Barcelona 2008 meeting

Malta’’s tax regime has the blessing of the EU. The headline rate of tax is 35%. The Euro is the currency. There is a remittance basis for companies resident in Malta but incorporated elsewhere. The EU Interest and Royalty Directives apply. For non-resident shareholders, the tax refund system reduces the tax to 5%, and to zero for cross-border income. There is no tax consequence on redomiciliation; outward redomiciliation is permitted to any jurisdiction not on the FATF list. A number of BVI companies owning property in Spain or Portugal have redomiciled in Malta. Tax rulings are available. The reforms of 2007 were the phasing out of the international trading company, an extension of the tax refund system to all dividends (except those derived from local property) and to shareholders of companies with a branch in Malta. There are over 45 tax treaties. Unilateral relief is also granted. Further treaties are in the pipeline. There are provisions for participation exemption. A branch in Malta is taxed like a Malta company. There is no tax on outgoing dividends. There are advantageous structures involving holding companies, finance companies, trading companies. Malta is not on the Spanish or Portuguese blacklist. An investment fund is exempt from tax.

The EU Green Papers will have a significant effect on cross-border estate planning. The first question to determine is, what property is or is not in the estate – jointly held property, trust assets, pensions. Then there are differences in taxation, forced heirship and matrimonial property regimes. There are different legal frameworks. In common law countries, the formal validity of a will is crucial; civil law countries have different approaches. A will made in one jurisdiction may not revoke a will made in another. In civil law countries, the property of the deceased passes to the legatees; the executor, if any, has a merely administrative function. In the UK and elsewhere, there may be unilateral or treaty relief for foreign inheritance tax. Concepts of domicile vary: many common law countries do not have the concept of revival of domicile of origin. Rights of spouses, illegitimate children and dependants vary from one country to another. Forced heirship limits testamentary freedom. Some inter vivos gifts may be set aside. The equality principle has been extended from divorce to claims on death. The EU Green Paper on Succession and Wills attempts to unify the treatment throughout the EU. It seems that the UK will not opt in, but any change will affect UK individuals with property abroad. Will testamentary trusts be recognised? Will inter vivos gifts be clawed back? The new measures proposed are that the applicable law on maintenance will be the law of the creditor’s habitual residence. The new Green Paper will provide that the parties to a marriage can agree which court has jurisdiction on divorce and what should be the applicable law.

Participation rules are broadly similar. An investor may own Luxembourg No 1, which owns Luxembourg No 2 which owns an SPV. The “Dutch sandwich” now costs 8.3% tax. For trading in UK land, the investor may have used a Guernsey exempt company which owned a Guernsey resident company which owned the land. Malta, Hungary, Netherlands now offer an alternative. The revised Dutch sandwich has the Netherlands company owned by a Malta company. The investor may own a Cyprus company owning an SPV. A recent development is holding the SPV through a Dutch cooperative. A hybrid instrument may take interest via Netherlands or Luxembourg. Austria has many uses – e.g. the SPV owning real estate may be held by an Austrian company held by a Malta company held by the investor. The Malta company may be replaced by an Austrian foundation. The participation privilege in Singapore requires the Netherlands subsidiary itself to pay tax at 15%; Singapore has a remittance basis for foreign income, but remittance is required to take advantage of the treaty. Where French business real property is held by a French company, the shares may be held by a UAE company and sold without a French tax liability. Private investment funds established in Jersey or Guernsey may have a subsidiary In Cyprus or Malta. The French closed down the Luxembourg and Denmark routes for French property profits. There are anti-shopping provisions in place – a definition of conduit in the UK/Switzerland treaty and a wider use of the US-style limitations provisions. For the Swiss, a holding company must show real substance. The Germans have similar provisions as does Austria. The UK Reit is a transparent investment vehicle. Other countries have followed. The treaty treatment is unclear.

The previous government having been returned to power, it is possible to foresee the future shape of the Spanish tax system. Residence is the key criterion for an individual’s tax ability. Income Tax rises to 45%. Wealth tax is presently up to 2.5%. Inheritance tax can rise to 81%. Spain has 18 autonomous communities, with tax-raising powers. An Individual is resident in Spain if he is resident for 183 days in a year, and there are several presumptions of residence. Non-residents are taxed on assets and on income arising in Spain. The “Beckham regime” allows an employee to retain his non-resident status for 5 years. Only the income element of an annuity is taxable. There is now an overall rate of capital gains tax of 18% and a 3% withholding requirement on a sale by a non-resident. The wealth tax is still in force, but Mr Zapatero has promised to repeal it. Inheritance tax is chargeable on assets in Spain or where the beneficiary is a resident. It is hugely complicated and the amount depends on a large number of factors, notably the relationship of the beneficiary, his age and net worth. Holding property through a Spanish holding company used to be tax-efficient but is no longer. There has been for some time a French-style special corporation tax on immovable property owned by a non-resident company; there is now a deemed residence for companies a majority of whose investments are in Spain. Exemption is available for companies resident in treaty countries.

