Monte-Carlo 1994 meeting

Meeting Summary
  • 1. General ConsiderationsRoy Saunders (updated 1998)
    • Loans relating to real property are a minefield. Many investors in foreign property have lost money and one reason for this has been their ignorance of the tax implications of property purchase. Many investors have been wrongly advised.
      Rental income is generally taxed by the country in which the property is located and is not relieved by treaty. Depreciation or interest charges may reduce the taxable base. Sometimes a foreign company is indicated – e.g. in Germany a foreign company is not subject to the trade tax, or a foreign company may be preferred to a domestic company, so as to avoid a further tax at the dividend level, or to utilise the non-discrimination provision of a treaty.

      As well as reducing the tax charge on rental income, interest may serve to reduce the tax on a capital gain on disposal. If there is a limit on the time for which a loss may be carried forward against a gain, an “internal” sale may be required to crystallise the gain within the prescribed time. The interest needs to be deductible: it may enjoy treaty relief; if it is performance-related it may not be deductible; interest paid by a branch to head office is generally not deductible. Some countries (e.g. Spain) do not permit a foreign company to deduct interest unless it has a permanent establishment.

      The United Kingdom is one of the few high-tax countries which does not levy tax on capital gains of foreign companies investing in local real property. Other countries tax at various rates – e.g. France has different rates for different periods of ownership. Roll-over or indexation may be available to a foreign investor.

      Where the property is owned by a local company, the sale of its shares will generally be just as taxable as a profit on a sale of the property, but – importantly – may be relieved by treaty.

      Inheritance taxes must also be taken into account, as must any relevant forced heirship rules, possible gift taxes, any wealth tax, transfer tax, VAT or other taxes.

  • 2. Investment in SpainRoy Saunders
    • An individual owning property in Spain pays tax on rental income if any or if none on a notional rent of 2%¹ of the value of the property. He is subject to wealth tax and to capital gains tax on a sliding scale depending on length of ownership – down to zero at the end of 20 years. A company suffers no wealth tax but pays capital gains tax at a fixed rate of 35% and a special tax of 5%² unless the beneficial owner’s identity is disclosed. Whether a company is advantageous depends on the figures but generally it is not.
      A foreign corporate investor is taxable on the gross income at 25%. The further 5% special tax may also be charged. A Spanish subsidiary with internal debt will generally be the preferred structure. The maximum debt/equity ratio is 2:1. The Spanish company is liable to 25% tax on the net income; sale of its shares may be free of capital gains tax under a treaty.

      ¹ The government intends, however, to abolish the imputed income provisions so that the 2% tax will no longer be applicable.

      ² Article 46 of Corporate Income Tax Law 43/95, which became effective as of 1 January 1996, reduced the Special Tax from 5% to 3%.

  • 3. Investment in FranceJames Howes (updated 1998)
    • A non-French investor may buy French property directly, through a civil company (“SCI”) or through a commercial company.
      Even if the purchaser of a second home is not to become resident in France he must nevertheless consider the forced heirship rules. He will be deemed to have an annual income of three times the rental value; but this is generally eliminated by treaty. FF 4,700,000 is the threshold for wealth tax: splitting the property among family members and using loans may help to reduce or eliminate wealth tax.

      If the property is a second home, capital gains tax is payable on a profit on its sale. Whether the property is owned directly or through an SCI, it will be liable to succession duty and gift duty. Transfer taxes and costs are high. There are also local taxes.

      An annual tax at 3% of market value is levied on corporate entities owning French property, with certain exceptions, all of which must be claimed – e.g. in favour of a taxpaying SCI.

      The investor in property for letting is subject to tax on the net rent. A small corporate investor pays at a total rate of 36% including a 10% surcharge. Capital gains tax (with allowances and deductions) and the 3% tax will also be charged.

      The investor purchasing property for re-sale carries on business. A commercial company may be advantageous here. The credit for mainstream tax against dividend tax tends to make distribution advantageous.

      In general, French property is best acquired by either an individual or a company which is entitled to the benefit of a comprehensive tax treaty with France.

