Chairman: Milton Grundy
The EU Succession Regulation comes into force later this year. It applies to EU States, except Denmark, Ireland and the United Kingdom. Habitual residence is the default connecting factor, but a testator may choose the law of his nationality at death. No choice of venue is available to the testator. Where, for example, a German testator leaves a restricted interest to A, but confers a subsequent interest on B, it is unclear whether the same law will apply to both dispositions. The Regulation will make changes in several countries — notably changing the law governing dispositions of real estate, but it does not generally alter the law applicable to wills executed before 17th of August 2015. German and French testators will no longer be able to escape forced heirship rules by acquiring English real estate, but English testators will be able to choose English law to govern their dispositions of real estate on the Continent. Existing bilateral agreements will prevail. There are many such agreements, some of long standing. Cross-border succession planning remains a minefield. The Regulation will solve a number of problems but create new ones.
The driving force is political. The BEPS agenda was launched in 2013. It was thought to be over-ambitious, but it has gathered pace. At the G20 meeting in Istanbul, three initiatives were put in place – the multilateral instrument on tax treaty measures, country-by-country reporting and IP box scrutinizing (in Germany and United Kingdom, benefits being proposed to be based on R&D expenditure). Changes in the Parent/ Subsidiary Directive are to be implemented by the end of the year, aimed at the use of hybrid mismatches. A tax measure may infringe the rule against State Aid: APAs are being scrutinized. The Starbucks structure is mostly directed to avoiding US taxes, and the outcome is uncertain. In Luxembourg, the Amazon ruling is under examination, but in in the Netherlands, the tax authorities have yet to discuss favourable rulings. Ireland is requiring more “substance”.
There are increasing amounts of digital information, only a small amount of which is valuable. Some digital assets are straightforward – bank accounts or share portfolios. Some, like photographs, are of sentimental value only.
In Australia, medical information is proposed to be kept online. There are social assets — e.g. diaries, and old hardware may contain information. Some assets are only digital — e.g. an avatar, digital art. How does the will deal with these? Does the testator own the assets? Much digital material gives only a lifetime license to the user. Digital assets are hard to ascertain and hard to value. Keeping records is important. Records can be kept online, but the host company could disappear. Executors may not renew subscriptions. An on-line bank may close accounts which are not used. Facebook will allow a “legacy contract” or “digital heir” (so far in the US only). Yahoo accounts are non-transferable. The terms of service generally prelude transmissions. The Americans have a Uniform Fiduciary Access to Digital Access Act. It needs to be enacted in each State. It gives rights of access to executors, attorneys, conservators and trustees (differently). Some online games allow characters to be sold. YouTube allows content to be “monetised”. This is hard to value.
In drawing a will, the first step is to identify the digital assets. There are concerns about including passwords in a will. A digital will may be possible.
The common law definition has been superceded by a more purposive construction. The beneficial owner here is the person on whose behalf the transaction is being conducted – the person exercising ultimate effective control, a much expanded meaning. FATCA had a hostile reception, but the concept has become accepted, and is manifested in the Common Reporting Standard. The United Kingdom has positioned itself as the poster child of cross-border disclosure, with its former colonies’ model intergovernmental agreement (“IGA”). The United Kingdom has for the time being a special alternative reporting regime for non-doms. Bilateral treaties are expanding the CRS. Settlors, trustees, protectors, beneficiaries and other exercising effective control may be regarded as beneficial owners. In the EU, the 4th Anti-money-laundering Directive gives effect to the FATCA 2012: Recommendations Nos 24 and 25 require a list of companies and of trusts to be maintained, with – for time being – restricted access to trust information.
The partnership is an institution of great antiquity. Partnerships are often (but not always) tax transparent. They facilitate splitting rights. A limited liability partnership is not transparent: it is a body corporate, through treated as transparent for UK tax. The LLC can be tax transparent in the US. Transparency can offer respectability and opportunities for arbitrage — e.g. in rebasing on changing residence from UK to US. Profit splitting enables income to be allocated to persons paying little tax. Partnerships can separate control and ownership. There can be regulatory issues. Partnerships which are not transparent can be a resident in country in which they are taxed, but partners in a transparent partnership are the beneficial owners of the partnership income. Partnerships have other uses in tax planning -synthetic bond stripping, private equity base-cost shift, remuneration planning. Partnerships are under attack in the United Kingdom, but still have planning possibilities.
Risk is the effect of uncertainty on objectives. Text planning involves risk — e.g. of offshore leaks, Luxembourg and Swiss leaks. A tax ruling or opinion does not necessarily eliminate risk. A favourable ruling can be hard to obtain, but an opinion and a meeting can help. If the client is evading tax, the advisers need to walk away. Some tax risk can be covered by insurance, including captive insurance (though the captive capital requirements can be onerous). A captive can cover other risks, too, confining itself to high-risk items, while low-risk items are self-insured. Where the owner of a company wishes to sell, he may insure the continuance of turnover. A royalty payment can be converted into an insurance premium.
Setting up a PTC has a number of problems – finding a suitable board and suitable people without conflicts. An institutional trustee may administer the PTC. There may be family directors, present and future. There are risks for the institutional trustee. A reserved power trust may be preferred, but they have their concerns. The composition of the board is important — including someone with experience and someone representing the purpose trust owning in the PT. See HR v JPT (1997). There may be statutory requirements — for issued capital, for a licence etc. Every level of the structure needs to be registered for FATCA; they will be mostly FFIs. One level could be a sponsor – perhaps the purpose trust if an FFI; each lower level would then not need to register.
The PTC could be a company limited by guarantee, but a company limited by shares held by a purpose trust might be regarded as the best. There needs to be a service agreement between the PTC and the purpose trust. A PTC can be created in many jurisdictions. Provisions for succession and amendment need to be considered. Careful planning is the clue to success.
The case of Symond v Gadens Lawyers Sydney Pty Ltd  NSWSC 955 was a case of the redemption of redeemable preference shares, the proceeds of which were held to be a dividend, contrary to the advice of his lawyers, whom he sued, successfully. The judgment was partially reversed on appeal. Many tax advisers have made mistakes — notably in the United States, as regards the marital deduction. In the United Kingdom, HMRC are becoming more strict, and there is a greater possibility of mistakes in this area. In a recent UK case, it emerged that an elaborate tax evasion scheme had given rise to disputes between the beneficiaries and thus came to the notice of the UK authorities. The use of a purpose trust for the direct holding of investment portfolios can give rise to similar problems. Many Latin American clients create offshore trusts which become very unsuitable, as beneficiaries become US citizens. Assets can be “decanted” into new and more appropriate trusts.