Madrid 2012 meeting

Meeting Summary
  • Gibraltar from an EU PerspectivePeter Montegriffo
    • Membership of the EU has been very important to the development of Gibraltar since 1973. It is excluded from VAT, the Customs Union and the Common Agricultural Policy. It does not have the Euro and is not part of Schengen. The freedom of persons, services and capital became particularly important in 1986, when Spain joined the EU.

      Gibraltar has access to the Single Market. In the Matthews case, Gibraltarians acquired the right to vote in the European Parliament. The financial services industry is regulated similarly to but separately from the UK. Passporting of services into the EU is important in banking, investment services and – in particular – insurance and gaming. The UK provides a ”post box” arrangement for communication with EU governments when required.

      Gibraltar has moved from classic offshore secrecy towards compliance and OECD adherence. It now has 20 TEIAs, though not yet one with Spain. Directive 2011/16/EU will expand the provisions for exchange of information, and this will make an agreement with Spain unnecessary – but may nevertheless facilitate it. The new system of taxation – with a general rate of 10% – has not been considered by the ECJ but is generally believed to be EU-compliant. There are some kinds of tax-free income – notably patent royalties, passive income and income whose source is outside Gibraltar. There is no capital gain tax, wealth tax or inheritance tax. Trusts made by non-residents for the benefit of non-residents attract no tax.

      There are some 500 individual taxpayers who enjoy a special regime for the HNWI. Relations with Spain appear to be improving, and Gibraltar hopes attract more headquarter operations and royalty companies.

  • Gift Planning through Life AssurancePatrick Way
    • Insurance-based tax planning appears to enjoy some official approval in the United Kingdom and perhaps elsewhere. The Discounted Gift Trust enables the taxpayer to “have his cake and eat it” – to make a gift but retain a benefit, without adverse inheritance tax consequences. The intending donor takes out a policy which confers two rights – the right to a sum on maturity and the right to draw down 5% of the premium each year for 20 years or until he dies. He gives the first right to the donees or trustees for them, and he retains the second. The gift is taxable, but the value of the gift is much lower than what the donees will ultimately receive: this is the “discounted gift”. The retained right disappears at the death of the donor. A possible downside in the United Kingdom is that the 5% draw-downs may be regarded as an annuity.

      The Loan Trust has a similar “have cake and eat it” effect. The donor lends a sum of money to the trustee interest-free and repayable on demand. The trustee buys a single premium policy, carrying a 5% draw-down right. The trustee uses the 5% draw-downs to repay the loan. Effectively, this is a tax-free gift of future growth. The trustee needs to be aware that if the bond declines in value, he will not be able to repay the loan.

      The Loan Trust seems to work in France and Spain. Both ideas might be used in Ireland and Italy.

  • International Tax Planning from a Spanish PerspectiveGabriel Pretus
    • Anti-avoidance rules apply to an entity established in a “tax haven”, zero-tax territory or non-corporative territory: there are procedural and debt recovery measures, provisions for deemed tax residence, transfer pricing adjustment, disallowance of expenses, and exclusion from non-resident tax exemptions, as well as CFC rules and deemed income rules.

      But the tax code does contain some more favourable features. The ETVE holding company regime exempts incoming and outgoing dividends and also internal and external capital gains. The regime does not apply to closely-held companies or passive holding companies. The ETVE must hold at least 5% in an underlying company or make an investment of at least €6m in an active company. Shares must be held for a year. At least 85% of the turnover of the subsidiary must arise from business activities carried on abroad and its profits must be subject to tax. Dividends must not be paid to black-listed countries. ETVEs are entitled to the benefit of the DTAs.

      There are several corporation tax reliefs – free depreciation and lower rates for patent and residential property income. Ceuta and Melilla have lower tax rates applicable to trading activities and are entitled to the benefits of the DTAs. Long term assets attract capital gains taper relief, which in some cases may amount to full exemption.

