Cannes 2012 meeting

Bespoke policies are used by HNWIs, though they are not widely understood. They typically hold a long-term investment – e.g. a fund manager’s partnership interest. Life policies are widely recognised and accepted. They are seen as a social good – unlike trusts, and they are less likely to attract adverse publicity. To qualify as life assurance, the right to benefit needs to be related to life (or death) of the assured; and if it is, the policy may function as an investment “wrapper”. The policyholder has a contract with the policy issuer. The assets within the policy are not owned by the policyholder, but by the policy issuer – hence solvency considerations. The life assurance element is typically re-insured.Several issues arise – separate custodian, management, shares in private company, level of life cover, solvency requirements, possible use of a cell company, restrictions on sales.

In Switzerland and Liechtenstein, companies do not generally offer bespoke policies; neither does the Bahamas or Bermuda. They are found in the EU – in Luxembourg, Ireland, Gibraltar and Malta, and also in Guernsey and the Isle of Man. The assurance companies in Luxembourg and Ireland are big. More flexibility can be expected in Malta and Gibraltar. Guernsey and the Isle of Man are outside the EU and allow PCCs and ICCs. This is a highly regulated industry. Most jurisdictions have minimum capitalisation and solvency requirements. In practice, a 1% insurance requirement is the accepted minimum. Assurance companies are reluctant to permit investment in shares in private companies: a PCC or (better) an ICC may be used instead.

Feetham and Jones have written a Guide to PCCs and ICCs. Assurance PCCs exist in Gibraltar. They are permitted in Malta. They are well-developed in Guernsey.

Onshore profits are taxed at 16.5%. Offshore profits are not taxed. There is no capital gains tax or estate tax. The location of a trade determines whether the profits are taxed. Hong Kong is allowed to maintain its own tax system and enter into its own tax treaties, independently of China. There are 17 treaties in force, with 6 awaiting notification and 16 under negotiation.A company is resident in Hong Kong if it is incorporated or ”managed and controlled” there. The OECD Model Tax Convention for the Exchange of information was implemented in March 2010. The first DTA was with Belgium. Belgian royalty withholding tax is reduced to 5%. In the treaty with the United Kingdom, UK royalties suffer only 3% withholding, and interest 0%. Hong Kong may function as a hub to hold, finance and licence IP rights into the UK – or into Europe indirectly. Hong Kong is used as a gateway to China. A treaty with China was signed in 2006. It contains some anti-treaty-shopping provisions. A BVI or other foreign company can be managed in Hong Kong and obtain a Certificate of Residence.

There is a new code of taxation of trusts in France. It has two arms – a declaration of trust assets by French resident settlors and beneficiaries, and an annual reporting of trust assets by trustees. The law contains definitions of “trust” and “settlor”. A French resident settlor must declare the trust assets -whenever situated – on his wealth tax return, as if he owed them personally. Gifts made via a trust are liable to gift duty, and devolutions on death are liable to estate tax. If assets are not declared, a special tax of 0.5% is levied; charitable trusts based in a treaty country and pension trusts made by companies for employees are exempt. Many of the details of the trustees’ obligations are yet to be published. It is difficult for trustees to know when their duty lies. There is a fine of €10,000, or 5% of the fund, for failure to comply. The new law is a reason for not choosing France as a place of residence.Article 123bis attributes the income and gains of foreign entities to French resident beneficiaries. A private foundation lies outside the new law relating to trusts – so far, at least. The Nevis multiform foundation in partnership form offers a possible alternative.

The EU institutions are the Council of Ministers, the Parliament, the European Commission and the ECJ. The EU treaties and secondary legislation give rights to and impose obligations on individuals. Disputes are adjudicated by the national courts, which can ask the ECJ to rule. Powers are vested in the Commission and a number of agencies, which are charged with assuring compliance with EU law; challenges to their activities are heard by the General Court of the ECJ. Such a case was the Gibraltar case (C-106/9 andC-107/09) where the Commission had decided that a proposed new tax regime infringed the rule against State Aid, a decision with which the ECJ – at least on one ground – agreed. In Case C-493/09 the Court held that the Portuguese treatment of dividends discriminated against non-resident pension funds. In another case, the question of interest payments, dealt with in a Directive, was referred to the ECJ by the German tax court (Scheuten Solar Technology). In Balkan and See Properties and Provadinvest, the Court had to consider whether Bulgarian law was compatible with the VAT Directive.The current Littlewood Retail case concerns the treatment of discount given to agents by the way of commission. VAT has been overpaid and the question arises whether the interest claimed on sums repaid by HMRC should be simple or compound. In another case – Deutsche Bank, the Court is considering whether VAT is chargeable on discretionary management fees. In Ocean Finance, the UK First-tier Tribunal has considered the VAT liability on remuneration of a loan broker, channelled through a Jersey company.

