The professional advisor is at risk of being sued. But many actions against lawyers are misguided. The lawyer’s duty to his client will often, in an adversarial system, be displeasing to other parties to litigation, but he has no duty of care to such other party.
The Grupo Mexicano case is illuminating: the U.S. Supreme Court found that a general creditor (without a judgement) has no interest in the property of the debtor. In the Havaco case, a Tennessee resident became an instant resident of Florida, bought a large house and claimed “homestead” relief. He succeeded. The Court ruled that a fraudulent conveyance was not fraud nor egregious conduct. A fraudulent conveyance action is an action against the transferee; the law applies after the transfer. Fraudulent conveyance is not a tort: tort requires duty which is breached. There can therefore be no conspiracy to commit a fraudulent conveyance. And there is no tort of “aiding and abetting”. Statute may provide for pre-judgement freezing orders. But in the absence of such order, the client may do what he wishes with his assets and his lawyer is at liberty to assist him.
Bermuda was founded as a British Colony on 11th July 1612. Political parties began in 1963. Government has recently changed from the U.B.P. to the P.L.P. A recent referendum rejected independence, but the question may be revisited. Bermuda lies 800 miles east of Charleston and is one and a half hours flying time from New York.
A “know your client” culture has prevailed in Bermuda from the beginning. The activities of Exempted Companies have always been restricted, but the number of licensed trust companies, both local and exempted, now stands at about 30. The principles of common law and equity apply, together with English statutes before 1612, as subsequently amended and supplemented by local legislation. Government has always co-operated with the private sector in developing the offshore industry. There are none of the usual direct taxes, except for a rather limited stamp duty, but there is a payroll tax, an annual company fee and various licensing fees. The regulatory regime is under the care of the Bermuda Monetary Authority.
Before 1970, all companies were formed by private Act, and this procedure is now used to establish other entities. “Exempted” companies are exempt, not from tax, but from the requirement for 60% Bermudan ownership. A local quorum of directors for exempted companies is no longer required. An exchange control regime remains, but is very liberal. International companies make a very significant contribution to the economy. There are some 7,500 to 8,000 work permits for non-Bermudans presently in issue – representing 20-25% of the workforce.
Bermuda is now one of the world’s leading insurance marketplaces. More than $10 billion has entered the Bermuda market since September 11th 2001. Bermuda acquired insurance business from the Bahamas in the 1970’s and subsequently lost some (in the field of medical malpractice insurance) to the Cayman Islands. The arrival of the Jardine Matheson Group from Hong Kong has been followed by others.
The 1990’s saw the growth of the Bermuda Stock Exchange, which currently lists over 350 securities – mostly mutual funds. Other new developments are the anti-money-laundering legislation and regulations, information-sharing (very strictly circumscribed) and an environment for e-commerce. Provision for segregated accounts companies were enacted in 2000, and overhauled in 2002. “Corporate inversions” are not new, but are newly in the news. A present challenge is the onshore perception of the offshore world: a balance is required between freedom and regulation.
Canada taxes residents on world income, and has a FAPI regime akin to the US CFC system. 50% of capital gains are included in income; there are no gift or estate taxes, but there is a deemed realisation of capital gains on death – a tax commonly minimised by “freeze” devices and financed by “exempt” insurance policies.
Currently the FAPI rules extend to non-resident discretionary trusts, if the trust has a Canadian resident settlor and a related Canadian resident beneficiary: under s.94 the trust is deemed a resident of Canada and responsible for the tax. Canada is therefore a haven for the wealthy heir: no tax is payable on distribution – even of previously accumulated income – by a non-resident trust funded by a non-resident. The current rules also do not apply unless the settlor has resided in Canada for 5 years: immigrants, therefore, can benefit from a five-year tax exemption by having income earned by a non-resident trust. The new regime which is slated to come into force in 2003 will impact outbound trusts. Under current law, non-resident discretionary trusts settled by a Canadian resident for non-residents are not deemed resident in Canada. Under the new regime, a non-resident trust to which a Canadian resident has transferred property will be deemed resident in Canada, and where a trust is liable to tax, its tax liability is to extend to the settlor. But the taxable income is only that which has not been distributed, and tax may be effectively avoided by bona fide distribution to non-resident beneficiaries.
