Disputes are, alas, a feature of off-shore activities, and seem likely to increase. A trust dispute may be between trustees and third parties, between trustees and beneficiaries, between beneficiaries inter se, by way of a challenge to the trust. For parties to utilise an alternative to the courts, they must be willing or bound to do so, and able to agree to do so. The trust instrument may (and should) empower the trustee to arbitrate, or a statue may do so ( e.g. in England, but not in Jersey). If all beneficiaries are ascertained and sui juris, they may agree to arbitrate. Parties may choose to arbitrate for confidentiality, for choice of arbitral panel, procedure and timing, or for limitation of right of appeal. There are impediments to trust arbitration. The court will not permit its powers to be usurped – e.g. its power to determine the meaning of words. The role of the court may be limited by autonomous parties or by statue (e.g. the Arbitration Act in the UK). An arbitration tribunal must be empowered; it requires a “dispute”; it may have implied powers – e.g. to award interest – conferred by statute. It is considered that the tribunal cannot appoint representatives of minors: this lies within the power of the court. Enforceability of the award may be provided by statute or by the New York Convention.
Today is a day for a change of government, but legislation affecting the financial sector has always been passed with unanimous approval.
A trust comes within the tax net if there is one trustee in Malta. The trustee is chargeable at 35%. But a trust can be transparent, so that a trust with foreign-source income and non-resident beneficiaries is not taxable. Malta is recognised as a QROPS jurisdiction by UK HMRC. Pensions may take advantage of the appropriate tax treaty. A foundation is treated as a resident, but may irrevocably opt to be taxed as a trust and treated as transparent accordingly. There is a regime for HNWIs – a 15% rate on remitted foreign income, with a minimum a €20,000 pa plus €2,500 per dependent. The individual must buy real estate of at least €400,000 or rent premises at €20,000pa. The figures for non-EU nationals are slightly higher. A similar regime is applicable to retirees: all pension income must be received in Malta.
Leasing of private yachts is favourably treated. The VAT liability depends on the degree of use within the EU; only 30% of lease payments for a yacht over 24 metres are taxable. A similar regime is applicable to the leasing of private aircraft.
A company incorporated or resident in Malta is liable to tax at 35%. Tax credit is given on outgoing dividends. There is a participation regime for equity holdings (i) of over 10% or (ii) a €1,164,000 investment held for at least 183 days.
There is an anti-abuse provision but three safe harbours. Shareholders are entitled to a refund of the underlying tax – 6/7ths from a holding in an active company, 5/7ths or 2/3rds from a company with passive income. Non-domiciled companies pay tax on their foreign income only on the remittance basis. Cell companies are available and re-domiciliation is permitted. The European Societas Europaea can transfer its registered office to and from Malta.
From the year 2000 onwards, Liechtenstein has been at pains to adapt itself to the new world of compliance. Twenty-nine treaties ( 9 TAs and 20 TIEAs or MOUs ) are now in force, and more are to follow. It offers an attractive regulatory environment for banks, trustees, insurance companies, cross-border pension funds and investment funds. It is a member to the EEA.
Under new tax law, introduced in 2011, private wealth structures and trusts, which are treated as non-commercial entities, pay an annual tax of CHF 1,200 pa. Ordinarily taxed structures pay 12.5% income tax and may enjoy treaty benefit. But many items are exempt – portfolio and real estate income, capital gains, profits of foreign branches. The Foundations Law was revised in 2009, to make the foundation a recognised and transparent structure. The Disclosure Facility offers UK taxpayers a way to regularise their affairs without criminalisation – on their world-wide assets and not only bank accounts.
There were changes in the law in 2011; when the 1988 trust law was amended. Foundations were introduced into the law in 2004; a new law has introduced the Executive Entity. The two vehicles have much in common. The foundation was introduced to satisfy demand from Middle Eastern clients. They are both legal entities with no shareholders. The Executive Entity may have a variety of functions; it is a form of incorporated governance. It has a founder, a council and a local representative. Its charter is in principle a private document but may be filed for public access. It is not an asset-holding structure. It may have decision-making powers – e.g. to take an active role in dealing with assets, eg on the death of the patriarch. It may be a protector, a director of a company, the owner of private trust company, an adviser to a trust company. The Directed Trust limits the role of the trustee and opens the door to conferring investment powers on another party, on the Delaware model; the trustee’s responsibility is diminished accordingly, but the role of the court is unchanged. A “no contest” clause is expressly permitted. The rule against perpetuities has been abolished, as has been done in Bermuda, Guernsey and Jersey. A trust migrating into the Bahamas takes advantage of the absence of a perpetuity period. The trustee of a local trust can apply to the court to enjoy this treatment. Arbitration for trusts has been introduced.