  • 4. Investment in the United StatesStephen Gray
    • The first step is to discover the client’s precise intentions as regards his investment in U.S. property.
      As a practical matter, every commercial investment is made by a company, never by an individual.

      Portfolio interest may be used to route tax-free income to a foreign investor: techniques have been developed to this end. The IRS is now authorised to make such techniques ineffective. New provisions also attach the use of a loan with an “equity kicker”. A very high rate of interest may now give an economically similar result.

      The foreign individual investor in U.S. property faces a two-layer tax on his income if he uses a company, and if he does not he faces a potential estate tax charge. He may have a life interest only – through a partnership or trust. Or a grantor trust may have the individual as a grantor and a foreign corporation as the beneficiary.

      Classically, the investor or investors form a non-U.S. corporation which owns a U.S. corporation which owns the shopping centre. If the U.S. corporation accumulates the income and gains, the investors may achieve a single layer of tax by the non-U.S. corporation selling the U.S. one.

      The vacation home, by contrast, will generally be better owned by the individual: he is exposed to estate tax, but life insurance will usually be cheaper than the cost of a structure. An individual over 55 gets a one-time allowance of US$ 125,000; a U.S. person can roll-over into a non-U.S. property.

      In the two discussion sessions, members revisited the subject of basic U.S. taxation of the U.S. activities of non-U.S. persons. We discussed the changes made by the enactment in 1980 of the Foreign Investment in Real Property Tax Act, namely that non-business real estate would be subject to U.S. capital gains tax for the first time and that all real estate held by an intervening U.S. corporation would be subject to U.S. capital gains tax either when sold by the corporation, or on the sale of the corporation’s stock, where the land comprised the bulk of the corporation’s value. We also re-examined the broad definition of what is a U.S. real property interest (a “USRPI”) for purposes of these rules.

      Turning to ownership of non-commercial property, the group explored the costs of holding a USRPI via a non-U.S. company, thereby avoiding U.S. estate tax but also forgoing an increase in basis at death, compared with direct ownership. Life insurance to pay estate tax and holding the USRPI via split-interests as alternatives were discussed.

      In the commercial area, we noted the tension between the desire to avoid U.S. branch profits tax, where a non-U.S. company is involved, with the estate tax problem where no company is interposed. The conversation turned to revisit use of two-tier partnerships and recent IRS suggestions that certain U.K.-style holding companies thought to be partnerships for U.S. tax purposes may be reclassified as companies because there is no automatic termination of the company upon the death or bankruptcy of a shareholder, despite the memorandum and articles of association so providing, due to the peculiarities of U.K.-style company law. The new Cayman Islands limited duration company law was considered in this light.

      Various financing techniques, in view of the new U.S. legislation on multi-party deals and contingent interest, were also examined. The preferred solution, on an investment in another’s project, is to loan funds to unrelated parties in order to qualify for the portfolio interest exemption, apply a high rate of interest, take a security interest in the property (which interest is not a USRPI) and foreclose only if the balloon payment on the loan is not met. For investments in one’s own project, a split-interest partnership or use of two-tier partnerships (one U.S., one not) were preferred.

  • 5. Investment in the United KingdomRoy Saunders (updated 1998)
    • The non-domiciled resident may accidentally remit income in order to buy the real property. As in the United States, the purchaser of a modest property will generally find it cheaper to accept the inheritance tax risk and take out insurance to cover it. For a more substantial property, a non-resident company owned by an offshore trust will generally be used. A non-resident company is usually the best vehicle for a commercial property. Interest on borrowed purchase money may now be paid to a foreign as well as to a domestic bank. Section 776 seeks to charge to income tax a profit which borders on a trading profit. This is a complex issue, but basically the freedom from tax on capital gains is limited to gains which are really on capital account. In a more doubtful case, it may be wise to use a Jersey tax-paying company with no permanent establishment in the United Kingdom; if the Inland Revenue treat its profits as arising from trading, it can claim exemption from U.K. tax under the treaty with the United Kingdom, but at the same time the Jersey tax authorities will allow the deduction of a management fee of 90% of the profits, so that tax at 20% is paid on 10% of the profits. The 90% may then be earned as income of a Jersey exempt company.
      The following points arose in the afternoon discussions with Roy Saunders.


