A trustee is always acting in the interest of the beneficiaries. The settlor does not always appreciate that he has passed the property to the trustee and has no further power to control it. In Jersey, a widow is alleging that the trust property remained always the property of her late husband. Judgement has not yet been given in that case, but an understanding with the trustee that he will always follow the directions of the settlor can never be desirable – it can affect the “residence” of the trust and give rise to actions for breach of trust brought by the beneficiaries.
Settlements made by individuals whose personal law contains “forced heirship” provisions can give rise to conflict between the law governing the settlement and that personal law. The Cayman Islands legislation attempts to resolve this conflict in favour of the Cayman law; it may not be altogether successful. When the property is distributed to a beneficiary, he may be subject to proceedings brought by the persons entitled under the forced heirship rules. What is the position of the trustee if the settlement is set aside and he consequentially loses title to the trust assets?
The trustee cannot be exonerated from his duty to the beneficiaries by anything contained in a “memorandum of wishes” which is not part of the settlement. Trustees have the responsibility to make their own decision: it is proper for them to consult the settlor, but they must make up their own minds. A Protector has similar fiduciary duties, but conflict can nevertheless arise between the wishes of the Protector and the duties of the trustee.
One of the duties of a trustee is to tell a beneficiary who becomes absolutely entitled that he is so entitled. It is doubtful whether a provision in a trust instrument can relieve the trustee of his fundamental obligations: a clause excusing the trustee from concerning himself with the affairs of companies whose shares are comprised in the trust fund may well be of no effect – see the English decision in Bartlett (but see the opposite decision in RoyWest Trust etc in the Bahamas). A trustee has a fundamental duty to obtain information, to consider such information and to act on it if it shows that anything is wrong. In Boe v. Alexander 1987, the British Columbian Court of Appeal said that the trustees have a minimum duty to act honestly, to exercise the level of prudence to be expected from a reasonable businessman and to hold the balance evenly between the beneficiaries.
A trustee must keep records; this is especially important for corporate trustees, whose personnel change from time to time. Minimal accounting records must show income, capital, capital gains and accumulated income. A trustee who loses control over trust assets may find himself liable to compensate the trust fund if the assets were lost. Trustees cannot exercise for their own benefit powers which are conferred on them for the benefit of their beneficiaries.
Success in financing the acquisition of aircraft depends on keeping interest rates low. Use of tax advantages is one of the ways of reducing this cost.
In the 70’s, leasing of aircraft could take advantage of capital allowances. This has generally ceased and lessors have had to look for alternatives.
A Belgian bank may use Ireland for this purpose. A Shannon company could acquire an asset and credit-sell it, the resulting income being taxed at a very low rate in the hands of the bank’s Irish subsidiary. There is an OECD type treaty between Ireland and Belgium: the profits of the subsidiary can be passed up to its Belgian banking parent by way of dividend, the parent taking credit for the tax spared. The benefit of such transactions depends on government acceptance, an AAA credit rating of the ultimate customer, a consistent tax rate applicable to the bank. It is desirable to choose an appropriate currency and to take guarantees where appropriate.
A transaction of this kind will generally have a life of three years; it should be capable of being undone if it becomes requisite to do so. The same asset may be used for more than one dip.
Similar transactions may be structured between Austria or New Zealand and Ireland. An OECD treaty is needed, but what is crucial is the company with a significant tax liability. A variant of this transaction may nowadays be done with a Dublin company. Similar principles may be applied to ships.
An English barrister practising in the tax field is regularly asked to give his opinion as to the meaning of a legislative provision. This he does by paying close attention to the words of the statute and construing them in the light of what he perceives as the intention of Parliament. By way of example, it appears that the words of what are now sections 145 and 168 of the 1988 Act do not support the current Inland Revenue contention that the use of an offshore company to hold property in the United Kingdom results in the occupier being taxed on the benefit of living there as a “deemed director” of the company. Since this talk was given, at least one taxpayer has won an appeal on this point before the Special Commissioners, but it seems that the Inland Revenue are still making assessments on this basis – and collecting tax from taxpayers who do not want to appeal!