  • Retiring to Spain: Critical tax planning factsMichael Soul
    • The expat will find many differences – not least that the value of his investment and pension will be related to the value of the Euro. The individual who becomes resident in Spain becomes liable to income tax, capital gains tax, wealth tax and inheritance tax. A person is resident if he is present in Spain for 183 days in a year or has his principal business or his professional or other economic activities in Spain. Proving residence in a tax haven is very difficult. The DTAs have the usual tie-breaker rules. Non-residents pay tax on Spanish assets and income.

      Income tax rates rise to 56% in some regions. Annuities are taxed on the income element. Capital gains are taxable to residents at a top rate of 27%. Wealth tax comes and goes; the top rate is 2.5%.

      Spain has 17 autonomous communities, which have different rates for wealth tax and inheritance tax. Inheritance tax is a tax on beneficiaries. A beneficiary not resident in Spain, or not habitually resident in an autonomous region, pays the national rate. The amount changed depends on the circumstances of the beneficiary and his relationship to the deceased. Rates go up to 81% for an unrelated beneficiary. Andalucía offers registration as a de facto partnership, which is taxed as a married couple.

      Property should not be held by a tax-haven company, but a treaty company may be used – e.g. a UK nominee or trustee.

  • Tax and Asset Planning for the Chinese HNWIMimi Hutton & Pearl Lam
    • Wealth in China co-exists with corruption, with concerns about personal safety and protection of wealth and with an uncertain application of the rule of law. The mainland Chinese HNWI is typically a 51-year old self-made man (though some 11% are women), who has listed a company on an overseas stock exchange, is from the coastal provinces, has had little formal education (having grown up during the Cultural Revolution), speaking little English , having a small family (perhaps two) and holding a government advisory post. He desires control, liquidity and security – including a second passport or residence visa abroad for himself and his family, (the number one destination for the family being the United States). He will be fee-sensitive. He will prefer to deal with a person who speaks his dialect of Chinese. HNWIs are becoming more interested in wealth preservation, inheritance planning and seeking education opportunities for his children abroad.

      Chinese tax residents are subject to tax on worldwide income. Dual citizenship is not permitted. Investment income is taxed at 20%. Capital gains from publicly traded stock are exempt. There is a heavy tax on property transfers. There is no estate tax or gift tax, nor any exit tax on change of tax residence. There are rules attributing the income of a CFC to a resident, but there are exceptions, and appropriate offshore structures may permit the avoidance of these rules.

      Chinese trust law is contract-based and is used for commercial purposes, but the tax treatment of trusts is unclear. A resident beneficiary is subject to tax on a distribution from a foreign trust. There is community of property, but marital agreements are recognized. Planning for the married client requires the consent of both parties. There are no forced heirship rules, but the community property rules limit what each spouse may leave.

      With Chinese clients, conducting due diligence is very difficult. Other difficulties include exchange control rules, the non-compliant culture and a lack of awareness of foreign tax issues. Offshore pre- IPO listing offers opportunities for planning.

  • Tax Planning Through Corporate RestructuringNiklas Schmidt
    • The presentation focused on eight case studies, involving corporate transactions utilised for tax purposes.

      Debt Dumping Parent creates NewCo with loan capital; NewCo acquires new Subsidiary and establishes tax group; interest payable on the loan siphons off profits.

      Inbound Cross-border Merger Parent has foreign Subsidiary with cash; the two companies merge. The Tenth EU Directive provides a frame for this. Tax on the dividend received can often be avoided.

      Outbound Cross-border Merger Foreign Parent has domestic Subsidiary with cash. Again, the two companies merge. Dividend withholding tax can be avoided.

      Creation of Repayable Capital Foreign Parent has domestic Subsidiary with cash; Parent creates domestic NewCo which takes over Subsidiary, which declares dividend to NewCo. Some jurisdictions allow NewCo to return to Parent tax-free its capital cost. No withholding tax on the outbound dividend.

      Hybrid Instrument Foreign Subsidiary is funded by a hybrid instrument, the return on which is deductible by Subsidiary but treated as participation income in hands of Parent. The OECD and EU Commission are looking into this.

