Budapest 1996 meeting

Private banking is the management of assets of individuals. The usual minimum amount is £1m; a ‘HNWI’ has upwards of US$5m assets. For smaller accounts, mutual funds are generally used.
To manage a large account, the banker needs to maintain a close relationship with his client. Accounts have different degrees of risk. The banker needs to manage on a discretionary basis, so that urgently required action can be taken without delay. Financial instruments should be of investment grade quality; investment of riskier sorts require express client approval. Younger people are more inclined to take risks – e.g. by investment in emerging markets, generally through unit trusts. The ‘Asian Tigers’ appear to offer sustainable high growth rates.

The original private banks, established mostly in Geneva 100 or more years ago, are partnerships of individuals with unlimited personal liability. This system affords the bank a high degree of independence and the long service of the individuals helps to retain long-term relationships with clients. The number of Swiss private banks has shrunk, but the assets under management have grown.

A private bank requires to make substantial investment in people and systems. Return on investment is a function of risk; unscrupulous marketing often indicates the opposite. Private banking requires long-term commitment; many U.S. banks who opened Geneva offices found the term too long.

It is estimated that 40% of all offshore funds are managed in Switzerland. Swiss banks have established offices in London, New York, S.E.Asia and elsewhere. This has helped the bankers to establish and maintain close relationships with their clients. Private bankers have branched out into institutional fund management and direct investment advice.

The private banker naturally tries to minimise the taxes suffered by the clients. Bond interest has gradually been freed from withholding tax – following the success of the Eurobond market. Equities, on the other hand, generally involve two layers of tax – one on profits and one on dividends – amounting to some 50% in all. But tax factors are often overridden by investment considerations.

Money-laundering is not a great practical problem, but it is nevertheless a considerable risk. It seems that clients with illegal funds tend to avoid private bankers.

Private bankers offer trusts and foundations, where such vehicles appear appropriate.

Swiss banking secrecy is still in existence, but it is a mistake to think that it protects criminals. A Swiss bank now requires to know the identity of the owner of every account. If there is an act which constitutes an offence both in Switzerland and in a foreign country, the Swiss Court will order disclosure of information to the foreign court.

Hungary is the leading country in the region for the receipt of foreign investment – notably from the U.S. The Czech Republic comes second. Their privatisation programme resulted in a dominating investment position being taken initially by unregulated investment funds, controlling vouchers issued under mass privatization.
In Hungary, the privatisation programme continues – investment now coming primarily from European sources. The pace of privatisation has been slower in Poland. Little investment is going into Slovakia, nor have Romania and Bulgaria succeeded in attracting large amounts of investment.

New investors will probably begin with a Representative Office – a term with a wide meaning, especially in Hungary. Joint Stock Companies are used for large and multi-shareholder enterprises; the equivalent of the German GmbH is more generally used, along with a variety of arrangements going under the name of Joint Ventures. Some kind of co-operation with local investors is in most cases desirable. Hungary and the Czech Republic are the most open and least bureaucratic of countries in the region.

There is a general tendency to protect local lawyers from foreign competition; at the same time it is very hard to find good people. Protection of intellectual property rights has come to the region over the last five years. Employment is highly taxed; in Hungary, the situation is getting worse. Correct levels of remuneration are difficult to establish. Loyalty to the employer is not known, but foreign enterprises have to employ in senior positions significant numbers of local personnel, and repatriation of earnings by foreign personnel has a high tax cost. Use of management and technical service payments have come under attack from the tax and VAT authorities; schemes are being developed to overcome these difficulties. Exceptionally, dividends from Hungary are fairly tax-efficient. Interest-bearing shares may be used in Hungary, even having very high interest rates.

The first step in opening an office in Hungary is to talk to a lawyer. There are Hungarian firms and 23 Western firms. The law permits Western firms to have a representation office and provide services abroad. They may form an association with Hungarian lawyers. The law is to be changed, to enable foreign lawyers at least to give international advice. Foreign lawyers may join the Hungarian Bar – but the examinations are in Magyar.
The Big Six are well represented – Deloittes having the largest presence. Some form of association with Hungarian accountants is desirable.

A foreigner needs no permission to form a Hungarian company. Incorporation can be done in 14 days, though registration takes several months.