Companies in the Netherlands Antilles have been used to shelter trading profits from U.K. tax. The U.K./Netherlands Antilles treaty was terminated in 1989, and their place may now be taken by Cyprus companies, but it is necessary to ensure that the “management and control” of the company is situated in Cyprus. The Channel Islands or other jurisdictions may be used as “stepping stones” for business profits; in this context, it is useful that in Switzerland the 1962 decree, which effectively prevents Switzerland being used as a stepping stone for royalties, does not apply to business profits.
The demise of the U.K. non-resident company has left a need for a structure with a U.K. face but no U.K. tax liability. This may be filled by a limited partnership, a trust taxable on a remittance basis or a “thin” trust, or even – in cases where sufficient foreign tax credit is available – by a trust fully liable to U.K. income tax or a company fully liable to U.K. corporation tax.
Where it is desirable that a person should have the economic benefits of share ownership, but cannot without fiscal disadvantage own any shares (in the case, for example, of a Gibraltarian resident seeking to have an interest in an exempt company), “phantom shares” may be issued.
A Luxembourg holding company had several subsidiaries, including a UK Service company. It created a “hydra” trust – which permits the establishment of separate sub-funds, all of which have a common trustee, and enjoy investment and actuarial advice from a common source. A centralised remuneration policy for a group (for example, its pension fund) serves the group objectives of group-wide loyalty, identity and culture, group-wide consistency and economies of sale. At the same time, there are differences in levels of pay, cost of living, customs, traditions and so on. There are also important tax considerations – deductibility of contributions by the employee and employer and the tax imposed on benefits. In the United Kingdom, and some other jurisdictions, a domestic fund which meets local regulatory requirements is highly tax efficient, but an offshore fund may nevertheless be preferred: the requirements to be satisfied may be fewer and the size of deductible contributions may be larger.
Non-resident directors of Luxembourg holding companies are in principle liable to tax on their emoluments, though the tax on the “tantieme” is not in practice collected and the remaining tax is at a low level. For UK resident but non domiciled directors a sub fund of the hydra trust was created: the contributions by the employer were not taxable in the hands of the individuals and they were able to take their benefits offshore without exposure to UK tax. In this example, the group forgoes the benefit of a deduction in the United Kingdom. Contributions by the non-domiciled employee may be deductible within the usual limits. In addition, the fund is not subject to many of the restrictions applicable to an onshore UK fund.
Now that the UK rates of income tax and capital gains tax are similar, the advantage of an “approved” share option scheme over an unapproved scheme has become marginal. A “phantom” scheme has similar tax consequences, and avoids the consequences of issuing shares, which may include meeting stock exchange and other requirements if the shares are listed.
In Luxembourg an employee’s pension is generally buy way of promise or retirement annuity insurance rather than by funding. The promise can in certain circumstances come from offshore. A hydra trust may be used to hold funds offshore in respect of the liability of the onshore company as promisor. Such a scheme is very tax efficient, although no deduction is available to the employer.
For Luxembourg resident employees a share incentive scheme based on a low interest or interest free loan, which the employee applies in the purchase of the shares, is tax efficient.
The AEC (Aruba Exempted Company) is a zero-tax vehicle distinct from the NV or BV in the Netherlands or the Netherlands Antilles. The AEC was introduced in July 1988. On 1st January 1986 Aruba withdrew from the Netherlands Antilles and became an autonomous country within the Dutch Commonwealth. The highest court of appeal is the Supreme Court in The Hague. Formerly, offshore business was treaty-based; it is now government policy to encourage zero-tax business. Re-domiciliation laws are in preparation.
Aruba is a civil law country. The new company law is modern and imposes few formalities. The AEC cannot conduct business in Aruba or conduct any form of banking business. Shareholders may not include Aruban residents.
