London 2014 Meeting

Guernsey is not part of the United Kingdom, but is a ‘‘crown dependency’’ – historically, part of the Duchy of Normandy. It is self-governing, and emerged as a financial centre in the second half of the twentieth century. It is not part of the EU, but is linked by protocol 3. It is home to 32 banks, 148 trust companies, 860 funds and 770 captives. Some 40% of business is derived from the UK, 17% from the Far East. An estimated £300 billion of assets is under trusteeship. Income is taxed at 20% but businesses have a zero tax rate.

The Foundations law was enacted in 2013. Other features of the financial sector include purpose trusts, registration of image rights, pension planning, cell companies, aviation registry and investment fund structures. Unlike in Jersey the ‘‘Hastings-Bass’’ principle is not embodied in statute law. Captive insurance is a major activity, notably in the ‘‘Rent a Captive’’ form. Tax planning themes include a disclosure facility, cell companies, philanthropy and various UK-related themes – property ownership and development, excluded property trusts, pre-arrival planning and management and control.

Guernsey is home to private trust foundations. An LLP Act is in the pipeline; it will allow for migration in and out of Guernsey. There are proposals for LPs, revisions of the trust law, a ships’ register, UK DTA negotiations and OECD and transparency initiatives.

Exchange control is easing. The one-child policy is ending. China is familiar with trusts and foundations. The country has an uncomplicated tax system. Individuals resident and domiciled in China pay tax on worldwide income at 5.45% (active), 20% (passive). Capital gains are taxed, but stock market gains are exempt. Inheritance tax in some form is expected. There is a system of corporation tax, and 99 countries have tax treaties or TIEAs with China. In August last year, China signed the Multinational Convention on Administrative Assistance. There are restrictions on foreign ownership of shares and real estate. Circular 698 provides for taxation on certain disposals of Chinese investments. China permits freedom of disposition, but family members may challenge a will. There are provisions for intestate succession.

There is no tradition of wealth planning in China. Present wealth is first generation, and trusts are used mainly in banking. Due to currency and regulatory controls, offshore trusts can only be used at present for overseas assets. Individuals can transfer $50,000 out of China, but there are opportunities for transfer by companies (with a tax cost), by using transactions with offshore companies or by back-to-back loans to an offshore company. It is expected that tax and wealth structuring will become commonplace in future years.

Anti-avoidance rules may be judicial, specific/targeted (GAARs/TAARs), general (GAARs), general anti-abuse (GAA(b)Rs). More tax needs to be collected. Revenue authorities are tired of playing catch-up, and indeed, blatant tax avoidance is hard to defend. GAARs introduce uncertainty. Australia introduced a GAAR in 1915 – derived from 1895 rules in New South Wales and Victoria. The EU council recommend an EU-wide GAAR. The architecture of all GAARs is similar: it focuses on tax benefit, misuse of the law, absence of substance or lack of economic purpose. The purpose test may be objective or subjective. The burden of proof may be on the taxpayer or on the government or shared. There is generally a provision for the court to adjudicate disputes. The UK, Canada and Australia have review panels – which are powerful but unaccountable. The penalties are various kinds. A GAAR places the burden of disclosure on the taxpayer. It raises human rights issues: it potentially offends Articles 1, 6 and 7.

In Yukos v Russia, the court held that tax cannot be levied retrospectively. Some countries have clearance procedures; they are not always effective. Taxpayers need to take advice before engaging in transactions. It is extraordinary that a transaction which passes a SAAR should be caught by a GAAR. Some tax treaties now allow a GAAR override. Whether GAARs work is debatable. In the UK, the issue is whether the transaction is ‘‘abusive’’. The UK has a ‘‘double reasonableness’’ test.

First generation Chinese entrepreneurs, having been successful at home, are now making large investments abroad – in businesses, properties and works of art. There is much hidden wealth – probably more than the known wealth. Wang Jianlin, Zong Qinghou and Pony Ma are the three richest. Real estate and manufacturing are the key sources of their wealth, but their investments in the financial and IT sectors are growing. Hong Kong is the centre of choice for their listed companies. There is currently an upsurge in business confidence, but 60% of entrepreneurs are planning to emigrate – to US principally, but also to Cyprus, Malta and UK. The United States and Singapore have attracted Chinese billionaires, and there is also demand for residence in Hong Kong, London, Sydney, Canada and countries in SE Asia. Children are being sent abroad for education – principally to the UK. Chinese entrepreneurs do not take long holidays, but they often go abroad for medical treatment – to Switzerland, US, Germany and Canada, and they provide a small market for jets – though not yet for yachts. Philanthropy is strong – surprisingly, for a country which has no inheritance tax.