      Cross-border Loss Relief Parent acquires loss-making Subsidiary; it forms tax group to utilise Subsidiary losses. Foreign and domestic rules on computation of income may lead to a mismatch, thereby making the tax deferral permanent.

      Hybrid Partnership Operating Company (“OpCo”) is owned by individual in same jurisdiction (“State A”). He sets up hybrid entity (“HybCo”) in State B, which is transparent in State A, but non-transparent in State B. OpCo can pay out dividends free of withholding tax, based on classification of HybCo as non-transparent for purposes of the EU Parent/Subsidiary Directive. HybCo can pay out to individual free of tax in State A, based on classification of HybCo as transparent (Art.7 DTA).

      Capitalization of Contracts Tax haven entity trades, with long-term contracts; the business is sold to an onshore purchaser, a specific amount being allocated to the contracts, which are written down against income. Thus, the taxable income is sheltered.

  • The Future of Wealth ProtectionRichard Pease
    • There are threats to wealth other than tax. First, potential creditors: a trust or variable life assurance policy is available in several jurisdictions, with varying periods required. In Tasarruf, the claimant was a Turkish financial institution, which asked the Court to treat a power of revocation as property. The Privy Council agreed. In North Shore Ventures, individual loan guarantors had made offshore trusts. The Court of Appeal held that the trust documents were in the control of the settlors, because the trustees in fact “danced to the tune” of the settlors.

      Matrimony is another threat. Under the participation in acquisition system, one spouse is enriched by the gains of the other spouse. Rules in various jurisdictions vary hugely. The draft EU Directive – “Rome IV” – is intended to clarify the issues. Pre-nups are well-known in US, Germany and elsewhere, and are expected to be recognised in the UK. Are trust assets to be treated as resources of a spouse? Some trusts laws – e.g. those in Guernsey – try to prevent foreign judgements having any effect. In Whaley, the English Court nevertheless treated the trust asset as a resource of the spouse.

      Forced heirship rules are found in civil and Sharia law. They leave a freely-disposable portion, but it can be difficult to ascertain before death how much this is. Agreement may be reached between heirs. Some jurisdictions have anti-forced heirship rules, the effect of which has been disputed.

      Beneficiaries are generally entitled to information about trusts in which they are interested. This may be circumvented by using the STAR trust in Cayman or a Jersey foundation. An incapacity clause in the trust instrument can shelter an individual from expropriation. Investment protection treaties give effective protection and provide for an arbitration procedure. Canada, the Netherlands and Mauritius all have IPAs with potentially unstable jurisdictions.

  • The HNW Expatriate in EuropeNicolas Rollason
    • Residence and citizenship through investment programmes are becoming more common. There are HNWIs looking for political and economic stability and for education for their children. They want transparent and objective criteria, security of investment and conditions which can readily be satisfied. In the EU, Cyprus, Ireland, Austria, Belgium and the UK need to be considered.

      Residence in Cyprus requires a €1m investment of a prescribed kind – e.g. an entrepreneurial activity with a €10m turnover and three employees. It also requires approval of the Council of Ministers. Ireland has its immigrant investment programme, with a much clearer procedure than was formerly the case. A two-year residence permit may be granted, to be followed by citizenship after five years. The Netherlands has a modern immigration policy which is not yet in force. They will be looking for a minimum level of interest income and will not apply a language test. The Austrian programme is entirely discretionary. It is a 12-18 month process requiring unanimous cabinet approval. The applicant must make an extraordinary contribution; but there is no requirement to reside in Austria.

      Belgium has no passive investment programme. It looks for entrepreneurs with a genuine connection with Belgium. The process is discretionary and takes up to 18 months.

      The UK programme was introduced in 1994. It required a £1m investment. Permanent residence was available after five years, but the length of permitted absences from the UK was discretionary – a feature which many potential investors found unattractive. A new fast-track residence programme was launched in April 2011. There is a two-year route for £10m, a three-year route for £5m and a five-year route for £1m. Up to 180 days absence per year is permitted. The residence criteria for citizenship are more demanding and call for careful planning.

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