Disclosure of beneficial ownership emanated from Brussels is to be reflected in national law. The 4th Money Laundering Directive contains a definition of “beneficial owner” in Article 14.6: it extends to people with control or management powers. Transparency is the key concept. Persons with “legitimate interests” can have access to the information required to be held in the register. These requirements apply also in relation to trusts governed by the law of an EU State. The purpose of the Directive is to control the undesirable aspects of freedom of movement of capital.
From the 1st of January 2017, there will be exchange of tax ruling between Member States. The US is hostile to State Aid, but the target of the rule against State Aid is to protect other Member States and the market: the relationship between the taxpayer and the State should, it is argued, be at arm’s length.
“Tax good governance” covers State Aid but has a wider meaning: the Chapean Communication gives examples – avoiding aggressive tax planning. The main message from Brussels is that if you are engaged in corporate tax avoidance, you are a target.
Service providers have seen many changes. They need to consider the question ‘Even if it’s legal, do you want to do this?’ Information is now widely available – to tax authorities in particular. On the 1st of March, 2004, the Netherlands introduced information-gathering requirements. One result is that smaller firms are not surviving. Banks are refusing to work with small trust companies. A co-operative of several trust companies may provide a solution.
Luxembourg is a No 1 fund centre. It has numerous international banks. It is the home of the ECJ. It is small enough for business to be in contact with government.
Multi-Family Offices are facilitated by a new law. They are a way of pooling resources. A minimum of qualified personnel is required. The minimum share capital is €50,000, but obtaining a licence is a lengthy process. French, English, German and Luxembourgish are widely spoken. There are over 90 Family Offices, of which 30 are significant.
A GAAR has been introduced, but its practical effect is uncertain. The holding company is still attractive, though the tax rate seems high in relation to other countries. The effect of BEPs is yet to be seen. The recent EU anti-avoidance package seems more dangerous to the competitive standing of the EU in the world.
A commission of Advance Tax Confirmation has been established to review tax rulings. Cross-border Rulings and advance price agreements are to be shared with other EU member states. Limited partnerships and “plug & play” structures for EU passporting are still advantageous.
Legislation in Luxembourg facilitates Sharia transactions. A recent circular determines the time at which profit arises from a mubaha or sukuk transactions. The Hague Trust Convention was recognised in 2003 and the enforceability of trusts has been confirmed in recent cases. A trust is transparent for tax purposes.
The Special Limited Partnership is a new vehicle, transparent for tax purposes and with no legal personality. Reserved Alternative Investment Funds are new. They are unregulated (unlike the SIF), but the managers and custodians themselves must be regulated. It can opt to be exempt, like a SIF or to be treated as a full taxable entity, benefiting from relevant exemptions. Private foundations are on the way: the legislation is still pending.
“Private Insurance” is an insurance-based solution for a private individual and his family. The global citizen needs insurance which is advantageous wherever he may be – e.g. a Swede moving to the UK and subsequently retiring to France. Policyholders’ influence over policy investments is permitted in Sweden, but not in the UK, or France A policy may suit a US person resident in the UK, embodying provisions appropriate to both fiscal regimes.
A policy can offer trust-like outcomes without the tax burden of a trust – e.g. a gift with restrictions, which, for example, in the UK is nevertheless a PET. Insurance may serve to alleviate complexity or facilitate post-death planning.
An English trust lawyer decided to assist a client in fraud, but strongly denied impropriety. A naval Commander decided that the radar screen showed a missile, though he had no way of distinguishing the signal from that of an aircraft. Clever people do foolish things. But the Commander was right, though how he made the decision was mysterious.
We make decisions by the interaction of the unconscious experiential system and the conscious logical system. We have evolved to see threats more than opportunities: a loss has a deeper psychological effect than a profit. A hope is overvalued. The gambler’s last fling is creative desperation. Logical thought has its shortcomings. For chess masters the experiential brain gives rapid answers by situation recognition: it is an important part of assessing risk. Conscious reasoning often justifies situation recognition. There is a distinction between explanation and judgement: one can “mistake the shadow for the prey”. True expertise is about knowing the limits of what you know.
The OECD, EU and IFA have their own definitions of a tax ruling. Essentially, it is an agreement on the tax position of one or more specific taxpayers, usually made in advance. They have recently had unfavourable publicity. There are agreements for exchange of information about taxpayers. BEP’s Action 5 calls for exchange of information about rulings, establishing “preferential rules” (but not relating to natural persons). The OECD has proscribed a best practice: the ruling itself may need to be supplemented by the preceding correspondence. Rulings relating to companies with less than €40 million are not included. There is a standard form of exchange. There is to be a central directory, not (so far) accessible by the public.