Tax is charged at 18%; 23% supplementary tax is charged on top of dividends distributed, but this may be reduced by a tax treaty, and next year it may be replaced by a lower dividend tax – with a corresponding increase in the 18%. Management fees in excess of 1% of revenue are not deductible, but this rule does not apply to payments to treaty countries, where the treaty contains a non-discrimination clause – e.g. Cyprus. Dividends received are not taxable. Supplementary tax is not payable on dividends paid out of dividends received. For this reason, and the attractive treaty network, Hungarian companies may be attractive as holding companies, but also as Royalty Conduit Companies and ‘Off-shore’ type of companies.

Hungary has 45 tax treaties which follow the OECD model, 28 of which provide for nil withholding tax on interest (22% for nil on royalties). Treaty countries do not pay the 23% second level of tax on dividends emanating from Hungary. The treaty with the former Yugoslavia applies to the successor countries. There are new treaties with Bulgaria and Slovakia; other new treaties are in the pipeline. Under certain treaties the recipient of royalties does not have to be the ‘beneficial owner’ of them.
Hungary’s tax treaties apply to offshore companies. Offshore companies are entitled to tax credits provided by the tax treaties.

The time limits on construction sites go from three months to twenty-four months.

Hungary disallows deductions for technical fees paid to tax havens. This rule does not extend to countries which have a ‘general corporate rate’ in excess of 10%, but this general corporate rate does not take into account special beneficial treatment that reduces the rate to less than 10% e.g. in Cyprus.

Arnold Sherman’s paper at the Dublin Meeting covered books and periodicals. Now the CD-Rom, Internet and Lexis & Nexis need to be understood.
Printed material is always out of date by the time it is published. But there are many publications now available.

The CD will contain massive amounts of information. There are excellent materials on UK and U.S. tax law. Tax Analysts has recently published a CD of tax treaties, which appears to be more complete than the IBDF disc. Some CD’s have to be returned; others expire on a prescribed date.

Internet is an international network of collaborating networks. It lacks any overall structure: the user has to obtain access to the information he needs. Access to the World Wide Web (‘www’) can be sluggish and difficult, but the amount of information it has is vast. A ‘hyperlink’ will take the user from one document to another, by highlighting and clicking.

The URL is the uniform resource locator, indicating the web site. Some sites contain links to other sites. The user dials an on-line service – CompuServe, Prodigy, American Online – and the URL directs one to the web-site required. Netscape Navigator and similar software enables the user to find his way. Text cannot contain a virus, but graphics can. It is not desirable to put one’s credit card number on the Net.

Crime is producing larger profits, society has become more critical and drug-dealing has proliferated. Money-laundering has become a most serious problem.
The United States has led the way in anti-money-laundering legislation. The forfeiture rules have generated conflicts between federal and state authorities. In 1990 the European Commission produced a Directive, which is reflected in the United Kingdom in an Act of 1993. The law imposes a duty on a banker to report ‘suspicious’ activity; it exonerates the reporter from civil action, but it is unclear whether the exemption will extend to suits outside the jurisdiction concerned. It is also unclear whether a person may need to reveal transgressions of foreign law. It seems plain however that the current trend is to make the reporting requirements more stringent.

The Mutual Legal Assistance Treaties (the MLAT’s) provide for exchange of information, but at least provide for due process in its administration. Will this stem the tide of drugs?

‘Long-arm statutes’ originated in the United States to regulate inter-state torts. They are now commonly used for non-tort claims and have been extended in some cases to have worldwide jurisdiction. Courts have, in certain circumstances, allowed the admission of improperly obtained evidence.

Asset Protection Trusts can give rise to the courts in another jurisdiction assuming jurisdiction over the trustees or the assets if they are found within the forum of the court.

Poland is changing rapidly. Ex-communists have considerable power, but privatisation is now well-established, and foreign investors are establishing wholly-owned companies to conduct a variety of activities – including those formerly carried on by a representative office. Certain specified classes of business require a licence, but these are being reduced.
A local partner is generally essential to the success of a venture. An investor should contact the local Chamber of Commerce. The law relating to real estate is complicated and consent is still required for the acquisition by a foreigner of title to a long lease. Office rents in central districts are high. Employment visas are required by foreign employees but can generally be obtained. The tax and social security costs of employment are high. Polish accountants and lawyers tend to be protected against competition from foreigners.

Banking services have much improved. Banks are mostly formerly state-owned companies; some foreign banks also operate. Business people have become much more experienced and at the same time wages and salaries have risen extensively. Warsaw now has excellent communications and the economy is expanding healthily. But there are still problems: bureaucratic procedures are still slow and old attitudes prevail; it is expensive to employ expatriates.