There can be disputes with beneficiaries, disputes with taxing authorities or other third parties or disputes relating to the construction or validity of the trust. With beneficiary disputes there is no right of indemnity. A trustee can apply to the court for authorisation to sue or defend (a “Beddows order”). The litigation procedure is lengthy and costly. Much can go wrong with trust investment. In the 19th century, the duty of care was that of the prudent business man; modern investment principles are wider in scope, and in some countries have been codified by statute.The US case of Estate of Rodney B Janes is a classic case of investment failure. Trustees need investment advice, or they may delegate the investment function and agree a policy statement with the investment manager.

There are defences to breach of trust claims – concurrence, acquiescence, release, “honest and reasonable conduct” in the English Trustee Act, the express terms of the trust. The Bartlett decision illustrates the obligation of a trustee to pay attention to the management of a company in which the trust has a major investment. An exoneration clause may protect a trustee (Armitage v Nurse), but several jurisdictions impose limits. Prudence remains the core principle.

Singapore has GST (a VAT system), property tax and stamp duty as well as income tax – a maximum of 20% for individuals and 17% (with lower rates for the bottom slice) for companies. It has a pseudo-territorial system, with a remittance basis. Treaties generally deny relief to unremitted income. Foreign dividends, branch profits and service fees are however exempt if taxed abroad at 15% or more. Capital gains are not taxed. There is no withholding tax on outgoing dividends. Tax credit is available. The Singapore holding company is tax efficient: substance is required and the structure may not be set up primarily for tax planning. A host of tax incentives are on offer. The family-owned investment holding company is tax exempt. Exemption is also offered to overseas and domestic fund vehicles, which are more appropriate to short-term gains, the fund manager being taxed at 10%.There are 69 DTAs currently in force, mostly based on the OECD model, but the PE provision is generally based on the UN model. Remittance is generally a condition of relief. Four of the treaties embody on anti-avoidance provisions. Eleven of them have a business motive test. There is no DTA with the US.

Singapore may replace Mauritius as the preferred gateway to India. India has a GAAR. The treaty with India contains an exemption from Indian capital gains tax, subject to conditions. Singapore is especially useful as a base for ASEAN investment. Singapore competes with Hong Kong as a gateway to China and is especially suited to investment in Indonesia.

Relocation to South Africa exposes the immigrant to income tax from the date of arrival. The cost of his assets is rebased for capital gains purposes. There is a donations tax and estate duty. It can be advantageous to establish discretionary trusts before arrival. Taxation of awards out of trusts depends on the source of the funds. New immigrants have a five-year holiday from exchange control. The emigrant needs to show that his residence has truly ceased. There is a deemed disposal of his assets; the tax charge was overridden by a tax treaty in the TDL Ltdcase, but amending legislation is expected. The emigrant can apply for permission to externalise blocked assets.Non-residents are liable to capital gains tax on disposal of immovable property, shares in a “land-rich” company and PE assets. This may be overridden by a treaty – e.g. that with Luxembourg or Mauritius. There are provisions for withholding of tax by the seller.

South Africa has introduced a holding company regime effective 1 January 2011. It is too early to say whether it will be successful. There is also a new investment management exception.

[TOP]

“Cosmetics” is the art of using an onshore vehicle which behaves like an offshore vehicle. It is not a substitute for proper planning, merely an adjunct to it. Business may be done by an onshore office, agent, partnership or LLC, or by a non-resident company or company taxed on a territorial basis. There are countries which offer zero-tax facilities but are not known for doing so – Uruguay, the UAE. The trust is the most interesting and versatile “cosmetic” vehicle – with the trustee a New Zealand or Australian company, a branch of a Canadian company or a UK co-trustee, and the trust may take several forms – including the unregulated charitable trust and the “thin” trust. The company limited by guarantee can be useful. Some transactions described in my “Six Fiscal Fables” may be conducted without the use of offshore vehicles.