The US taxation of life insurance is favourable and has encouraged the development of insurance products as investment wrappers. Offshore investment companies are no longer tax effective in most parts of the world. But insurance companies can function as investment vehicles and at the same time obtain a measure of tax relief on investment profits which go to benefit policyholders. Ownership of an insurance company can also be seen as a way of attracting investors in e.g. a hedge fund. There is a flourishing secondary market for life insurance contracts, so that a policyholder is not dependant on surrender to realise the value of his policy. Establishing or acquiring an insurance company requires an understanding of the risks involved. It needs to be capable of doing business in several countries – with respect to regulatory requirements. The US rules are mostly derived from case law, and focus on risk-shifting and risk-distribution; the IRS has safe harbour rulings. In selecting a domicile for the company, there are regulatory, tax and ownership issues to be considered.

As a general rule, a non-resident is not liable to capital gains tax on disposals of residential property, through gains of offshore settlements or their companies may be taxed on individual beneficiaries who receive benefits. In 2013 an annual charge was introduced (the “ATED’’) on high value properties (over £2m) owned by a company, by a partnership including a company or by a collective investment scheme. It does not apply to settlements or individuals or their nominees, but there is then an exposure to inheritance tax. Most clients have decided to pay the charge; others have liquidated their companies. The ATED and capital gains tax do not apply to property let to strangers. Stamp Duty Land Tax does not apply to transfers to a domestic or similar partnership: a Mauritian partnership can be similar to an LLP but a separate legal person. There is an exception for houses open to the public for at least one month in the year. A 28% capital gain tax change is made when the property is held by a foreign company. A lot of mixed property reduces the SDLT from 7 to 4%.

There are anti-avoidance provisions designed to disallow debts against property for inheritance tax; they do not apply if the borrowing is to finance the purchase (through not if the borrowed money is derived from the deceased and only if the debt is discharged on the death). The Indian tax treaty can exempt property from inheritance tax in certain circumstances.

A new capital gain tax on disposals of residential property after April 2005 has been announced.

Wyoming created the LLC in 1997. The LLC is a creature of state law, now found in all States. It is like a syndicate with limited liability. It is an entity separate from its members. It is transparent for Federal tax. It looks like a limited company but is a different entity. The operating agreement of the LLC is a private document. The articles are public but contain little information. In 1998, the IRS declared that an LLC would be treated like a partnership. A Texas LLC based in Dallas has a good ‘‘cosmetic’’ appearance. Most States require an annual return. Laws and requirements vary from State to State, but there a few accounting requirements. The operating agreement needs to deal with all matters regulating to the management of the LLC. There is no corporate seal. The company is run by the manager – who can be offshore.

The LLC is ‘‘see-through’’ for a Federal tax, but some tax authorities regard it as opaque – see e.g. HMRC v Anson (which has yet to be appealed). Profit shares may be changed after they have arisen – a feature which opens the possibility of inheritance tax planning. An ‘‘S’’ LLC is similar to a cell company.

The structure should get it right at the start, and it is important to understand the limitations of the powers of a minority interest (see A Limited as Trustee of the B Trust [2014] JRC 032). A sensible trustee faced with a difficult decision will make an application to the court for guidance or blessing. There is tension between an entrepreneurial entity accustomed to risk and the need for prudence on the part of the trustee. It can sometimes be wise to separate shareholdings or shareholding rights, but all depends on the dynamics of the family and the business. Self-dealing may not be permitted by the trust instrument – an important consideration if the trust holding is split between a number of family trusts. The VISTA trust was introduced in the BVI to relieve trustees from the obligation to monitor the company in which they hold shares. This can be dangerous, particularly after the death of the entrepreneurial settlor. Reserve powers do not necessarily invalidate the trust but can be problematic. It may be wise to isolate risky assets. The “family silver” company can be a problem: specific provisions should be included in the trust instrument. An anti-Bartlett clause is not a failsafe: the trustee still has to consider what action is appropriate. The trustee who participates at board level can have a conflict of duty: he may have liability on insolvency, have criminal liability or be caught up in family feuding. There can be conflict between “insiders” and “outsiders” relating to beneficiaries’ salaries, benefits or access to information. A flashpoint can arise for example if the business is not doing well, or a beneficiary is under-performing as an employee or director of the company. Application to the court for assistance is common in Jersey and Guernsey, but rarely seen in Switzerland. Many kinds of allegations may be made against trustees, who may not be protected by an anti-Bartlett clause. Trustees need to avoid becoming factional: they must put the interest of their beneficiaries first and take advice when difficulties appear.