Corporation tax is being reduced from 32% to 12.5% in 2003. This applies to trading or “active” income. There is to be a dividend withholding tax of 24%; it will not apply to dividends payable to EU residents or residents of treaty partners. There is to be a surcharge on undistributed trading profits.
A company incorporated in Ireland is to be treated as resident. To this rule there are two useful exceptions: if a trading company is controlled by residents of the EU or a treaty partner or if the company is resident in a treaty partner country.
An individual’s residence in Ireland is governed by the period of presence: 185 days in the year of assessment or 280 days in a pair of years of assessment. This rule affords a limited opportunity for a treaty partner resident to work in Ireland without paying tax either in Ireland or in his country of residence. “Time out” relief is given to Irish residents who work for part of the year abroad: the optimum result is obtained by a long period of residence in year 1 followed by a long period of working abroad in year 2.
Irish residents are affected by general anti-avoidance legislation, exit charges on companies and trusts and apportionment of capital gains of offshore companies.
The new treaty with the United States has a limitation of benefits article, but after 2003 a trading company paying 12.5% may take advantage of the treaty and the tax bite can be reduced substantially where the company has an employee spending a substantial time working abroad. “Artist relief” is still available in Ireland: whether it will survive the present EU initiatives is not clear.
Many Scandinavian nationals live abroad; traditionally, Denmark and other Scandinavian countries have not recognised trusts and have treated offshore vehicles as “transparent” for tax purposes. But the position is changing, Denmark leading the way – even referring to the trust concept in recent legislation. A recent Danish case, decided on appeal to the Supreme Court, recognised the integrity of a Guernsey discretionary trust which excluded the settlor and his wife from benefit, and did not apply the doctrine of “transparency”. A ruling to similar effect has recently been given in Sweden. However, a recent decision in Norway, relating to a Liechtenstein trust, has treated the trust as transparent; but the decision has yet to be appealed. No Scandinavian country has ratified the Hague Convention, nor are they expected to do so.
The Foundation is an institute of long standing in Scandinavia. Danish law requires, among other things, that the Foundation assets must be separate from those of the founder and may not revert to him. A Foundation must have an independent board. A trust with similar features may be expected to be recognised as such. A “letter of wishes” is undesirable.
In Denmark, legislation provides that a gift tax of 20% is charged on a transfer of assets to an offshore trust. Similar consequences apply, under the ordinary gift tax rules
As a practical matter, the draftsman of a trust instrument should follow the pattern of the foundation, and bear in mind that a Dane who has been absent for less than five years (or a Swede for less than ten) may still suffer tax on transfer to a trust.
The origins of the Private or Family Office were with the fortunes made by the American “robber barons” at the end of the 19th century. The administration of wealth calls for investment, custody, charitable giving. The Family Office has a role in preserving wealth for future generations. The Grosvenor Estate Office is a UK example. There are some 2,500 examples in the United States.
The Family Office offers privacy; it can help to maintain family unity; it provides a dedicated and personalised service; it offers a strong position vis-à-vis the outside world. It is probably only viable where the family has at least $200,000,000 of investable assets. The Family Office needs to be flexible, and change with changing needs of the family. Its role includes record-keeping, strategic investment planning, asset allocation, investment management, monitoring investment performance, legal advice, educational services, philanthropic and charitable administration and personal services to the family. New money is generally more inclined to risk-taking: old money is on the whole more interested in wealth preservation.
Locations to be considered for the family office are London, Paris, Geneva/Zurich, Monaco and Bermuda. London has some tax problems with investment management and with “mind and management” issues. The use of Paris is probably confined to French families. Tax rulings can be obtained in Geneva and Zurich, and family members of 55 and over can become resident in Switzerland on favourable tax terms.
A Private Trust Company (“PTC”) is a natural adjunct to a Family Office. This may be located in Bermuda, B.V.I., Turks and Caicos, Isle of Man. It facilitates decision-making and can be reassuring to an intending settlor. There are cost savings also. But it can have its dangers: the settlor should not suppose that he is getting a totally compliant trustee, nor do the beneficiaries have a “deep pocket” trustee to sue if things go wrong.
How should a PTC be held? It can be a charitable trust – or in Bermuda a purpose trust – or in Cayman a STAR trust. The PTC may be incorporated in Bermuda, B.V.I., Turks and Caicos, Isle of Man, or alternatively in the United Kingdom, New Zealand or Switzerland.
