policed, has sunshine, millionaires and meetings of the ITPA. It does not regard itself as a “tax haven”. Its government does not require large expenditure; there is no personal tax or tax on foreign companies not doing business there. A licence is required to carry on business; some are obtainable only with difficulty.
The anglo-saxon trust concept was introduced in 1936 and the mutual fund concept in 1988.
The attraction of the UK as a residence for non-domiciled individuals is well known. Advisers to such an individual who intends to take up residence in the UK need to be familiar with the concept of “domicile” and will need to keep abreast with the changes of the law now being considered. A grasp of the concept of “remittance” is also important, and the use of an offshore trust to separate capital gains from remitted money will generally be advisable.
Non-resident and non-domiciled individuals may find it useful to create trusts in the UK. The “thin” trust, where foreign income is paid to a non-resident beneficiary, offers cosmetic and perhaps treaty advantages. An accumulation or discretionary trust can be an excellent vehicle for holding non-income yielding foreign assets.