State Aid is a current issue. It must be repaid by the recipient. It is a financial benefit granted by a State applying to certain goods and/or businesses – a special rate, an exemption etc. Recent examples include Apple, Starbucks, Fiat, Amazon, McDonalds. The Apple rulings limited taxable profits in Ireland. It was said that there was “no scientific basis for profit”, but the end result was not arrived at on an arm’s length basis. The repayment may not qualify for tax credit in the US. Similarly, the Commission considered that the taxable profits of Fiat Finance & Trade were improperly reduced by the ruling. In Starbucks, the royalty payment was too high, as it was in Amazon. In McDonalds, branch royalties were allocated to the US, where they were not taxable.
The US is hostile to the State Aid case, as is the EU to the State Aid.
A mid-shore jurisdiction has less tax rather than no tax, and may have certain exemptions. It has tax treaties. It “feels” respectable – which is important nowadays: banks may refuse to deal with zero-tax jurisdictions. There are several push factors – the EU Savings Directive, CRS, FATCA, the register of beneficial owners: taxpayers fear that a connection with a zero-tax jurisdiction may lead to investigation. The US, UK, France and Italy have introduced harsh new penalties for “offshore tax evaders”. The UK Act imposes strict liability on taxpayers and penalises failing to prevent tax evasion and “offshore asset moves”. In the Murray Group case, the Court observed that the tax in dispute was relevant to the national budget and made thus a reason for the taxpayer’s appeal to fail.
A treaty network indicates a greater certainty of tax outcome. Article 49 of TFEU offers freedom of establishment and Article 63 offers free movement of capital; only an EU national can take advantage of these. (Stauffer decided that passive investment is not an establishment). There are treaty overrides, e.g. in the UK, TCGA 1992 s10A, the Diverted Profits Tax and other measures.
The top 10 interesting jurisdiction options are (10) USA – e.g. for the foreign grantor trust, (9) Estonia, (8) Ireland – with the old UK remittance basis for the non-dom, (7) Cyprus – which has a participation exemption, (6) Barbados, (5) Mauritius, (4) Malta, (3) Singapore, (2) Luxembourg, (1) UK.
The search for a sensible seat for the family trust is of some antiquity. When a family is dissatisfied with their trustee they may simply find a new trustee or may go to another jurisdiction.
Suppose a UK family, English speaking, living in several countries. Should the trust remain offshore? Should another jurisdiction be chosen?
Some civil law countries allow administration of trusts, but a common law jurisdiction may be preferred – one where first-class services can be found. Time zones and telephone links are relevant factors, as of course are running costs. Being “comfortable” with the trustee is important; the trustee must be able to say “no”.
The trust is inherently mobile. Tax liability generally goes with the residence of the trustee, but some jurisdictions –e.g. Jersey – look to the residence of the beneficiaries. Anti-avoidance rules may negate the apparent advantage of having the trust offshore. The OECD list of tax havens does not include New Zealand. There is a wide choice of countries using the common law, but some are the subject of blacklists – which are constantly being updated. Cyprus, Ghana, Hong Kong, India and Ireland are not listed by any EU Member States.
Efficiency, banking system, law courts – these are relevant to making a choice. A branch of STEP may indicate a higher level service provider. Hong Kong and New Zealand may appeal to a family resident in Asia. An introduction from a satisfied customer is a great help. To come to a final list, there are the “Rolls Royces” of the offshore jurisdictions – Bermuda, BVI, Jersey, Hong Kong, New Zealand. There are differences. Bermuda has high quality, but tends to be more expensive. It allows for purpose trusts. It has no register of trusts. The BVI is home to some 40% of the world’s offshore companies. The VISTA trust overcomes the problems indicated by the Bartlett rule and its rule in Saunders v Vautier.
In Jersey, a trustee is liable to local tax, but in practice is exempt if the beneficiaries reside abroad. The trust may have an unlimited perpetuity period. Hong Kong has source-based income taxation but no capital gains tax or estate duty. Trusts are recognised and not regarded with suspicion.
New Zealand is in no sense a tax haven, but taxation depends on the residence of the settlor. The trust can benefit from New Zealand’s tax treaties.