The corporate tax rate is 33.99%, but the effective rate is substantially lower – 14 or 15%. There is a notional interest deduction, introduced in 2003, when the co-ordination centres were phased out. It is capped at 3.8% of the equity. There are anti-abuse provisions, which prevent the use of a “Christmas trees” structure, but a finance company can replicate some of the advantages of the co-ordination centre. Hybrid debt can be equity in other countries – e.g equity in Luxembourg, but debt in Belgium, and the interest be deemed to be at arm ‘s length, and are not constituting State Aid or unfair competition.
Income from patents carries an 80% reduction, and expenses are deductible from the remaining 20%, provided the invention is made or improved in an independent “branch or activity”, (a condition which may be abolished) – but the R & D can be contracted out elsewhere. The regime for holding companies is favourable. The subsidiary must be subject to tax. Capital gains are exempt. Incoming dividends are 95% exempt; there is a one-year holding period. Outgoing dividends can go free of withholding tax to Luxembourg, Malta or Hong Kong.
Belgium offers a tax shelter for the audio-visual industry. An investment up to €500,000 a year carries a 150% deduction; it must be maintained for 18 months. There are some formalities, and the corporate taxpayer needs to have sufficient taxable income retained for the year, and the investment cannot also be depreciated. It is seen as a financial product, free of VAT.
The potential taxpayer may change residence, the profit-generating asset may be moved or a deductible expense may be introduced. These are three types of avoidance.
The benefit of change of residence may be nullified by deeming the residence as unchanged – e.g. a UK company remains UK resident, unless it becomes resident in a treaty country. But an exit charge in the form of a deemed disposal is not corrected by a treaty. (Davis). The UK taxes the temporary non-resident on the non-resident’s return to the UK. This is regardless of treaty protection. That is because a tax treaty can be overridden by domestic law, though EU law cannot.
Controlled foreign company legislation is intended to defeat the serious kind of avoidances: it succeeded in the UK case Bricom, despite UK/Netherlands treaty, but failed in the French case of Schneider, though later cases have followed the 1992 OECD Commentary, which says a double tax treaty does not prevent a CFC charge.
The third kind of avoidance is tackled by transfer-pricing provisions – which are in conformity with treaty provisions.
The Treaty of Rome protects the free movement of goods, services and persons within the EU and of capital world wide. If tax is an additional cost on exercise of a freedom, this is a restriction on the exercise of the freedom. A parent company in State B has a subsidiary in State A. If dividends from A suffer withholding tax for which B gives no credit: this is not necessarily a restriction – no difference in treatment may be involved. Swiss bank lends to French resident; France levies special tax. Although this is a restriction on the movement of capital(which applies to third countries), it is also a restriction of services, (which does not), and the ECJ has held that this is not a forbidden restriction, as the free movement of capital is merely secondary to the freedom of services. In de Lasteyrie the ECJ treated an exit charge as an improper restriction; in N v Inspecteur a guarantee requirement was similarly held. An exit charge could be drafted as EU law compliant but these were not.
In Cadbury Schweppes, the ECJ upheld the right of a UK company to establish itself in Ireland, even if this would not have happened but for Ireland’s low tax rate. But the ECJ will not support artificial avoidance schemes with no commercial justification.
Companies and trusts can be established in these jurisdictions, but there are important differences in cultural and legal matters. A youthful population requires many new jobs. There is considerable local wealth and infrastructure investment. The economy is dependent on real property and has undeveloped financial markets. There is little direct tax. In the region, 90% of businesses are family-owned. The number of Ultra-HNW individuals is growing at 8-10% per annum. However, Sukuk issues have fallen and tourist estimates have not been met. Dubai has been dealing with the problems created by defaulting property purchases.
Patriarchs in the Gulf have a historic preference for Swiss, Jersey and Cayman-based structures. The Gulf centres have many similar features, though they need to build a body of professional advisers. The DIFC has adopted aspects of English law, as to some extent have Bahrain, Qatar and RAK. Sharia law is fundamental, though parallel legal systems are no recent development. An excess or unjust increment – Riba – is forbidden, along with other haram activities.
The UAE has an extensive tax treaty network. The counterparties may be attracted by the possibility of inward investment. “Liability” to tax is merely the possibility of being taxed. Limitation on benefits articles are rare.
Art 13 of the Swiss Federal Constitution provides a right to privacy. Breach of bank secrecy is a criminal offence in some countries, such as Luxembourg and Switzerland. Switzerland has for many years distinguished between tax fraud and tax evasion, but in 2009 agreed to adopt Art 26 of the OECD Model Tax Convention, along with Austria, Belgium and Luxembourg. The UBS case is of great importance: the proceedings moved with incredible speed. There is some confusion within Switzerland as to whether the provision of information is in violation of local law and therefore illegal.
Governments everywhere are anxious to increase revenue and meet “international agreed standards” – full exchange of information on request in tax matters. White, grey and black lists have been developed, and there has been pressure to sign up to tax treaties so as to move on to the white list. The UN adopted OECD Model Tax Convention in 2008. The Global Forum has been established. “Peer reviews” are under way, emphasis is on agreeing to exchange information and ensuring implementation of the agreements. In 2009, nearly 200 TIEAs, and 110 DTAs were signed or amended. Anti-money laundering rules have been tightened, the Savings Directive has been extended, KYC regulation has increased (after Madoff). The sale of information has become of more significance, but countries may not be able to ask for assistance based on stolen data, e.g. France has said it would not ask for administrative assistance based on stolen data, and Switzerland has said it will not provide information if a request is based on stolen data.
Art 26 does not permit “fishing expeditions”: requests for information are governed by strict rules. Exchanged information must be kept confidential. Exchange of information is not limited to individuals. The OECD has no power to impose sanctions, but encourages countries to do so.
