A trust may present a psychological problem to the settlor unfamiliar with the concept. Reserved powers legislation is an attempt to remedy this, without creating a sham trust. Protectors may be the solution. Alternatively, a limited partnership may be formed, with the client as the general partner and the trustee the limited partner. Or an IBC may have voting shares which are issued to the settlor, and have little value after his death, non-voting shares being owned by the trustee. Or the client and the IBC have joint account, the benefit of which accrues to the IBC on the death of the settlor the IBC shares being then settled. Family quarrels which commonly develop after the death of the patriarch may be avoided by a family protocol. Information flow may prevent disputes; mediation and arbitration may resolve them discreetly. Deemed acquiescence may be incorporated into the drafting of a trust instrument; this is given statutory force in the new Guernsey trust law. A no contest clause has been held in Cayman to be enforceable if limited to unjustifiable contest. The integrity of an offshore trust structure requires observance of formalities and keeping abreast of changes in the law. Protection against incapacity may be embodied in the drafting. Recent English divorce cases indicate that trust assets may be included in the resources of the beneficiary: this presents the trustees with a very difficult problem. Can this be forestalled by including provisions in the trust instrument? Trusts are increasingly coming under attack. This is not altogether new. The UK Revenue circumvented the provisions of the 1967 Cayman Trusts Law, which attempted to counter a UK anti-avoidance section. The OECD have proposed that all trusts should be registered. The UK planned changes affecting trusts made by the non-domiciled. The trust lives on the 5-year trust in Canada, the excluded property trust in the UK, pre-immigration planning in Italy, France and Switzerland, the Alter-Ego trust in Canada, the Dynasty Trust, trusts in relation to tax treaties. The generational opportunity and the continuity of management are attracting clients from some new countries.
Singapore and Dubai, and even Belgium, France and Spain have their attractions for intending residence, and many countries offer advantages of one kind or other. Many countries are out of the question for non-tax reasons. As well as the amount of tax payable, factors include reporting requirements (where the UK scores badly), forced heirship, availability of a residence permit (for non-EU citizens), any minimal physical requirement and the possibility of acquiring citizenship. (A second passport can be very useful.) Stability is very important. Here, Switzerland is pre-eminent. Switzerland offers a lump-sum tax regime. Since the 1990s it has been available in all Cantons. It is related to the taxpayers expenditure in Switzerland. There is no age requirement. EU citizens have the right to move to Switzerland. Others must apply for a residence permit: each Canton can decide to give a residence permit for fiscal reasons outside its quota. Zurich requires an income of Swiss Fr 1million; other cantons are satisfied with as little as Swiss Fr 60,000. Belgium is attractive. It taxes interest at 15%. There is no capital gains tax on disposals of shares. There is a special regime for new residents and a new regime for holding companies. After 3 years, the new resident can apply for citizenship; after 7 years it is almost automatic. Austria is the easiest country in Europe in which to get a residence permit. An individual not present in Austria for more that 70 days is not taxable. Citizenship can be obtained by investment or gifts to public institutions. Many places in the Caribbean offer tax-free residence. Nevis is particularly attractive: citizenship is available by donation. The passport offers the right to travel to or settle in other parts of the CARICOM single market area.
The CIS countries were formerly part of the Soviet Union, but many have stopped recognising the benefits of the treaties made by the USSR. CIS member countries are very different from Russia, and some are making new treaties with other countries. There are many political tensions between various jurisdictions, including Russia. There are restrictions on the transfer of money. Russia would like to increase its power in the CIS, but many of the CIS members resist this. The level of corruption is variable but generally high, and cannot be avoided. Inflation is high. Due diligence can be virtually impossible. Azerbaijans economy, for example, depends on oil, minerals and construction. Cyprus treaties with Russia are still effective. There have been tax changes in Kazakhstan with unpredictable results. VAT does not work effectively, and tax collection is inefficient and arbitrary notably in relation to transfer pricing. Blacklists can be circumvented e.g. by using a Swiss company with a Dubai branch. In general, planning opportunities are limited: one needs to recognise that the countries differ from each other, and appreciate the importance of political influence. There are permitted debt/equity ratios, a love of papers and seals, frequent changes of the law and many arbitrary exercises of powers.