The constitution of an AEC is available to the public. The minimum capital is about US$5,600. Only one shareholder is required. Shares may be issued with or without a par value or at a premium; they may be in a registered or bearer form. Shareholders’ meetings can be held in any part of the world.
An AEC has one or more managing directors. It may have a supervisory board. Individuals or legal entities not resident in Aruba may act as directors. Managing directors may authorise others by power of attorney to act on behalf of the company.
An AEC is required to have a local representative in Aruba. If the byelaws so provide, an AEC is not obliged to prepare yearly financial statements.
An AEC is exempt from all taxes in Aruba – notably from tax on profits and on distributions.
The annual fee is presently US$ 285 payable in advance. The amount is determined by government decree. In addition, a fee for registration in the commercial register of a minimum of US$ 40 is payable each year. Incorporation cost is in the region of US$ 1,100.
The AEC may be utilised in any circumstance for which a zero-tax company is appropriate. An AEC cannot benefit from the tax treaty with the Netherlands and the Antilles, but a regular company may be formed for this purpose.
The Antilles is not expected to follow the example of Aruba if it succeeds in negotiating tax treaties; Aruba does not intend to enter such negotiations.
The Dubai Free Zone welcomes free trade. The growth in free zones throughout the world has shown the value of their contribution to world trade. Dubai aims to be the Hong Kong of the Middle East and is well on its way to playing this role.
The cease-fire between Iraq and Iran is holding; this offers many business opportunities in the Middle East. Multi-national companies are looking to cutting expenses and to locating in places with minimal restrictions. Dubai’s oil and gas revenues have enabled it to provide the infrastructure for its port and free trade zone. The port was a major construction project: it is the largest man-made port in the world. It is embodied in the free zone. It opened for business in February 1985.
Uniquely in the Arab world, 100% foreign ownership is permitted. There are no currency restrictions, no restrictions on work permits and no requirement to employ locals. There is a commitment to reduction of red tape. There are no taxes of any kind, and every company received from government a guarantee of 15 years tax exemption renewable for a further 15 years.
Joint ventures are not compulsory but have proved popular: major industries have been established as joint ventures – in petroleum refining, aluminium smelting, water desalination. Many multi-nationals now use Dubai as a distribution centre for the Middle East. New enterprises are presently coming to Dubai in considerable numbers.
A company incorporated in Jersey is now prima facie subject to Jersey Income Tax wherever it is managed and controlled. Companies can elect and qualify for tax exemption subject to:
the payment of a fee of £600 annually in advance
no Jersey resident having a beneficial interest in the shares of the company (the expression beneficial interest being widely defined)
the company not being permitted to conduct a trade within the Island, although it can maintain bank accounts in Jersey.
The law also requires that the Financial Services Department is provided with particulars of the beneficial owners and of any relevant trusts so that the authorities may be satisfied that no Jersey resident has an interest in the shares of the company.
Any changes in beneficial ownership must also be notified to the Financial Services Department.
Foreign companies (being companies incorporated outside of the Island but wishing to hold board meetings in Jersey) may apply for exempt status. No annual return is required for a foreign company but similar declarations as to the beneficial interests must be made to the Financial Services Department.
The exemption from tax in the case of an exempt company or a foreign exempt company extends to all income which does not arise in Jersey or from an “established place of business” there. Invoicing and other clerical activities have not been regarded as giving rise to local income.
Guernsey has a similar regime. In Jersey, there is a further exemption for foreign investment companies by agreement with the Comptroller of Income Tax. The company may have Jersey resident directors and be resident for tax, but not be liable to income tax on income arising outside Jersey, or on Jersey bank deposit interest.
Madeira is now a true operating reality. Since 1980 the Government took legal initiatives and developed negotiations towards the establishment of a free zone in Madeira in order to diversify and modernise its economic structure. Tax incentives were approved and financial activities and international services were encouraged by several laws and regulations. New legislation authorising the establishment of trusts and trust companies, as well as on a new international shipping register, was also promulgated.