Under the new rules, a non-resident trust which is deemed resident in Canada should be considered a resident of Canada for treaty purposes too. It should follow that a Bahamian trust to which the new s.94 applies will be entitled to avail itself of Canada’s treaty network, subject to any Limitation Of Benefit provisions in the treaty.
It seems that the non-resident trust rules do not apply to a foundation – e.g. one established in the Netherlands, and that the rules applicable to controlled foreign affiliates also do not apply to a foundation – a foundation not being a company with shares. But this sounds too good to be true, and the Canada Customs and Revenue Agency (CCRA) is likely to attack the use of a foundation under GAAR, at least in cases where the foundation is established by Canadian residents for the benefit of Canadian residents. A taxpayer who has an “interest” in an insurance policy is subject to tax on the income which accumulates within the policy, unless the policy is an “exempt” policy. It should be possible to structure a policy with a non-resident insurer in respect of which a Canadian resident does not have any “interest”, and thereby avoid tax on the accumulating income under the policy.
An offshore Thin Trust can be an alternative to an offshore company. It can have advantages in terms of cost, in terms of establishing “management and control” offshore and in terms of those ineffable qualities which come under the heading of “cosmetics”. Trusts and companies both have access to tax treaties, but in some jurisdictions trusts can be free of tax, while the income of companies is taxable. Recent changes in Barbados and Cyprus bring those jurisdictions sharply into focus in this context. Another New Horizon opens up from the consideration of the UK tax case from 1930, Franklin v. CIR (15 TC 464): the intended recipient of an amount which is presently uncertain cannot be subject to tax, but where there are two such recipients, and the uncertainties are alternatives, the prospective payor may nevertheless be entitled to a deduction.
New Zealand has been in a state of tax reform since 1984, but it has no true capital gains tax and few restrictions on the use of trusts – its trust regime focussing on resident settlors. Trust law follows the English rules of equity. There is no licensing requirement for trustee companies. The country is not perceived as a “tax haven”, but there is a tax exemption for foreign-source trust income. There is, however, an Overseas Investment Commission, whose consent is required for large or sensitive investment. Banks require a licence, and money-laundering legislation applies to all financial institutions, including trust companies.
A trust established by a non-resident settlor is not taxed on its foreign-source income – s.HH4(3B). The source rules are numerous and not entirely consistent. A gain from a “business”, from property acquired for the purpose of sale or from a profit-making undertaking is taxed as income. “Business” is widely construed. It is desirable that any business be conducted by a foreign subsidiary or by an agent outside New Zealand, and that contracts made or performed in New Zealand should be avoided. New Zealand has 27 tax treaties, some of which exclude from “residence” persons liable to tax only to domestic income. There is a CFC regime. It does not apply to the proportion of a foreign company’s income attributable to non-resident shareholders, where a conduit tax regime can be elected to apply. That regime allows such income to flow through a New Zealand company without tax.
New Zealand’s residence rules for individuals use a 183 day personal presence test which back-dates residence to the first day of presence in New Zealand. Careful tax planning is required for migrants.
Life Insurance offers tax-deferred growth, access to the growth, income and estate tax-free leverage of investment and conversion of tax deferral into tax free proceeds. Single-premium deferred variable annuities work well for temporary US residents. The charitable remainder trust offers deferral for the charitably minded. There are also tax-free municipal bonds.
A Variable Life Insurance policy includes a mortality risk plus an investment fund. A Single Premium Investment Annuity has no life element. Private annuities are unlikely to be tax effective. The proceeds of a Single Premium Life policy or annuity are taxed as ordinary income. Multiple Premium Life policies are more generously treated. Life insurance proceeds payable on death are not taxable.
