Canada taxes residents on worldwide income. Income tax is at 39% – 50% for individuals, and capital gains are taxed at 19.5% – 25%. There is no estate tax, but there is a deemed disposal for capital gains tax on death. Non-residents are taxable on Canada-source income (except interest) and gains on ”taxable Canadian property”. Recent legislation provides for taxation of offshore trusts by deeming a trust not managed and controlled in Canada to be resident if the settlor “the contributor”) is Canadian resident. The trustees, settlor and beneficiaries have reporting obligations and can be liable for the tax. Canadian beneficiaries are not liable to tax on distributions of capital (including accumulated income). The trustees can deduct income paid to the beneficiaries. There is no tax on gifts by foreigners or distributions of capitalised income from foreign trusts. There are provisions deeming a trust resident, if the contributor is a former resident, for example a trust for the benefit of Canadian residents settled within five years after the settlor emigrates from Canada.
An EBT for Canadian employees can be treated to that extent as resident. A limited partnership is tax transparent but can elect to be at corporation for US purposes.
Canada has measures tackling international tax evasion, including a whistle-blower programme. An anti-treaty shopping rule is being considered. Canada has a favourable regime for voluntary disclosure.
Businesses are crossing borders, and so are tax authorities. Information may be exchanged on request, spontaneously or automatically. Starting with the financial crisis, there was a push to obtain information by request; now more information is being obtained automatically. The OECD thinks there are many benefits from information exchange, and it is a useful way of uncovering non-compliance. Denmark is No 1 in countries sending and receiving information.
The legal basis for information exchange may be found in the relevant tax treaty, in the terms of a Memorandum of Understanding (based on the OECD model), in the Convention of Mutual Assistance or in the EU Savings Directive (which covers only interest and applies only to individuals).
There are new developments regarding the EU Savings Directive: in June 2013 proposals were launched to widen the scope of information exchange. FATCA is implemented by inter-governmental agreements (Models 1 and 2), and what was at first merely machinery for making information available to the US has become a network providing information to all the participating countries. The OECD has published a Model Competent Authority Agreement and a Comment Reporting Standard.
Many factors influence the choice of location of fund management – lifestyle, communications, the regulatory regime, and government policy, as well as tax. There are essentially two tax risks – residence and source. These factors can be examined in the context of a particular jurisdiction – for example South Africa, which between 2010 in 2013 modified its rules to attract Africa-related funds. The US, Canada, Hong Kong and Singapore have provided ‘‘safe harbours’’ for fund management. The UK, Ireland and Australia have also taken measures to attract investment managers. Currently, the UK and US have the most favourable rules.
For companies, tax planning is a necessity, not an option. The choice between a foreign branch foreign subsidiary will be to some extent influenced by the tax treatment. The “permanent establishment” requires a place of business and the business carried on at that place. Considerations include transfer pricing and anti-abuse provisions.
In the UAE, a distinction is made between onshore entities and offshore entities. An onshore entity may be established under the civil code: it may provide services but may not conduct commercial activities. More common is the limited liability company established under the Companies Law. It must be controlled by a UAE national. A branch may be owned by a foreigner, but is limited to providing services and conditions may be imposed by The UAE government.
Luxembourg has many well-known tax advantages. A Luxembourg finance company may have a Swiss branch, whose profits are not taxable in Luxembourg. A ruling may be obtained in Switzerland on certain conditions. The branch profits will be taxed in Switzerland it 1.5% – 2%. Or the Luxembourg company may have a Swiss trading branch, which is taxed in Switzerland at the rate of 8% – 12%.
A Canadian branch of a Swiss company conducting shipping activities would have zero tax burden in both countries. A similar structure may be used for intellectual property – for example, a Swiss company with an offshore licensing branch will have a Swiss tax burden of 0% – 10%.