      The tax department in Madrid is so overloaded with work that it takes a very long time before an exemption from the 5% Spanish tax is granted. Moreover, it should be borne in mind that the 5% tax is a charge against the property itself, which can lead to complications when the property is required to be sold. Potential purchasers would be advised to retain a percentage of the purchase consideration until there is clarification that exemption has been granted from the 5% tax.

      There is a danger that offshore companies such as Gibraltar companies, whose sole asset is Spanish real estate, could be considered to be fiscally domiciled in Spain. In this event, the 6% transfer tax on sale of the shares of the Gibraltar company will be payable, and although bearer shares may be issued in the Gibraltar company, in order to obtain exemption from the 5% Spanish tax, the identities of the beneficial owners have to be given. Once a transfer of the shares of the Gibraltar company has taken place, the identities of the new owners will have to be disclosed on the relevant form which would highlight the transfer of shares, and therefore incur the 6% tax (always assuming that the Hacienda follow this through).

      Double tax treaties should give protection from the 5% Spanish tax under the Regulations as well as Non-Discrimination Articles. Unlike the French 3% tax, the 5% Spanish tax is currently only levied on offshore (non-Spanish) companies, so that the Non-Discrimination Article is relevant should it be attempted to impose the tax on treaty resident companies.

      It has been suggested that Madeira companies could own Spanish real estate without incurring the 5% tax, but the dislike of the Spanish authorities for Madeira companies is quite well known, and in fact the Spanish/Portuguese double tax treaty is currently being re-negotiated to exclude such companies from benefiting.

      Whether or not strictly required by law, it is advisable for non-resident individuals owning real estate in Spain to make a Spanish Will, in particular bearing in mind the Spanish forced heirship rules. It may be noted that, as in France and many other European countries, the more distant the relationship of an heir to whom property is bequeathed from the deceased, the higher the percentage of inheritance tax.


      A similar 3% Special Tax is levied on both French and non-French companies owning real estate in France unless the non-resident companies are located in tax treaty jurisdictions or ones where there is an adequate exchange of information provision, and full disclosure is made of the beneficial owners. However, there is an exemption where the company’s assets comprise less than 50% in French real estate, and it is fairly common practice to borrow money to acquire portfolio investments prior to the end of any accounting period so that the 50% level of gross assets (rather than net assets) is not invested in French real estate.

      It was mentioned that in the event of a husband and wife purchasing French real estate, it is advisable for the property to be registered in both of their names. The benefit of this is that on the death of one of them, inheritance tax is only paid upon the value of half of the property. In the event of simultaneous death, there are rules under the French civil system which determine who died first, and this can very often have adverse effects on the inheritance tax position.

      United Kingdom

      Under the 1994 Finance Act, interest payable by both non-residents and residents may be made to non-U.K. lenders whilst still qualifying for tax relief against rental income. Consent will be required for the payment of interest gross to non-U.K. entities by U.K. entities from the Inspector of Foreign Dividends, but no withholding tax need be levied, and therefore no consent required, in respect of interest from one non-resident entity to another, even though the interest may qualify as deductible against U.K. rental income owned by the non-U.K. borrower (subject to a claim for refund in respect of any withholding tax deducted from the rental income unless the interest is paid through a U.K. agent out of the rental income received).

      Tax relief is only granted on interest payments in respect of loans for the acquisition of property, or to fund further capital investments in the property. Additional loans taken subsequently, for example, to obtain a higher interest amount for offset against rental income will not be allowed as a deductible expense, since the additional loans have not been borrowed for the acquisition or refurbishment of the property. However, one can achieve the same desired result by arranging for the sale of U.K. real estate owned by one foreign company to another company for a sum which is financed by the higher loan arrangements.

      A view was expressed by Roy Saunders that it is astonishing that the United Kingdom has not introduced legislation similar to the U.S. FIRPTA legislation introduced in 1980 in the United States. Although other countries such as Belgium and Holland allow capital gains on real estate to be earned by non-residents without incurring local taxation, these simply mirror local rules; in the case of the United Kingdom, resident individuals and companies are liable to capital gains tax on the sale of U.K. real estate, but non-resident companies and individuals are not so liable, and this is where the anomaly is in relation to the legislation of most other countries.