There is little in the UK Budget of relevance to the international tax planner, but there are minor changes to CFC rules and the stamp duty provisions. No GAAR is to be introduced at present. A review of s.739 is in progress and a consultative document on double tax relief is expected.
The three-pronged attack on international tax planning continues. The OECD recommendations of April 1998 provided for a forum to prepare a list of tax havens within a year and a list of “harmful preferential tax practices” within two. The forum is currently “interviewing” countries on a provisional list.
In December 1997 the EU established a Code of Conduct Group, which has issued its first annual report on “harmful tax practices”. They are presently studying a list of eighty-five practices in five categories – those relating to inter-group services, financial measures and offshore companies, sector-specific measures, regional incentives and other measures. France and the United Kingdom lead with ten items, five of the UK items relating to Gibraltar. Curiously the Luxembourg SOPARFI and the Danish and Austrian holding companies are not on the list. The Group is waiting for a study on ruling practices: an interim report is expected for May and a final report for November. Member states are obliged to “roll back” over 2 years practices which are on the final list.
The UN Office on Drug Control and Crime Prevention originated the concept of “money laundering” and have now sponsored a report – the “Blue Book” – which is damning on the practices of tax havens. The authors made several suggestions to address specific issues – banking secrecy, IBC’s, trusts (especially those administered by unregulated trust companies) and lawyer-client privilege.
The EU has made a proposal for extension of cross-border assistance in enforcement of tax debts. Directive 76/308, as extended in 1979, covers indirect taxes. It is proposed to extend it to direct taxes and to provide that the requesting state does not have to exhaust its remedies or to await the outcome of any appeal. There is also a EU proposal for withholding tax or information relating to payment of interest to a recipient in another member state: the proposed rate is 15%, it should be extended to UCITS’s and the system should apply to non-member states (starting with the neighbouring states).
Mr Green wants to make a will: he will leave his trading company to his son, his farm to his daughter. His company is Danish, but still has 100% IHT relief. His farm is in Denmark, so gets no agricultural relief. His house in Cap Ferrat gives rise to forced heirship problems. His wife is non-domiciled. He is a national of Italy, and was formerly an habitual resident of Sweden. All these countries could seek to apply their succession rules.
The United Kingdom has testamentary freedom, but if the deceased is domiciled in any part of the United Kingdom, members of his family may apply to the Court for reasonable financial provisions. Italy, Sweden and Denmark have forced heirship provisions, which are not all the same – e.g. Mr Green’s illegitimate son has an entitlement under Italian law.
Mrs Green is domiciled in Italy: a UK court will, under the doctrine of renvoi, apply the succession laws of Italy.
A solution to these difficult problems is offered by the Hague Convention of 1989 but this has been ratified by only a few countries. A possible solution is for the testator to change his domicile, habitual residence or nationality. He may have more than one will – but here it must be remembered that the form of will required for its validity varies from one country to another. Some assistance may be offered by the Hague Convention of 1961 or by the Washington Convention of 1973. India, notably, is not a signatory of either Convention. A satisfactory solution to these problems requires that the testator discloses all his assets to one person.
A further aspect to this problem is the possibility of multiple taxation. Treaty relief is not widely available, despite article 220 of the European Community Treaty, and unilateral relief – where it exists – may be subject to stringent conditions.
In the United Kingdom, the decision in Ross v.Counters of 1979 is increasingly being followed: a solicitor owes a duty of care to a beneficiary. It can be negligent of a solicitor not to take into account foreign succession rules and tax implications.
The establishment of a trust may present a solution. Trusts are popular with non-domiciled residents, but due heed must be paid to “money laundering” provisions – in the United Kingdom, the Criminal Justice Act 1988.
The main issues to address are the validity of the trust, its recognition in the relevant countries, (the Hague Convention of 1985 having been adopted by only a few countries), the liability of the trust to taxation – on the transfer, on death, on distribution etc.
Switzerland has a large foreign resident population. Foreigners have restricted political rights; some jobs are reserved for the Swiss; new residents have limited rights to own real property and suffer tax by deduction at source; foreigners can be extradited. The Swiss enjoy a high quality of life, and irksome regulations are much fewer than they used to be. Servants are few and integration into society can be difficult.
