Copenhagen 1992 meeting

Meeting Summary
  • Cross-Border Estate Tax PlanningBernard Vischer
    • Cross-border estate tax planning inhabits a world of uncertainties and technical complexities. The legal and fiscal consequences of death vary greatly from one country to another.
      In Switzerland and in much of the Continent of Europe when a person dies the competent authorities “open the succession”. But in other countries the estate devolves directly upon the heirs; elsewhere the estate forms a separate entity. There are various regimes of martial property rights. Jointly-held assets may accrue to the survivor. Some jurisdictions have “forced heirship” rules.

      Jurisdictional problems abound. It is important to consider what jurisdiction will tax the estate, but it is of primary importance to consider what system of law will govern the succession itself. The death of a Swede resident in Switzerland gives rise to two estates and two sets of executors! Sometimes an estate may be split among two or more jurisdictions; sometimes it may be hard to find a jurisdiction where the will can be proved. The art of planning is in finding an acceptable jurisdiction and ensuring that the estate is eventually administered there.

      Estate taxes are levied at hugely different rates in different countries. The many tax treaties operate to prevent double taxation and to share the tax appropriately between the jurisdictions concerned.

      The Hague Convention is bringing recognitions of trusts to civil law countries. As well as Australia and United Kingdom, Italy has ratified it, and it has been signed not only by Canada and the United States but also France, Luxembourg and the Netherlands (though not by Switzerland). There is not yet sufficient jurisprudence in these countries for the practitioner to predict accurately the fiscal effect of a trust, but in general it seems possible to take assets out of any charge to estate tax by putting them into a trust, though one needs to be aware that the act of settling them may trigger a charge to a gift tax.

      It is useful to remember that registered shares in an offshore company are situated where the company is incorporated; thus incorporation of a foreign holding company effectively changes the situs of the holding in its subsidiary.

      Holders of Swiss bank accounts are something advised that probate and estate tax may be avoided by use of a power of attorney – which under Swiss law may survive the death of the donor. But the power does not confer on the donee any property in the account and if the bank is on notice that some other persons (eg executors) are entitled to the funds it will not release them to the donee of the power. One of two joint accounts holders, on the other hand, becomes on death of the other absolutely entitled as against the bank to the funds in the account.

      An adviser’s first priority must be ensure that the client’s estate will be distributed in accordance with his wishes. Estate tax planning plays an important but secondary role.

      The adviser need to examine the client’s personal circumstances – his domicile, residence and nationality – to determine the jurisdictions which will recognise the regulate the succession. The client may be advised to change one or more circumstances, so as to eliminate rival jurisdictions or to choose a jurisdiction more sympathetic to the devolution he intends or less demanding in its estate tax. Changing the nature or location of assets or establishment of trusts may need to be considered, as does the effect of the inheritance on the tax position of each of the beneficiaries.

  • Denmark: Tax Planning and EmigrationJorn Qviste
    • Denmark is a highly taxed country, but the system of company taxation is surprisingly gentle. A Danish holding company may be free of tax on dividends it receives; capital gains may be tax free; foreign income is taxed only as to 50%; transfer pricing and depreciation rules are liberal; interest is deductible and suffers no withholding tax and there are no thin capitalisation rules. The EC directive has been implemented. A ruling is available from the tax authorities. Where dividends are received from abroad and the paying company is 25% owned for the past two years, the recipient is entitled to credit for the underlying tax. A dividend is entirely free of tax in Denmark if the paying company is subject to a similar tax regime abroad and the shares have been held for the last year.

      Denmark has an extensive treaty network. The treaty with Switzerland provides for zero withholding tax on dividends; if these are paid to a thinly capitalised Danish company the problem of swiss Federal tax on distributions may be circumvented.

      There are conditions attached to the freedom from tax on capital gains – notably that the shares must have been held for 3 years. If they have been held for a shorter period the gain may be reduced; bonus share may be received tax free and a disposal of the original shares (devalued by the bonus issue) may create a loss which may be utilised for this purpose.

      Losses of foreign subsidiaries may be deducted from the domestic parent’s profits. The loss may remain available for carry forward in the jurisdiction in which the subsidiary is resident.