The label offshore is thought to discourage investors, and blacklists tend to focus on the well-known low-tax countries. The UK is a high-tax country, but has carved out a very favourable regime for non-resident investors. Non-residents are basically exempt from capital gains tax, even on UK assets, and non-domiciled individuals (and their settlements) are exempt from inheritance tax on non-UK assets. Partnerships of non-residents and settlements made by non-resident settlors are also favourably treated. A UK agent may be used by a non-resident. A UK holding company is useful where the subsidiary has a tax rate of at least 28%. In the USA, non-resident aliens pay no capital gains tax, except on US property and US property holding companies. Bank interest is tax-free and (except that payable to Canadians) is not reported though banks may find it more convenient to report it. There are many interest-yielding investments which are tax-free to non-resident aliens. The LLC is transparent and is not obliged to make a tax return. Countries with territorial systems can function as offshore centres e.g. Singapore, which has a UK-style remittance basis, and levies no tax on outgoing dividends. Companies, partnerships and trusts are used to receive tax-free income. There is no capital gains tax or estate duty. Hong Kong also has a territorial system. A company is also exempt from tax on incoming dividends and local widely-held fund is also exempt. There are no withholding taxes. Australia only charges non-residents on local income and on Australian property -related gains. An Australian company or partnership may be used for non-Australian activities. The trust is a transparent entity. Austria is a high-tax country, but has a participation exemption and an affiliation privilege. An Austrian company may hold shares in a foreign trading company. A partnership is transparent. Austria is attractive as an agency location. It has a wide treaty network. Hungarian companies pay an effective 20% tax rate, but 50% of royalties are exempt, and there is no withholding tax on outgoing dividends. Interest is similarly treated, but the permitted debt/equity ratio is 3:1 and the routing of interest through Hungary is under investigation by the EU. Capital gains on significant holdings are exempt from corporation tax. Dubai has no individual taxes and entities in the DIFC are exempt to 2054. Companies, partnerships and trusts may be established and enjoy treaty benefits.
The economy of Cyprus relies on the service sector mostly tourism, with 11% of it consisting of financial services. Cyprus became an EU member on 1 May 2004 and adopted the Euro on 1 January 2008. No change adverse to financial services is expected to follow from the election of a left-wing President. The tax system is attractive, with 43 tax treaties, being compliant with the EU and OECD. A uniform tax rate of 10% was introduced in 2003, with favourable provisions for holding companies. There is no tax on the disposal of securities, on foreign dividends, on profits of foreign branches or on disposals of foreign real property. There are no CFC rules or withholding tax on outgoing dividends, royalties or interest. Taxability is based on residence. The exemption from tax on dividends from a foreign subsidiary is conditional on the subsidiarys income being trading income and the holding company having at least a 1% share in the subsidiary. Unilateral relief is available where the dividend is taxable. Treaty partners include most of the CIS countries: these agreements derive from the USSR treaty and are particularly favourable. A Cyprus company can also function as a financing company. There are no thin-capitalisation rules; a 10% spread is permitted. A Cyprus company can similarly function as a royalty company. It is also possible to have a Cyprus non-resident company: it is not taxed on foreign income, but cannot take advantage of the tax treaties. Capital gains of resident companies arising from disposals of shares are generally exempted by treaties, even if the company holds local real estate e.g. in Romania; for investment in property in Bulgaria, however, shares in the Cyprus holding company should be sold. A non-trading branch in Ireland may be used to convert EU interest into Cyprus dividends. Royalties may follow a similar route. The treaty with South Africa is now much used for investment there. New measures cap stamp duty and provide for company re-domiciliation. A new Bill, providing for some information exchange, is expected to remove Cyprus from the Russian blacklist. A new treaty with India is under negotiation: gains on disposal of Indian real property is the focus of dispute. Cyprus was recently adjudged the country with the most favourable regime for holding companies.
