Lausanne 2006 meeting

When South Africa changed its tax regime from a territorial basis to the taxation of worldwide income, many South African residents found themselves obliged to report income from assets acquired in breach of exchange control rules. There was, however, an amnesty, of which residents could take the advantage by paying a levy. Typically, the resident had created an offshore trust, which owned an offshore company or a portfolio of quoted securities or both, and the Amnesty Act provided for an election whereby the assets held by the trust would be deemed to be held by the settlor. The question, whether it is desirable to make or discontinue the election, can be a very difficult one. Equally difficult are the problems of distributing trust funds to beneficiaries of settlements with South African-resident settlors in a tax-efficient way. Where beneficiaries are resident elsewhere, the optimum procedure will of course be determined by the rules of the countries of residence. Emigrating and immigrating from and to South Africa bring with them a number of tax and exchange control problems. Foreign advisers need to know that assisting an exchange control offence is a crime severely punished.

Many foreigners retire to France, though it is very highly taxed, compared with the other jurisdictions covered in this book. Absence of inheritance tax or estate tax is a feature of the tax regimes in Cyprus, Gibraltar, Guernsey, the Isle of Man, Italy, Malta and – to a large extent – Monaco and Portugal. Guernsey and the Isle of Man have low rates of income tax and no capital gains tax. Monaco has no direct taxes at all, and the income tax and capital gains tax rates in Italy are – for the time being at least – low. Retirees who go to live in other jurisdictions may achieve a low tax liability by taking steps before they arrive. The offshore company with redeemable preference shares is appropriate for Cyprus, Greece, Portugal and Spain. In Gibraltar and Switzerland they can apply to take advantage of a special tax regime. The retiree’s key to a low tax liability in Ireland, Malta and the United Kingdom is to retain his foreign domicile, though there is no benign niche for Irish capital acquisitions tax corresponding to the United Kingdom’s exclusion of foreign assets from liability to inheritance tax. The non-domiciled individual resident in the United Kingdom can solve his remittance problem by establishing an offshore “thin” trust.

In the English case of Hastings-Bass (1975) the trustees made an appointment held at first instance to be void but held by the Court of Appeal to have been made by mistake. Earlier decisions were Lady Hood of Avalon v Mackinnon and re Abrahams’ Will Trusts. The rule was considered in Mettoy, Green v Cobham(2000) Breadner v Granville-Grossman and Abacus Trust Co (IOM) Ltd v NSPCC, in the Jersey case of The Green GLG Trust, and in Abacus Trust Co (IOM) Ltd v Barr and Burrell v Burrell. By this stage, there was no question of invalidity, but simply one of a misunderstanding of the circumstances, leading to a mistake and – in particular –- to unexpected tax consequences. The judgement in Sieff v Fox sets out the Hastings-Bass rule in its present form: the court will interfere if the trustees fail to take into account matters they ought to have taken into account. The rule has been followed in a number of jurisdictions outside the United Kingdom, and most recently in Cayman in A & 6 Others v Rothschild Trust Cayman Limited 2004/05 [CILR 485].

Amnesty” is derived from the Greek amnestia. There are historical examples – from Charles II of England to the 1986 US amnesty for illegal immigrants. Ptomlemy V gave a tax amnesty in 200 BC; there was one in Germany in 2004 and many in Italy – most recently in 1984, 2001/2 and 2002/3. The IRS is wholly opposed to amnesties. It seems that amnesties are a sign of tax systems in trouble. Most intelligent wealthy people accept a degree of taxation but not in excess: the exit of 300,000 French taxpayers to reside in the UK can be seen as significant in this context. Demographic trends and government expenditure indicate greater tax requirements. The next few years may see a struggle for resources between the generations as well as between the Far East and the West. Tax systems are going to have to become more efficient, but without blurring the important distinction between avoidance and evasion. The scale of the black economy is hard to measure. The US is notoriously unwilling to deal with the black money in its banking system. Tax competition exercises a downward pressure on tax rates. There are arguments for and against amnesties and their individual features vary greatly e.g. – with or without disclosure, frequently or once a generation. Recent amnesties have had varied success. Fairer and less complicated tax systems would have less need for amnesties. Governments should spend money more wisely. A successful amnesty needs public discussion and attractive features.

