Lisbon 2012 meeting

Meeting Summary
  • Designing Cross-border Investment StructuresJames Quarmby
    • Clients need to be aware that tax avoidance is unpopular and defending against Revenue attack is expensive. “Midshore” companies have a better image than the offshore companies, but the same level of professional service may not be available. EU and EEA rules can be advantageous – e.g. in defeating attribution rules. The Commission has asked the UK to change the law, and the government has issued a consultation document.

      The US LLC has the merit of being US tax transparent. It can be used to separate ownership and control: the individual subscribes for units in a Cook Islands or Belize LLC and settles it few – enough to carry control on asset protection trusts. The LLP in the UK can work similarly, as can the Scottish limited partnership and the SLP in Jersey or Guernsey. Distributions by a UK LLP to a Malta company qualify for the participation privilege.

      Many pensions take the form of trusts. Unregistered pensions can function like family trusts, without the adverse tax treatment. Life assurance can be used to defer income tax: the policyholder is better protected if the insurer is a PCC.

      In the UK the new SDLT charges present challenges. The client may buy directly and insure, use a nominee, or use a double trust or partnership.

  • Family Investment Companies: a viable alternative to trusts?Patrick Harney
    • In the UK, the FA 2006 made trusts a virtual no-go area for local taxpayers. This, and the 50% income tax rate, has made companies a focus of interest. Since 2009, dividends from treaty countries are not taxed: this opens the door to the use of a UK company as an accumulation vehicle. Companies, like trusts, can serve to separate control and ownership.

      Family limited partnerships have regulatory requirements in the UK. Family general partnerships can have a similar effect, but can circumvent the regulatory problems – e.g. with the senior partners having ‘‘golden votes’’. The family investment company is a bespoke body. It is not a “collective investment scheme” in the UK.

      In a typical FIC, parents form the company and given some shares to the children. Parents retain redeemable preference shares (or loan) and A shares, settle some B shares, giving ordinary C shares to son and ordinary D shares to daughter. Son is a low rate tax payer; dividends are paid to him to see him through university. In another case, a widower with two children used an FIC to hold a share in an investment property through a family partnership. Indexation applies to a company’s holding.

      There is a double tax charge on non-dividend income, but there is the benefit of re-investing income taxed at only 24%. Taking profits out by way of liquidation needs to take into account S682 of ITA 2007.

      The FIC can achieve control by the senior generation discretion over income distribution, an ability to take out capital tax free by way of redemption of prefs and a degree divorce protection.

  • Foundations and the FutureJulien Dif
    • A foundation is a self-owning legal person devoted to a purpose. It is not inherently abusive. It is not incompatible with common law systems. It is, in a way, a combination of a company and a trust.

      In Panama, the foundation is a well-known and well-understood. The identity of the beneficiaries can be kept secret, and can include the founder. The charter is deposited with the Registrar and is available to the public. The by-laws on the other hand are not open to the public. There is a minimum capital requirement of US$10,000. It is exempt from tax.

      Liechtenstein has similar rules, but with some differences – e.g. a foundation may be both private and charitable. A foundation has a Representative, who deals with government officers. Private foundations pay S₣10,000 a year tax.

      Swiss law makes provision for ordinary foundations and special foundations – which include family foundations. These do not require registration and are not subject to supervision. The beneficiaries must be members of the family and in financial need.

      Luxembourg allows only charitable foundations, but private interest foundations may be on the way.

      Jersey’s foundation law was enacted in 2009. Jersey foundations seem to be the preferred vehicle for holding shares in a private trust company. A “qualified member” is required, as is a “guardian” – a kind of protector. There is no capital requirement. Records must be kept. They are tax free.

      It became possible on the 1st January to form Isle of Man foundations. They can be of unlimited duration. They require a licence. There is no requirement for a qualified person. The High Court has extensive supervisory powers. They are tax free.

      Foundations began in civil law countries but have spread to common law countries. They have many similarities to trusts, but there are differences – notably as regards the rights of beneficiaries. They can in some circumstances migrate to another jurisdiction.