France has been active in obtaining information, and further measures are in the pipeline, e.g. a blacklist drawn up of 18 “un-cooperative countries”. Italy’s tax amnesties have been very successful (in raising revenue and requiring repatriation of assets). The US Government has just acquired new powers to obtain information (HIRE Act just signed into law), in addition to those of the PATRIOT Act, FBA reporting and other measures.
The UK’s new Disclosure Opportunity has not been a great success, in contrast to the Liechtenstein Disclosure Facility. Disclosure brings its own problems – notably its impact on other taxpayers. HMRC have new powers and the burden of compliance is increasing.
There are non-tax reasons for privacy (e.g. kidnapping). Nominees, trusts, foundations, companies can be used in planning: structuring options do exist, especially those not tax-driven. Most people are happy to disclose beneficial ownership to financial institutions or tax authorities, but they are concerned about other (non-tax) reasons for safeguarding their personal safety, e.g. political instability in their jurisdiction.
Gibraltar was taken by an Anglo-Dutch fleet in 1704 and ceded by Spain to Britain in 1713. It is a UK Overseas Territory. Unlike the Channel Islands, it is part of the EU. The Constitution of 2006 redefines the relationship with the UK, giving the people of Gibraltar a high degree of self-government. The economy is diversified and prosperous – tourism and retail shopping (benefiting from cheap sterling), e-gaming and financial services. Gibraltar has access to the Single European Market, and can take advantage of the EU Directives (e.g. interest/royalties, parent/subsidiary). An Experienced Investor Fund can be established; the insurance industry has grown, notably in the motor market.
There is a new 10% corporate tax regime. Exempt companies are being phased out. The new regime is intended to be EU and OECD compliant. Gibraltar continues to offer an attractive regime for the HNWI – the “Category 2″ individual, it and now offers a similar regime for High Executive Possessing Specialist Skills (“HEPSS”). A TIEA with US was signed in March 2009; there are now 18, and the country is white-listed. There are niche activities – tobacco and petrol sales, satellite control centres, re-fitting and export of vehicles and ship bunkering. Relations with Spain have improved.
Gibraltar offers a powerful tax proposition within the EU, the economic and political outlook being favourable.
Swiss banking represents 12% of the GDP. It grew substantially in the 1990’s. It employs 6% of the workforce and provides 10% of tax receipts. Switzerland is the third most important wealth management centre. There are the Big Banks, the regional banks, foreign-controlled banks, specialised wealth managers, the true private banks. Switzerland has attracted a wealthy clientele.
It is estimated that 84% of EU assets with Swiss banks are undeclared. There is now a strong pressure for transparency. ” Continued serious tax offences” now require the bank to disclose information. Project Rubik would offer access to financial markets in exchange for help in collecting tax. It is complex and expensive, but may lead to a new agreement. The Swiss have to pay attention to the tax and regulatory issues of foreign clients. They are under pressure to do so – from the EU, Germany, the US, France and Italy, and this gives rise to internal problems. There is currently no real political consensus as to what domestic changes are needed. The Swiss Federal Council published a report in December 2009, which considered some solutions.
Before 1st July 2007, when the Hague Convention was ratified, it was not unusual to find a Swiss co-trustee as administrator. The ratification has opened the door to the use of a Swiss trustee. Swiss law now recognises the distinction between the trust assets and the trustee’s assets. A Circular has been issued, making it clear that a trust is fiscally transparent and only the trustee fees are taxable. The Swiss Court has already had to resolve a dispute. Federal as well as Cantonal tax issues have been dealt with in Circulars. A trust will be treated as revocable if the settlor can benefit in any one of a number of ways. A trust created by a Swiss settlor is recognised only in limited circumstances. A “revocable” trust is effectively ignored for tax purposes. Where the settlor is non-resident, income of the trust is not taxed. Distributions to a Swiss resident by an irrevocable discretionary trust out of trust income and gains are treated as income.
The new certainty, especially the segregation of trust assets, has made management of trusts in Switzerland more attractive, especially the segregation of trust assets. There are some limitations. There is no machinery for the regulation of trustees (apart from money-laundering); this may be introduced in the future. The interface with Swiss domestic laws may give rise to problems. The jurisdiction for resolving disputes may be determined by the trust instrument. Swiss practitioners are acquiring more knowledge of trust matters, but there is still some way to go. Overall, the outlook for trust business in Switzerland seems good.
The text of the New Directive is still under discussion. The proposal is aimed at effecting taxation of certain income and forms part of attempts at “improving tax governance”. The 2003 Directive had a limited aim: it was concerned to ensure that cross-border interest payments to individuals suffered tax; it imposes an obligation on “paying agents”, reported information being automatically communicated to the relevant tax authority. A withholding tax applies in respect of some countries during a transitional period. Agreements were reached with third countries. The operation of the Directive is required to be “reviewed” every three years, to ensure effective taxation and removed undesirable distortions of competition. The proposal for a new Directive from the review of 15 September 2008, which identified “avoidance” – investing in non-interest-bearing assets (e.g. life insurance policies), routing of interest via a non-EU intermediary or intermediary in a more lax EU Member State, and paying interest which had no beneficial owner – e.g. to discretionary trusts.
The proposed new Directive has much in common with the existing Directive, but the scope is wider. The definition of “interest” is extended to cover certain securities and policies. The new text deals with knowingly routing interest payments via non-EU intermediaries. There is a general anti-routing provision, the beneficial owner being determined in accordance with money-laundering legislation. Art 4(2) deals with intra-EU routing. It has been questioned whether tax authorities will be able to deal with the volume of information this measure may produce and what effect a Directive in this form will have on the markets.