Dynasty Trusts for grandchildren combine tax-free growth and the $1m lifetime exemption from gift and generation-skipping tax. Client and spouse can settle $2m in total; the trustees invest in a Variable Life Insurance policy, the death proceeds of which are free from all US taxes. A Life Insurance contract must be valid under local law. The U.K. and France permit a 1% life risk, but the U.S. rules are stricter. Multiple Premium policies (“7-pay” or “Non-MEC” policies) have more restrictive rules, whether offshore or onshore: if offshore, the federal excise tax is substantially lower than state premium taxes, the policy has greater flexibility and the policyholder may cash-in tax-free if he is no longer a U.S. taxpayer. The policyholder may be an offshore trust: in that case, compliance with securities law and State insurance regulations is easier, the structure can offer asset protection; the policy has greater investment flexibility and there can be an estate tax advantage. The investments must yield at least 6% to make such a policy worthwhile. Pre-immigration trusts can be structured to save estate tax. Income tax can be saved by investing in a deferred annuity policy (to be drawn down when the policyholder is no longer a U.S. taxpayer).
The new treaty elaborates the Limitation of Benefits provisions and takes account of the UK’s abolition of ACT. The treaty was signed in July 2001: the zero dividend article appeared to extend to UK subsidiaries of EU parents, and this was remedied by the Protocol signed in July 2002, as was the lack of zero dividend rate for pension fund investment in certain pooled vehicles.
Benefit may be obtained by “residents”. These include tax-exempt pension schemes and green card holders with substantial presence, permanent home or habitual abode in the U.S. and not resident of another U.K. treaty country, but many dual-resident companies are excluded. Following the OECD Report, income of fiscally transparent entities may be attributed to the taxable member: the meaning of Art 1(8) is extended by the Diplomatic Notes. The Limitation of Benefits rules operate by first specifying the “person” entitled to benefit: these include individuals, certain pension schemes, listed companies and unit trusts regularly traded and (with limitations) their subsidiaries. Other entities and trusts qualify if the have 50% or more “good owners”, subject to a base erosion test. Some derivative benefits are permitted, and benefits may be extended to an “equivalent beneficiary”. There are anti-abuse provisions and an exclusion of remittance taxation.
U.S. dividends suffer 15% withholding, but only 5% for 10% corporate shareholders and 0% for 80% corporate shareholders. The new treaty permits a U.S. branch tax at 5%, but 0% for pre-1 October 1998 activities. Non-contingent interest and royalties have zero withholding. Provisions relate to business profits, stock options, pensions and effective dates.
Courts are reluctant to find that a transaction is a sham. But Rahman shows that it will do so if necessary, and it seems from R v. Allen that a criminal court finds it easier to do so, and Affordable Media LLC is an example of a U.S. court doing so.
The Privy Council decision in Pagarini modifies the rule in Milroy v. Lord and has been followed by the Court of Appeal in Pennington v. Waine  1 WLR 2075. The Hastings-Bass decision shows the Court annulling an earlier act of trustees: it appears that the extent of this rule may be narrowed.
The decision in Armitage v. Nurse validated an exculpatory clause, but this may be subject of future legislation, following a general trend of requiring that people acting professionally should take personal responsibility for what they do.
The 2002 case of Twinsectra Ltd v. Yardley clarifies the nature of accessory liability. The issues may well be revisited when the House of Lords hears the appeal in Walker v. Stones next year. The extent to which beneficiaries are entitled to call on trustees to disclose documents was explained in In re Londonderry’s Settlement, but disputes have continued, and the rights of beneficiaries may prove to have been greatly extended by a widening of procedural rules relating to pre-action disclosure in England and Gibraltar (a development which may shortly be extended to the B.V.I. and Cayman Islands).