      A company incorporated in Denmark is always subject to Danish tax, wherever it is managed and controlled. But an individual is taxable only if habitually resident in Denmark. In 1979 the net worth tax was raised. This triggered a substantial emigration of wealthy Danes. In consequence there were a number of court cases about residence and the concept is now well defined in Danish law. An individual may be non-resident even if he retains a summer house in Denmark. An individual who ceases to be resident is treated as a resident for the next 4 years unless he is subject to an approved tax regime in his new country of residence. Strangely, the United Kingdom tax regime is approved for this purpose.

      In 1987 an “emigration exit tax” was enacted. It affects individuals who have been resident for the last 5 years. A shareholding of the emigrant if substantial (holdings of certain relatives being included for this purpose) is deemed to be disposed of, but payment of the tax may be postponed until the shares are actually disposed of. Other provisions impose various taxes on the income of an emigrant, but most of the problems in this area can be overcome by careful planning. Careful advance planning can also minimise the tax liabilities of an individual who comes to live in Denmark – eg by burdening himself with interest charges.

  • New Horizons in International Tax PlanningMilton Grundy and panel
    • Trust in France
      The Fiducie will have purposes similar to those of the trust, but in fact will be a contract. The Bill which will provide for the Fiducie is presently before the National Assembly. The tax authorities are anxious that this should not offer opportunities for tax avoidance. The proposals also have the shortcoming that once a beneficiary has been appointed, he cannot be changed.

      A 60% transfer tax will be levied on the transfer of assets into the Fiducie with beneficiaries unrelated to the settlor; lower rates apply where the beneficiaries are so related. No capital gains tax is payable on such transfer. The Fiducie will not avoid any wealth tax and will be transparent for income tax.

      Article 44 of the present Bill provides that these provisions will apply to all existing trusts and all new offshore trusts. It will be possible for non-French companies and individuals to act as fiduciaries.

      Trusts in Ireland

      Ireland has not been attractive as a situs for trusts. But the necessary changes are expected in the next Finance Bill in the autumn. The Dublin IFS Centre offers Irish tax treaties at a cost of 10% tax, though Denmark and other countries are understood to be not altogether happy about the possibilities this offers to their own residents.

      Ireland already offers facilities for open-ended and closed-ended investment funds. The changes this year will relate to private Irish trusts where the settlor is non-resident, the assets are situated elsewhere and the beneficiaries are non-resident: such a trust is already exempt from capital gains tax; it will be exempt from income tax and capital acquisitions tax. Changes in trust law are also foreseen. It is expected that a trust company will require a licence from the Central Bank.

      New Domicile Rules in the UK

      The proposed legislation is not tax-inspired. The concept of domicile as a connecting factor between the individual and his system of law is to be retained. But there are to be changes. The “domicile of origin” is to be abolished: the domicile of a child is to be determined by a “closely connected” test. An adult individual will be domiciled in a country if he is present there and has the intention to settle there for an indefinite period. The text of the prepared legislation is simple and short. Provision is made for determining the domicile of children, those under an incapacity and of residents in federal states.

      The New Luxembourg Holding Company

      The new holding company (the “SOPAFI”) closely resembles the Netherlands participation company. It enjoys the benefits of Luxembourg’s tax treaties – including that with the United States, and qualifies for zero withholding tax under the EC directive. Its domestic exemption from tax on dividends and capital gains is conditional on the subsidiary in question paying foreign tax at the rate of at least 15%.

      The standard withholding tax on outgoing dividends is 15%. But a debt/equity ratio of 33/1 may be permitted subject to Ruling, and when the Portugal/Luxembourg treaty is signed a Madeira company may probably be used to receive dividends.

  • Recent Developments in Asset ProtectionJohn Goodwill
    • Formerly, trusts “protected” assets against political risk or exchange control, today the expression “asset protection trust” refers to trusts which protect assets against creditors of the settlor. A line requires to be drawn between the legitimate and the illegitimate.
      Interest in this topic has been stimulated by the US litigation explosion – fuelled by contingency fees, awards of damages by juries, the “deep pocket” doctrine. Basic asset protection is the gift of the asset eg to a wife. All common law jurisdictions provide for avoidance of a gift in some circumstances.