An employed foreigner needs an entry visa and work permit. Permits are not available to the self-employed who are under 55. A foreigner employed by his own company may get a permit if his company employs at least seven Swiss. The regulations are Federal but the administration of these is Cantonal. Residence for 90 days or less, even for the purpose of working, does not generally present any difficulty.
Labour laws are relatively pro-employee, but the employer has the right to dismiss an employee and work hours are long. Many kinds of employment are governed by standard provisions. The tax and social security systems encourage saving; the provisions are complicated and vary between cantons. In round terms, the cost of social security comes to some 14%, half being suffered by the employee and half paid by the employer. Direct tax rates vary somewhat between communities – from around 13% to 16%.
Retirees over 55 can generally obtain a residence permit without difficulty. It is even possible to acquire Swiss nationality but this confers few additional benefits.
The Stichting is a legal entity with corporate status, not essentially different from the Danish Foundation. It may undertake commercial activities: the profits of such enterprise are subject to corporation tax. Gift tax is payable on the funds donated to the Stichting by a Dutch-resident donor. Salaries payable to directors are in principle deductible, but excessive payments will be disallowed – and may lead the Stichting to be treated as “transparent”.
A Stichting can be part of a group: “fiscal unity” is not available, but the participation privilege is available, though it is only useful if the foundation carries on an enterprise. A foundation can function as the parent of a group or as a subsidiary. Third parties may benefit from contractual arrangements with the foundation, but distributions must be of an ideological or social nature.
A foundation which merely holds assets is not liable to corporation tax.
The co-operative association must have at least one Dutch member. It may distribute profits without withholding tax and may enjoy the participation privilege. Interest is deductible up to 90% of the gross investment income. A distribution to an individual member may be deductible in computing the profits of the association without being taxable in the hands of the member.
The Netherlands has signed the Hague Convention. No new legislation has been passed to deal with the tax position of the trust, but it is clear that gift tax is levied on a transfer of assets to a trust. This is a tax which may be worth paying, so that subsequent gains by the trust may be tax-free.
A Protected Cell company in Guernsey has separate classes of capital corresponding to separate “cells” whose liabilities are isolated from each other. Traditionally a multinational company or group forms a captive insurance company to insure its liabilities. Some companies are too small to do this and have relied on a “rent-a-captive” facility: in such a case, provision is made for the assets and liabilities from each client’s insurance to be kept separate. But this does not prevent creditors arising from one client’s insurance from making claims against assets referable to another client’s insurance. The introduction of “fire-breaks” to prevent such cross-claims was pioneered in Bermuda, where companies have traditionally been formed by Act of Parliament. In 1998, Guernsey made a general statutory provision for the incorporation of such “protected cell” company by registration.
Where a protected cell company is used, a creditor will claim first against the cell with which he has done business. He may then claim against the non-cellular assets of the company. But he cannot claim against the assets of other cells.
A PCC must announce itself as such, and each cell must satisfy the asset and other requirements applicable to insurance companies.
Although the PCC was intended for use by the insurance industry, other users are being attracted to the concept. A PCC facilitates a de-merger and can isolate the liabilities of separate departments of an enterprise.
The Edwards Report refers to “legal uncertainty” of the PCC. This is a misapprehension. The “protected cell” concept is found in other spheres – e.g. in US banking, Lloyds of London.
The Edwards Report dealt with regulation in the UK Crown Dependencies. It calls for a standard of perfection not always appropriate. The rule of law is to be preferred to the “naming and shaming” Andrew Edwards calls for. He calls for a requirement for companies to report changes of beneficial ownership, not knowing in 99% of cases this is already done. He calls for audited accounts; this is truly not necessary and ought not to be made compulsory. Mr Edwards did not entirely understand the existing powers of the Guernsey authorities and his call for international discussions of “harmful tax practices” goes beyond any concern with regulation. He appears to believe in the possibility of nominee directors and that the “Sark Lark” is a Guernsey problem, which it is not.
The offshore jurisdictions need to adopt a more positive approach to the attack on offshore practices, explaining to the world that the onshore jurisdictions are trying to solve their internal problems by blaming the offshore world. From a Guernsey perspective, the EU seems undemocratic, wasteful and poorly administered: Guernsey needs to assert that its political and financial policies and in particular its lack of interference in the lives of individuals should be emulated and not suppressed.
The offshore islands have rigorously applied their anti-money-laundering legislation and have a right to continue their prudent policies.