The Foreign Account Tax Compliance Act provisions were enacted as part of the Hiring Incentives to Restore Employment Act 2010. They require Foreign Financial Institutions (FFIs) to report information to the IRS or their national government. There are five types of FFI. The FATCA provisions are part of the US Internal Revenue Code and will be interpreted in the light of other US tax definitions and provisions, including beneficial owner, US person (a US citizen, a person born in the United States and, in certain circumstances, a person having a US parent) a green card holder; certain foreign trusts and companies can be an FFI or NFFE. There is a system of registration online. To avoid 30% withholding, an FFI needs to enter into an agreement with the IRS: an FFI may be compliant or deemed compliant. The FATCA obligations are in addition to QI requirements, and they have separate registration procedures. The IRS has issued frequently asked questions (”FAQs”) which are available on the IRS website and are updated regularly.
The US has reached agreements (Model 1 or Model 2) with several countries for the delivery of information, either to the national government or directly to the IRS. Recent Notice 2014 – 33 clarifies a number of issues. The period 2014-15 will be regarded as a transitional period: it may be sufficient for an FFI to making a good faith effort for the purposes of IRS enforcement and administration. Furthermore, there is a new version of form W-8BEN-E.
The Stichting is the Dutch foundation, which has a long history. It is different from the trust in many ways: it is a legal entity and can enter into contracts. It has no beneficiaries; it has an object or purpose. It has a founder, directors and secretary. The objects can be very wide. Once the Stichting is established, the founder has no further role as such, though he may be a director. The Stichting can only make payments in accordance with its objects – for example, if the object is to manage a shop, it can pay wages and salaries.
A Stichting is controlled by its board. It does not have members or shares. It can be used to hold shares in a company and exercise voting rights, while holding the shares for the benefit of the members, providing a takeover-proof structure. It can operate a museum, own and operate a business, provide asset protection and business continuity, operate and manage a pension fund.
In the Netherlands, a Stichting pays tax only if it carries on a business (mere investing not being a ”business”). Having no shareholders, it will not be a CFC. The Stichting also exist in Indonesia.
Malta has an expensive but attractive programme. Citizens of Malta have the right of establishment in all EU countries, and the EU has endorsed the Malta programme, now that a one year residence condition has been introduced. Portugal offers a residence permit, not citizenship. It requires a stay of at least 35 days over five years and the purchase of property of at least €500,000. The St. Kitts and Nevis programme began in 1984. It has become the most successful in the world, following the reform of the programme in 2006 and 2007. The Antigua programme was introduced 2013 on the St. Kitts model. Switzerland has a residence programme. It is relatively easy for EU citizens. The forfait has been abolished in some cantons, and a federal inheritance tax may be in the offing. Canada used to have a very successful investor immigration program, but is now very limited and it may be abolished. The United Kingdom’s non-dom tax regime has attracted a large number of wealthy foreigners. The UK has an investment programme, but its future is uncertain: it is likely to remain but become more expensive. Malta however now offers the possibility of acquiring EU citizenship and with it the right to move anywhere in the EU, including the United Kingdom.
The nation state is still a powerful force. As we have heard, Ireland, Luxembourg and United Kingdom compete for fund management, Malta and Portugal compete for immigrants and the FATCA regime illustrates the power of the United States.
The imposition of the EU Financial Transaction Tax is intended to take effect from January 2016. Only 11 countries seem to be keen to impose this tax. The German Finance Minister appears to be lukewarm about the proposal as it stands. The tax is intended to raise in access of €30 billion, some of which will probably be retained by the Union – which would have the effect of moving some power from the State to the Union. The definition of ”financial transaction” is broad. The tax relates to institutions established in a Member State. The UK takes the view that ”customary international law” does not permit such a tax.
The proposal – dating from 2008 – for a new Saving Directive resulted in an agreement earlier this year, and there is a proposal to amend the Parent and Subsidiary Directive by adding a GAAR and introducing provisions relating to hybrid instruments. The ”Patent Box” rules are being considered by the Code of Conduct Group.
The Commission has been suggesting revision of DTAs to comply with standards of ”good tax governance”. State Aid is not simply the transfer of funds from public to private spheres. It is wider, and it is understood by the Commission to extend to rulings – a line of thinking applicable also to the agreement between the EU and Switzerland. In the Emerging Markets case, the ECJ decided that Polish dividends paid to a US investor should be exempt from Polish tax in the same way as dividends to a Polish investor are, subject to certain conditions.