      The Rahman decision illuminated the possibility of disregarding the trusts which are shams. A transfer of property into trust may be avoided if it satisfies some objective criteria, generally related to a period of time. It may alternatively be avoided if it satisfies some subjective criterion, related to the intention and state of mind of the settlor; the best asset protection trust is one which comes into existence for some quite other reason.

      The subjective test was embodied in the Statute of Elizabeth (13 Eliz. C.5) and later in Section 172 of the English Law of Property Act 1925. An objective test was set out in Section 42 of the English Bankruptcy Act 1914, and now appears in the Insolvency Act 1986. Both tests are used in the US Bankruptcy Code and Uniform Fraudulent Transfer Act.

      A trust in an offshore jurisdiction places obstacles in the way of a creditor, even in a case where the onshore law would afford him a remedy. The trust may however be protected by recent legislation in the offshore jurisdiction.

      A well drafted asset protection law must maintain a careful balance between the rights of the trustees and the rights of the aggrieved creditor: any legislation seen as encouraging fraudulent transfers may not be recognised by a court in another jurisdiction and indeed such a court may seek to penalise the trustee of such an unrecognised trust.

      The Isle of Man began to be used for asset protection trusts before the asset protection legislation in other jurisdictions was enacted. It is doubtful whether Manx law offers any substantive protection. The same is broadly true of Bermuda, Jersey and Guernsey. The Bahamas, Cayman, Cook Islands, Gibraltar and Turks and Caicos have express legislation directed to the establishment of asset protection trusts.

  • Structuring International Contracts for Entertainers and SportsmenRoy Saunders (updated 1998)
    • It is first necessary to clarify the nature of the income – employment or self-employment, performance, training or creative income. In the U.K., the 100% relief for temporary absence is available to the employed¹ . The self-employed may have a wider range of deductible items and obtain gross their income arising abroad. Performance income is nowadays taxed in most countries; “slave” companies and other schemes will not be recognised. But a gratuity may be exempt, and a payment to train made to a new resident may not be treated as income. Rights resulting from creative activities (e.g. copyright) may be vested in some entity, which can receive the income from them at a low or nil rate of tax, and take the benefit of Dutch or other treaties. Social security charges and value added tax should also not be overlooked.
      Entertainers and sportsmen do not benefit from articles 14 and 15 of the model treaty. The services of other people in the entourage may nevertheless be provided through loan-out companies. The EC directive may enable royalties to be paid gross, even where the tax treaty provides for no or a smaller reduction.

      A producer often likes to form his own U.S. corporation to receive and pay the income, so that the decision to pay gross under some treaty can be taken by him and not by some strange promoter.

      A loan-out company may suffer withholding tax but nevertheless avoid wage tax or social security. By choosing an accounting period different from that of the individual, a degree of postponement may be achieved. Deductions for pension contributions may be permitted. Loan-out companies do, however have certain disadvantages: an individual may not be able to take credit for tax suffered by the company and there are anti-avoidance provisions to be considered (e.g. section 739 in the U.K.).

      Changing fiscal residence may be advantageous: most countries adopt a 183 day rule, but note that the U.S. has a cumulation presence rule, and the U.K. attaches importance to the availability of a home in the U.K. For example, a German former resident sportsman becoming resident in the U.K. may take advantage of U.K. treaties without having any income arising in the U.K. An individual ceasing to be resident may benefit from the previous year basis of tax on self-employed earnings. An individual resident and domiciled in the U.K. may take the benefit of the exemption for those absent for 360 days. A U.S. taxpayer has a $70,000¹ deduction by being resident abroad.

      Trusts for French residents, 5 year trusts for a new resident in Canada, Offshore trusts for the non-domiciled resident in the U.K. are other vehicles to be considered.