Insurance is a pooling of risk. It has a long history. Life insurance provides for widows and children; it is encouraged by governments. The tax advantages and the pooling of investments make the insurance policy an advantageous investment vehicle. Generally, the policy offers deferment; treatment of proceeds varies but they are never worse than the taxation of the underlying income. Life insurance is more generally an advantageous medium for estate planning. Trust–type distribution provisions can be written into the contract. Many countries do not require the existence of a life policy to be declared for tax purposes. Insurance is common in most countries and a policy made in one country will generally be effective in another. Some countries do not allow creditors of the policyholder to access the policy. A life policy is easy for the client to understand. Cayman provides hedge fund investments for insurance companies, so that e.g. US citizens can indirectly invest in them. In Europe, four jurisdictions actively participate in the cross-border market. The Isle of Man began in the 1980s. The Third Life Insurance Directive of 1992 allowed cross-border business throughout the EU. Luxembourg first grasped this opportunity. Ireland came into the market later but has grown larger: Italian companies established subsidiaries in Ireland, whose business is mostly in Italy. Liechtenstein now has 17 companies in the market. Luxembourg’s focus is on large single premium policies tailor made for the client. The US taxpayer finds the deferred variable annuity attractive. A policy is also attractive to a temporary US resident, to the non-domiciled UK resident, to the French citizen and to the Belgian resident. Wealthy people are becoming more numerous; life assurance may be more heavily taxed in the future, but it is expected to be more widely used as a tax planning vehicle.

The institutional trustee is generally a publicly quoted company with an offshore and onshore presence. The small institutions are more inclined to engage in lobbying. The offshore activities are prone to enquiries from onshore tax authorities. The UK has changed its trustee residence rules. The rule is now the same for income tax and capital gains tax: to be treated as non-resident, the trust must have a non-resident trustee and the settlor to have been neither resident nor ordinarily resident and non-domiciled when the trust was made. This gives rise to a number of problems – which have been rather over-shadowed by the proposed changes in the rules relating to the non-domiciled. Most particularly, the rules in the UK which came into effect from 6 April 2007 introduced the concepts of “branch”, “agency” and “permanent establishment”. If a trustee has, in the course of business, a branch, agency or permanent establishment in the UK, it will be resident in the UK. These are new concepts in the field of trusts and are open to different interpretation, and are likely to cause difficulty to foreign trustees conducting any sort of business in the UK. For example, what is the position where a foreign trustee has a UK resident affiliate which provides investment advice? HMRC has tried to alleviate concerns in this area through correspondence, but the legal basis for their interpretation of the law has been put into question. The offshore trustee has to consider whether it should make disclosure to foreign tax authorities or pay foreign tax. These are difficult areas where trust laws and tax laws are often in conflict. A trustee may well have to seek the directions of the court to pay foreign taxes which, on the face of it, are unenforceable against the trustee. The offshore trustee needs to be able to show that the trust is truly administered offshore. The institutional trustee may be in a better position to do this. The beneficiaries do have access to the deep pocket of the institutional trustee. Some such trustees have explored the use of private trust companies. The compliance and risk control procedures of the institutional trustee help to show that the trust is genuinely being administered offshore which is an area of increased scrutiny by onshore tax authorities.

Andorra maintains a low profile. The country has been independent for 700 years. Tax levels are low – there is no personal income tax, inheritance tax, gift tax, wealth tax or capital gains tax (except on local real estate). Privacy is intrinsic to the culture and protected by the constitution, the penal code and the Court. Family offices maintain a secure server in Andorra. It is expected that the country will sign some OECD information -sharing agreement perhaps on the Swiss pattern and some form of tax treaty with France and Spain.

It is an independent country, founded in 1301 AD and a republic since its foundation. It is not a member of the EU. It has tax treaties with Austria, Belgium, Croatia, Luxembourg and Malta. Others are in the pipeline. San Marino can be a base for business in Eastern Europe and financial investment in major financial centres of Europe Company income is taxed at 17%. There is no withholding tax on dividends. There are special tax regimes – for intellectual property, for services provided to foreign companies in the same group, for holding companies and for investment funds. Boats registered in San Marino carry a very low VAT but can freely stay in EU waters. Trusts are governed by a law of 2005: tax of 1.7% is charged on trust income and 15% on distributions to beneficiaries of fixed trusts.

Purpose trusts are being more widely used. A purpose trust has no beneficiaries and therefore cannot be terminated under Saunders v. Vautier. The right to enforce the trust is vested in the “enforcer” . Generally, the trust can continue in perpetuity. The practice is to establish the trust by way of declaration of trust. The trust instrument must make provision for the distribution of the trust assets when the trust comes to an end. The purpose trust is a flexible vehicle. Like other trusts, it enjoys a high degree of confidentiality and is subject to little regulation. Over 20 jurisdictions now offer purpose trusts. Liechtenstein was the first – in 1926. Bermuda introduced its registration in 1989. The legislation in the BVI, Cayman and Mauritius are similar but by no means identical. There are also mixed trusts – the STAR trust in Cayman, the VISTA trust in the BVI. The purpose trust has many uses. It can have wider purposes than a charitable trust. It is used in commercial transactions – a fund to pay creditors or meet claims, a sinking fund trust, company reserve fund, a voting trust, securitisation, off balance sheet assets or liabilities or for providing ownership structures such as holding shares in a private trust company. It is unclear whether a court in a jurisdiction which does not have purpose trusts will give effect to one. The draftsman should allow for amendments.