The risk exposure of professionals is increasing: this may be attributed to easier travel, more extensive offshore services and greater volume of offshore business. As carriers of indemnity insurance, professionals present a natural target. Lawyers advising plaintiffs are inclined – perhaps indeed bound – to join as many defendants as possible. More numerous beneficiaries and new kinds of settlors (including dishonest ones) are ingredients in this trend to more litigation.
The tax planner has to be aware of and comply with the requirements of other areas of law. Professionals are significantly at risk in committing acts of negligence. A letter of retainer is useful in defining the matters on which the practitioner is advising: he should not stray outside his area of expertise. He should also remember that contractual exclusions may not affect any liability he may have, not to the client but to others who may be affected by his advice.

New legislation in Jersey, providing for limited partnerships, is expected to exonerate partners not personally involved in the negligence. The use of limited companies for audit work may or may not afford the benefit of limited liability. In the United States legislative initiatives have been directed towards limiting liability to a proportion attributed to the accountancy firm.

A person who is a trustee is fully liable to third parties, except to the extent that the contract expressly provides otherwise, but does have a lien on the trust fund to cover such liability. The Jersey Trust Law seeks – perhaps not altogether successfully – to limit a trustee’s liability to the amount of the trust fund; this limitation may not protect the trustee against claims in tort, or claims made in another jurisdiction or a determined tax authority. A limited company is not always a complete solution: the company may have – and be compelled to enforce – a remedy against directors. A lot of existing trusts may be susceptible to attack on Rahman principles: it is useful to have documentary evidence of disagreements with the settlor. Plaintiffs have brought proceedings against trustees – for injunctions (including Moreva injunctions), for discovery, for a local grant of administration, for ‘gagging’ orders, for a Bankers Trust v Shapiro order (for disclosure of destinations of funds). Trustees have to decide how to respond, and where the legal costs are coming from: an application to the Court for directions is routine. Insolvency can produce litigation of various kinds involving trustees.

Much of the danger affecting trustees can be covered by professional indemnity insurance.

Every Austrian company can function as a ‘Holding Company’. Company formation is becoming easier: one-shareholder companies become possible from 1st July. It is not necessary for directors to be resident in Austria, though the Court may appoint one if necessary.
Income is taxable at 34%. Some local business is desirable, so as to afford VAT deductions. Inter-EU dividends are free of withholding tax. An Austrian company holding at least 25% of another company (‘the Subsidiary’) suffers no income tax on dividends or capital gains tax on sale – even if the company is not Austrian. The Subsidiary must be in active business and the shareholding must have been held directly for at least one year.

The Austrian authorities may take an unfavourable view of a transaction if no business or commercial reason for it can be established.

There is a 1% capital tax on any capital injection, but this can be avoided by having an ‘indirect’ shareholder (e.g. grandparent company) play the role of the investor. The registration triggers a small fee, being a percentage of the share capital.

The Austrian Foundation began with charitable foundations. It is now similar to the Dutch Stichting. There are some 350 Foundations now registered – compare some 40,000 in Liechtenstein.

The legislation governing the Austrian Private Foundation was intended to encourage their use. It is a legal entity. No government licence is required. The will of the founder is supreme. The founder’s rights are not transferable. The Foundation requires to be registered and particulars, but not of the beneficiaries, are available to the public.

The Foundation document declares the purpose of the Foundation. If the purpose becomes unachievable, the Foundation must be dissolved. It is more formal in nature than a trust, but its effect is not dissimilar. There is an ‘entrance fee’ – a gift tax on donations to the Foundation. The minimum opening donation is one million Schillings.

The Foundation pays no tax on capital gains arising from sales (at least one year after acquisition), and it pays no income tax on interest and dividends.

Hungary is a country of 10.2 million people, bordered by Slovakia, Ukraine, Romania, Serbia, Croatia, Slovenia and Austria. It is now a democratically-governed country with a market economy.
The offshore regime was introduced on 1st January, 1994. The current number of offshore companies is about three hundred. The offshore regime is similar to that of Cyprus with the exception of non-availability of trusteeship. Trusts are not recognized in Hungary. To benefit from this regime a company must be a limited company with its registered office in Hungary; it needs a licence; it must not engage in banking or financial services; it requires an audit; it must be owned by non-Hungarians and not be associated with any enterprise operating in Hungary.

It pays tax on net income at a rate of 2.7% – 5% (depending on the amount of dividends declared), plus a municipal tax at rates varying from 0-1.2% on gross profits.