      ¹ The March 1998 Budget abolished, with immediate effect, the 100% General Foreign Earnings Deduction

  • The EC Directive on Money Laundering: Practical AspectsMonty Raphael
    • New laws are on the horizon which are calculated to change the way offshore business is done. In 1980, the Council of Europe passed a convention on narcotic trafficking. In the 1980’s the US government became concerned about drugs in American society. This concern spread to the United Kingdom, which enacted legislation in 1986. It is no longer sufficient to be honest, it is necessary to be careful. The policies of the United States are being imposed on all countries in the world.
      The EC Directive comes into force on 1 January 1993. It deals with all money-laundering, including proceeds of tax evasion; it is not, as is the present law in the United Kingdom, confined to narcotics and terrorism. The United Kingdom does not plan to introduce general money-laundering legislation. The Vienna convention, and Council of Europe convention and the G7 Financial Action Task Force have all had their influence: the laws in European countries are many and various. The Directive is expected to introduce some uniformity in the EC.

      The size of the problem is immense. It is estimated that drug traffic amounts to some US$ 30 billion a year, of which 70% is profit. The Directive will affect banks and investment institutions of all kinds. Different EC countries will apply the Directive to difference classes of persons, but a wide range of application should be foreseen. What will effectively be forbidden will be handling money obtained from criminal activity of any kind. Methods of alerting senior management to this requirement will have to be found. It is not yet clear to what extent information will be made available to tax authorities. Suspicious information must be disclosed; the disclosure must not be disclosed. What happens if the discloser makes a mistake? In the United Kingdom, some (as yet untested) immunity is offered to the discloser.

      The United States Bank Secrecy Act introduced the requirement to report all cash transactions over US$10,000. This produces 6m pieces of paper, which nobody has time to read, and whose effect on tax narcotics trade is not observable.

      A wide range of crimes, violent and environmental, is covered by the US money-laundering law.

  • The Managed Trust CompanyJohn Whillis (updated 1998)
    • Professional advisers give best service to their clients by maintaining a continuing responsibility for the management and administration of offshore trusts and companies established on their behalf. The managed trust company has developed as a vehicle for this purpose. Trust corporations in offshore jurisdictions have for many years provided a physical and management presence for trust companies owned by third party professional firms.
      Part of the merits of the continuing involvement of the client’s advisers in this way is that the providers of financial services can be left to specialise in the activities they do well as third party agents i.e. banking and investment management. The use of a managed trust company facilitates changes in one or more financial service providers when the need arises, without the complexity or necessity of changing the trustee of a number of trusts. The managed trust company opens up the possibility of providing service facilities in a number of jurisdictions. The essential policy decisions relating to the business of the company remains under the control of the professional advisers.

      How a managed trust company should be owned will vary from case to case. The company could be wholly owned by the professional firm with all day to day management and control with their manager, or as a joint venture with the chosen manager. Sometimes a “dedicated” trust company is owned by a charitable or purpose trust of which the professional adviser is the protector.

      The choice of jurisdictions will be determined by practical rather than theoretical considerations as most offshore services can nowadays be undertaken in every jurisdiction. Crucial is the management of the managed trust company in a business-like fashion. There is no reason why it cannot be a profit centre, although that may not be the central reason for establishing the facility.

  • The Offshore Investor and the European Holding CompanyMilton Grundy and Kerry Wright (updated 1998)
    • The topic was approached from the viewpoint of a zero-tax investor from outside Europe – e.g. a Bermudian resident. A European holding company for European operating companies may be desirable for non-fiscal reasons; in choosing the jurisdiction for it, tax considerations will generally be predominant. Possible jurisdictions include Austria, Belgium, Denmark, France, Gibraltar, Spain, Switzerland and Madeira in Portugal, but the companies used most widely are the old Luxembourg holding company and the Netherlands participation company. Both are free of tax on their income; the former offers no treaty advantages on incoming dividends but effectively costs only a tiny tax on outgoing dividends, while the latter offers treaty advantages on dividends coming in but costs a hefty tax on dividends going out.
      The aggregate tax on outgoing dividends from a Dutch company can be reduced by putting an Antilles company on top; a new regime is currently under discussion. There is also the Luxembourg SOPARFI, which functions like the Dutch participation company. It too imposes tax on outgoing dividends. This problem may be alleviated by putting a Malta company on top. Although little used until now, Madeira may well have a great future as a jurisdiction for holding companies. Back to back borrowing may be used to acquire an operating company from a subsidiary and the interest utilised to reduce operating profits. Germany and Spain have laws apt to impose tax on the capital gain made by disposing of substantial interests in companies: this problem may be alleviated by using a U.K. trust to effect the disposal.

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