  • International Tax Planning from a Portuguese PerspectiveFilipe Romão
    • Many changes were made in 2010, and new austerity measures are on the way. Capital gains tax exemptions have been withdrawn. CFC rules have been widened. There is a now a 10% inheritance tax, with exemptions for bequests to relatives and for some gifts, periods of limitation have been extended, and penalties for fraud have been tightened. The general anti-avoidance provisions are more widely invoked. Rates of income tax and capital gains tax have been increased. There is a tax planning disclosure regime. Penalties have been increased. The approach of the tax authorities has become more aggressive, and the court has become more ready to involve the anti-abuse rule. There have been three tax amnesties. There are a number of new tax treaties and TIEAs. In consequence, tax planning for resident individuals has become very much more different. Life insurance is still effective. Donations are useful. Individuals migrating to Portugal can take advantage of special regime designed to encourage immigration. The treatment of foreign pensions is particularly favourable.

  • Is the Global Crisis Secrecy’s Greatest Friend?Anna Steward
    • The emphasis of the OECD has shifted to tax havens and tax evasion, equating avoidance to fraud, terrorism and money laundering – with the purpose of enabling high-tax countries to collect taxes more effectively. Confidentially is under attack in various ways – notably in the growth of TIEAs and the wide-ranging powers required to give effect to them.

      Many individuals require a level of secrecy for privacy purposes – for personal security, for avoiding forced heirship or divorce claims. Tax mitigation is often only part of the reason for using an offshore jurisdiction. There is some pressure to encourage a movement to onshore jurisdictions; but new-style agreements stop short of automatic exchange and allow payment as an alternative to disclosure.

      Evasion is no longer acceptable, but there is still a widespread demand for privacy and confidentiality.

  • Residence and Citizen ShoppingHakan Cortelek
    • Australia, Ireland, UK, Canada, St. Kitts, Dominica, France, Belgium Switzerland, Austria, Malta, Hong Kong and Antigua have passport programmes of various kinds.

      The United Kingdom still offers an advantageous tax regime to the non-doms. Its cosmopolitan high quality of life and flexible rules appeal to many non-British clients. The process of acquiring a passport is quite speedy and is not difficult. The applicant needs to show £1m to get residence in 5 years (£10m in two years, £5m in three).

      Antigua is also easy, and the required investment is less. In St. Kitts, dependent parents can be included.

  • The Isle of Man Company Limited by Guarantee – a planner’s dream vehiclePeter Cannell
    • The history of guarantee companies goes back to 1865. They have been traditionally used for mutual insurance and charities. All members provide a guarantee of an amount to be paid if and when the company is wound up. A hybrid has two types of membership – guarantee and shareholding. It is used for private clubs. The guarantee may be of a nominal amount. Membership is not transferable. The company is generally funded by subscription. There are no dividends, but there may be distributions.

      Their advantages are certainty, mutuality, flexibility, privacy and enforcement. They are understood by civil lawyers and well as common lawyers. CFC rules do not always apply: there is no member with control. They can be useful in inheritance tax planning: a member has nothing to pass on. There can be different classes of membership with different rights. They can behave like a foundation – private or charitable. They can be Sharia-compliant and proof against forced heirship.

      The new Manx foundation offers less public information, but the guarantee company can be used for similar purposes.

  • What the non-US Service Provider needs to know about FATCAJoseph Field
    • FATCA is much misunderstood. The mechanics are complicated, but its purpose in plain – to collect information for the US government. It does not apply to US institutions – not even their foreign branches. It comes from the Q1 rules and the HIRE Act. Foreign institutions will have to report annually on US account holders. The provisions are not yet in force. The institution will need to enter into an agreement with the IRS. The provisions can only be avoided by having no US clients and no US investments AND having no “pass-through” payments. Indicia of US status are provided. Many aspects are not yet known – e.g. as regard trusts and trustees.

      The US, France, Germany, Italy and Spain have agreed to accept the FATCA model. They have been joined by Japan, the Channel Islands and Switzerland. A phased introduction is provided for, down to 2017. There of definitions of “pass-through payments”, “financial institution” and “account holders”.

      The measure is popular with governments. A mass of due diligence is required of the institutions. “US person” is very widely defined. US citizens, residents and green card holders have to make disclosure. There have been three amnesties. The first two raised $5bn so far.

      Expatriation is a way out of US tax and reporting regimes. There is an exit tax for long-term green card holders as well as citizens (“covered expatriates”). There is a notional disposal of all assets, and gift and inheritance taxes for US beneficiaries continue to apply. The current lifetime gift option can be effective to reduce or escape the exit tax.

      FATCA is here to stay. It is going to be very difficult to avoid.

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