Under the current rules, it is not easy to determine whether an individual is resident in the United Kingdom. There is guidance in HMRC20 (formerly IR20). After the decision in Gaines Cooper, the government decided that the residence rules needed to be clarified. The result was embodied in the Finance Bill 2013. The provisions have been generally well received. An individual is to be automatically resident if he meets one of the automatic UK tests and none of the four automatics overseas tests. Otherwise, an individual will be resident if he satisfies the sufficient ties test – a combination of days spent in the UK and the family tie, the accommodation tie, the work tie, 90–day test or the country tie. There are anti-avoidance rules in the new legislation to prevent individuals escaping income tax by short periods of non-residence. The new rules introduce little change but increase clarity.
The United States taxes citizens regardless of residence and aliens if they are resident. An individual is resident if he holds a green card or is present for an average of 183 days a year. Canada has a simple factual test, as – broadly – do France or Italy. Under most tax treaties, the tie-breaker rules focus on permanent homes, centre of vital interests, habitual abode and nationality.
The new law came into effect a year ago. Cyprus has had for many years the equivalent of the English Act of 1925 – in contrast to Malta, where the trust is a relative newcomer. The new law expressly provides for reserved powers not to invalidate the trust – on the Cayman model. It includes a definition of protector and indicates the powers he enjoys. It affords trustees the discretion to disclose information to beneficiaries. It makes provision for purpose trusts, perpetuity and investment powers. The anti-forced heirship provisions are particularly interesting: as in other jurisdictions, it exclude the application of foreign law or judgements concerning determination of the rights of beneficiaries. The law strengthens the existing asset protection provisions. It permits a power to vary the terms of the trust. Some issues are not addressed – eg the delegation of powers and liability of trustees to third parties.
Brussels is not just about tax. It is concerned also with (among other things) trusts and succession. EU regulation 650/2012 has 83 recitals and 84 articles; it will mostly come into force in 2015 and will affect trusts throughout the EU; it applies the law of the state in which an individual was habitually resident (or, if he chooses, that of his nationality) to the devolution of his estate on death.
Brussels makes national tax law
It stops tax avoidance
It taxes financial transactions.
The Court has influence on tax.
Recommendations against double taxations from Brussels can actually be helpful to taxpayers.
1. The bail-outs carry conditions – Portugal has to restructure its tax system, Ireland has to make changes in its tax regime, Greece has to tighten up its tax system.
2. Brussels recommends third countries to apply minimum standards of good governance. Members are recommended to create blacklists and to be asked to suspend or terminate tax treaties. Member States are encouraged to amend tax treaties to ensure that relief is not given in one country for income not taxed in another. A GAAR is recommended to all Members States: tax is to be levied by reference to “economic substance”.
3. Eleven countries are joining together to establish a financial transactions tax; the tax extends to dealings in certain instruments issued in the eleven countries even by institutions outside their frontiers.
4. The Court favours some provisions allowing losses in one state to be relieved in another and facilitating exit from Members States.
5. Member States are being urged to find a way to avoid double inheritance tax on death.
The family-owned business is central to the culture of the Middle East and is older than Islam. One cannot ignore the spiritual dimension in the culture, or the impeding changes occurred by succession to businesses built up by earlier generations. The Middle East client, not necessarily a Muslim Arab, will be an individual with merchant wealth. There are huge inequalities and huge uncertainties; the ruling elites are very distant from the people they rule. Many wealthy families are deeply invested in the region. There is a surprising optimism. Family-owned businesses are generally dominated by a patriarch, who is concerned with succession planning. Internal family feuds need to be managed. There can be a problem with “credit card children”. As a result of the inheritance rule, 25% of wealth in the UAE is owned by women. The desire for conspicuous wealth is endemic. Sharia law is prevalent – with civil codes and common law enclaves. The forced heirship system is based on religion and kinship. The heirs have expectations of inheritance. The range of heirs is wide. There is no clawback rule, but everyone behaves as if there were. There is a tension between the need for central management and fragmentation of estates on death, and changes are imminent.