The Cyprus International Trust has a similar position in tax planning to that of the Cyprus company. The law follows the English statute. The settlor and beneficiaries (except charities) must be non-resident. The trustee must be resident. There is stamp duty on the trust instrument; local-source income is taxable, but foreign-source income is not, nor is the beneficiary taxed on it. To obtain a treaty benefit, the claimant must be a person and a resident. The US and Canadian trustees treat the trust as a person. For the purposes of other treaties, the trustee company can satisfy both conditions: it pays tax on trust fees, but tax on local income may not be enough. However, it is liable to tax on any foreign-source income also if it has any. Is the trustee the beneficial owner? It is not a mere agent or nominee. With the treaties with eastern European countries, the problem may be overcome by use of an intermediary company. It is considered that the International Trust can be used in treaty shopping e.g. for royalties, for the profits of a foreign PE, for foreign dividends. The Cyprus tax authorities treat the International Trust as a see-through vehicle. The trustee may hold shares in a Cyprus resident company: the company receives interest and royalties free of withholding tax and pays over 95% of it to the Trust. The discretionary trust enables income to be accumulated throughout the perpetuity period. A Cyprus International Trust can function as a unit trust: it may be treated as a company, and may have its management and control outside Cyprus. Units can be issued to bearer. Like a company, the unit trusts pays no tax on dividends or capital gains (even though entitled to treaty benefit on the gain). The International Trust has the benefit of confidentiality provisions; it offers forced-heirship protection, a 100-year perpetuity period and asset protection.
The US has many tax haven aspects including insurance policies. No information about a policy is given to the IRS unless it is surrendered or matures with a loan outstanding. A US policy is particularly suited to the temporary US resident, and it is often used in the financing of real estate purchases in the US, France and elsewhere. The numbers are impressive, but regulation in Europe may forbid the broker from selling the policy and US companies are disinclined to issue policies to holders with no US connection. A US policy can give life cover up to age 115 120, which is generally not available in Europe. Of particular significance is the incontestable clause. The US company will require the applicant to use its doctor and the medical information is shared with other providers. The insured who pays the annual premiums but does not live for a long period will realise the best investment return. The purpose of the incontestable clause is to reassure potential applicants that they will receive a cheque and not a lawsuit. It is prudent to use more than one insurance company if very large sums are involved. The proceeds of a policy may lie beyond the reach of creditors: most US States so provide by statute, but a foreign client may prefer a trust. A policy which satisfies the necessary conditions has US tax advantages: it may be exchanged tax-free; the proceeds paid on death are generally excluded for estate tax which encourages foreigners to use US insurance, but this applies only where the policyholder is the life insured. A payment of a premium from a foreign bank account by a non-resident alien does not suffer US gift tax. The practical problem for the foreigner is to find a US insurer who will write a policy for a non-resident alien with no links to the US. The sale of a policy may be made in Switzerland or the United Kingdom, but the contract may be unenforceable or unlawful in the country of residence of the insured. The problem may be overcome by the use of a US trust, an LLC or a foreign trust. A policyholder must have an insurable interest in the life of the assured: a close family member or spouse has an insurable interest, but grandchildren have it only if dependent and an unmarried partner does not (except in certain States). Second-to-die life insurance is common for married couples in the US. Foreign policyholders will probably want to make use of a trust.
Every tax plan needs up-to-date advice of relevant professional advisers. The abus de droit concept has been adopted in the UK (in Halifax), the EU Court of Justice, and the French Supreme Court (Royal Bank of Scotland). The combination of e.g. a US subsidiary and a Dutch CV (and a French branch) can achieve long-term deferral. If an EU parent owns the CV, the parent has a participation exemption. Similar principles can result in a double- or triple-dip for interest, a double-dip for losses of a GmbH. The US check the box system offers many opportunities e.g. double interest / loss deductions between US and many countries, including France. The France and Luxembourg treaty was used for real estate investment in France; under the new treaty, the property should be held through an SCI. The Spanish ETVE now has some advantages over the Netherlands holding company. A Luxembourg company can be liquidated without a tax charge. The use of a Malta trading company with a Malta trading company gives a tax rate of 5%.