Branches of financial institutions have been granted greater freedom to deal with all the other entities licensed to operate in the Madeira’s International Business Centre (the new designation of the free zone), and a political decision was taken to allow for the incorporation of new financial institutions.
Many licences have now been granted for operations in the four different sectors of the Centre: Industrial Free Trade Zone, Financial Services, International Services and International Shipping Register. It has been widely recognised that the development of this initiative as a well-regulated and strictly supervised Business Centre has contributed for its good reputation and trustfulness.
All this has been achieved with the blessing of Portugal’s partners in the EU. Madeira is part of Portugal, but has a measure of autonomy – with its legislative assembly and regional government. When Portugal entered the Common Market in 1986, Madeira (unlike e.g. the Canary Islands) decided to opt for full integration in all respects and common policies. From a customs point of view, free zones can be freely created in the EU following specific regulations; what is exceptional about Madeira is the special tax incentives which go with the free zone. Assembly in Madeira can confer EU origin on products which thereby have free access to the Single European Market. Companies from outside Europe are already taking advantage of this.
The EU has recognised and accepted the specific structural constraints of Madeira, namely those resulting from its location in the southern periphery of Europe and, hence, it is not considered likely that the pressure towards fiscal harmonisation will deprive Madeira of the special regime previously approved.
Malta is an attractive mediterranean island, welcoming to tourists and new residents. A new resident requires £M 150,000 in capital or £M 10,000 a year of income and to buy or rent a property and he must remit at least £M 6,000 which will be taxed at 15%, with a minimum of £M 1,000. (£M 1 = approx. £1.70 sterling). His liability to succession duty is limited to his local property.
During the time of British rule, some English law doctrines were introduced into Malta. The concept of Trust was not among them but exempt trusts can now be registered under the Offshore Trusts Act 1988. They may have a perpetuity period of 100 years; they require to be registered and they are exempt from tax.
A holding company is totally fiscally exempt. An offshore trading company suffers a 5% tax. A holding company requires only a brass place but a trading company must have a place of business in Malta. A Branch of a foreign company cannot in general enjoy any fiscal advantage, but a foreign company can be continued as a Maltese company. Exceptionally a branch of an insurance or banking company may obtain fiscal advantages.
Offshore companies must carry on business outside Malta and in foreign currencies. For manufacturing companies an on-shore company must be used; incentives are available for a limited period. A company operating within the freeport area may also enjoy a tax exemption for an indefinite period.
Instead of becoming a “permanent resident”, a foreign individual may create an offshore company and obtain a work permit to work for the company. He will pay tax at 3% on whatever he may earn from his company.
The activities of nominee companies are carefully regulated but the services of such companies are available. Non-Maltese persons may participate in these nominee companies under specified conditions.
The offshore company pays an annual licence fee – £M 500 for ordinary non-trading companies, more for the banks or insurance companies. Malta is party to a number of tax treaties, which were made before the offshore company legislation was enacted.
Tax treaties – the old ones especially – can repay close examination. In the light of current developments in Madeira, it is interesting that Madeira is part of Portugal for the purposes of its treaties with the United Kingdom. Similarly, Berlin is part of Germany and Norfolk Island part of Australia.
Article 28 of the OECD model permits treaties to be extended to dependent territories. Thus, the Switzerland/United Kingdom treaty has been extended to a number of territories with low-tax or zero-tax companies – Antigua, Barbados, Belize, Grenada, Anguilla, Nevis, St Vincent and the BVI.
From the Swiss Decree of 1962 to the US article 16 there has been a movement against treaty-shopping – manifested notably in the United Kingdom/Switzerland and United Kingdom/Netherlands treaties. But it may be that this movement has gone as far as it will go and that the pendulum is now swinging back.