Tax treaties are numerous and well-known. They contain a simple form of exchange of information article. TIEAs derive from the US Caribbean Basin Recovery Act of 1983. In return for small benefits, the foreign country agrees to supply information. TIEAs are made by the Treasury and do not require Senate confirmation. First Barbados and Jamaica, then a number of small states signed TIEAs. They paved the way for the OECD Report. The questions a party to an OECD-model TIEA is required to answer are wide, and the steps required to be taken are extensive. It agrees to change its law for the purpose. Some information may have to be exchanged spontaneously. These TIEAs are more extensive than those which the UK has made with its dependant territories. Gibraltar and some other jurisdictions have not signed TIEAs with the US. The use of TIEAs have spread to other countries – e.g. there is now a TIEA between France and Spain (March 2002). The spread continues. The OECD has produced models, and – on June 5th – a further Report. The US is supposed to keep the information confidential. But this obligation is largely illusory. A taxpayer does not have to be told that any information has been provided under any TIEA . (It is otherwise under the corresponding domestic provisions.) The attorney/client privilege is very narrow. (It has been in any case much eroded in the EU, with the introduction of anti-money laundering legislation). Five years from now there will be hundreds of TIEAs. (The erosion of privacy was foreseen in the talk given by the speaker at the ITPA meeting in Berlin in 2001).

New residents in France should understand the tax system. They should invest for growth rather than income. They should establish an uplifted base cost before arrival. They should file their income tax and wealth tax returns by the due date. Most taxpayers do not get an audit: those filing sensible returns promptly will probably not be audited. New taxpayers should declare overseas bank accounts and document the date of becoming resident. Wealth tax is not pro-rated: tax can be saved by waiting until the new year to become resident. An individual is resident in France if he has his “foyer” (family base) or “habitual residence” there, or has his principal place of stay, is employed in, carries on business in, or has his centre of economic interests in France. He may be entitled to the benefit of a tie-breaker article. A non-resident may become liable to tax by virtue of the availability of a dwelling place. There are anti-avoidance provisions in Art. 123bis, Art.155A and Art. 1736. The use of corporate entities for the ownership of land is discouraged by additional taxes, fines for default in filing and interest on unpaid tax. Offshore trusts may be used, but drawing money out if them can be expensive in tax. Personal service companies can be transparent. Theabus de droit doctrine emphasises substance over form: economic reality will prevail. The taxpayer should use high-tax jurisdictions as an interface and use French documentation where appropriate. There are a number of circumstances where assessments will go back over previous years. The new resident should plan before he arrives, keep enough free cash, make returns promptly, shun avoidance schemes and expect to pay a sensible amount of tax.

Austria is a high tax country, not seen as a tax haven; but it has tax treaties with Belize, Cyprus and the UAE. Personal income tax rises to 50%. Corporation tax is 25%. Dividends suffer 25% withholding tax, but not distributions in a winding-up. There is an affiliation (participation) privilege: the subsidiary must have active income and not have a low tax rate. Capital gains are tax-free if re-invested.The GmbH is a private company. The AG resembles the public company; the SE is the European version. There are open and limited partnerships, which are transparent for tax. An Austrian partnership with a branch in Switzerland avoids the Swiss 35% tax.Beneficiaries of foundations are not publicly known. A foundation can own real property, and ownership can be changed by changing the beneficiary. It can own an Austrian holding company, which can in turn benefit from tax treaties – of which there are many, including an interesting one with India.A Russian shareholder may own an Austrian company (investing US$75,000), owning a Swiss company with investments (not through a BVI company) in various countries. Alternatively, the ultimate owner may be a foundation; it is not taxed on its income and if the beneficiary is a resident in a country with a treaty, the distribution is “other income”.In a royalty stream, the Austrian company receives treaty-protected royalties and amortises the cost of acquiring a licence from the owner. In an interest stream, there is no tax on the outgoing interest. An Austrian company can trade as the agent of an offshore company for a 2-5% fee. There are also possibilities with double – or triple-resident companies – e.g. a company registered in Austria with branches in Cyprus and Gibraltar or a double-resident Austria/Dubai company.

Switzerland has Federal, Cantonal and Municipal income tax, and cantonal and municipal wealth tax. Some harmonisation was introduced in 2001. Some items are exempt. There are no CFC rules, but two recent cases have created a quasi-CFC rule. A foreigner resident but not working in Switzerland can negotiate a lump-sum basis. Capital gains on private movable assets are not taxed. However, there is a 35% tax on investment income, a classical system of corporation tax and a wealth tax (not applicable to those with lump-sum status). Estate and gift taxes are cantonal. A foreigner may elect that his estate shall devolve in accordance with his national law. The usufruct is effective for estate tax planning. Trusts, foundations, partnerships and corporations are also used. Trusts have become important. Ratification of the Hague Convention is under way. A circular outlining the tax treatment of trusts is expected in the autumn. A revocable trust is transparent. An irrevocable trust is a gift, the tax treatment depending on the relationship between the settlor and the beneficiaries. The tax treatment of distributions to discretionary beneficiaries is under discussion. The 35% withholding tax may be avoided with a favourable tax treaty. The situation has improved since ratification of the Savings Agreement in 2005, and there is now no tax on cross-border dividends paid to European associated companies. In the DTT-Denmark case, the Supreme Court said that an anti-abuse clause is to be read into tax treaties.