      A question was asked as to whether the Inland Revenue intend to re-introduce legislation to abolish the U.K. non-domiciled legislation; they have already stated that they have no such intention of abandoning the non-domicile rules, and indeed this is most unlikely.

      The question of whether back-to-back loans with regard to U.K. real estate may be considered as a remittance has indeed been raised in many cases; where the individual’s own funds can be traced as providing a deposit against which the bank loans are lent on a back-to-back arrangement to the individual resident in the United Kingdom, U.K. tax on a remittance basis may be payable on the capital sum. The idea of an offshore trust owning an offshore company acquiring the real estate, perhaps by way of back-to-back loan arrangements, would not create such a remittance problem.


      The 1993 Anti-Abuse Act in Germany has changed the tax planning scene for investment in German real estate. Prior to this, Dutch companies owning German real estate for more than two years would be free from German capital gains tax under unilateral German law, and free of Dutch tax under the Netherlands/Germany double tax treaty. The 1993 Anti-Abuse Act has changed the unilateral exemption for companies owning real estate for more than two years, so that they are now fully subject to capital gains tax, and therefore Dutch BV’s would not be in any better position than other non-resident companies.

      Incidentally, the 1993 Anti-Abuse Act also requires treaty recipients to be the ultimate beneficial owners of income derived from Germany in order to be able to benefit from lower rates of withholding tax, for example, under the relevant double tax treaties with Germany¹ . Whether such unilateral law can override the provisions of Germany’s double tax treaties, without the requirement to re-negotiate them, is a moot point.

      ¹ Since the lecture, several high profile cases have come before and been resolved by the German courts in connection with the question of treaty override. As a result of these cases it is evident that the provisions of a double tax treaty with Germany will be overlooked if it can be shown that there has been an abuse of law.

  • Acquiring and Avoiding ResidenceHuw Griffith
    • The important facts are summarised in the letter and table reproduced below. The U.K. rules for the non-domiciled individual resident there are singularly attractive – and one should not forget the availability of treaty relief and tax credit available against taxable income. A foreigner spending less than 90 days in the United Kingdom will not be treated as resident; the resident non-domiciliary should be aware that he will be treated as domiciled for inheritance tax purposes from the 16th anniversary.
      The emigrant from the United Kingdom may still be paying tax on his U.K. pension and on the income from U.K. investments (but note that U.K. dividends do not carry tax except – theoretically – the higher rate). A common reason for becoming non-resident temporarily is to get out of a large investment in a single company. This needs careful handling. Avoiding inheritance tax requires a change of domicil and generally a wait of at least 3 years. The client needs to know that living abroad is not the same as holidaying abroad.

      The most interesting point that arose out of the afternoon discussions was about Cyprus, namely the fact that occupational pensions paid out of England can be tax free in the United Kingdom and taxable in Cyprus at only 5% in the hands of a Cyprus resident, and it would appear that there are not any very great problems to establishing this residency. There was also discussion about the disadvantages of tax exile as such, and it was remarked how few people are really prepared to dig up their roots and genuinely go abroad merely for tax reasons.



      I am giving a talk to the ITPA in June on the subject of the rsidence rules in various countries in the world, and I would be extremely grateful if you could assist me by letting me have a very brief summary of the rules as they exist in your country.

      I am proposing to look at the subject in two different ways, firstly from the point of view of people who wish to spend some time in a particular country, but without becoming treated as a resident for tax purposes, and then on the other hand people who wish to take up residence in a particular country whether for reasons of genuine migration or in order to assist in avoiding being resident in another authority with higher tax rates.

      Regarding the first category,the questions I require answers to are as follows:-

      1. What is the maximum number of days that can be spent in the country, both on an individual year and on an average basis, without being treated as a resident for tax purposes.

      2. Is there any significance for residency purposes in the ownership or tenure of accommodation in that country.

      3. Are there any deals that can be struck with the authorities regarding a tax structure that can be fixed irrespective of the number of days of physical presence.

      4. Are there special rates of tax (whether favourable or otherwise) that can be applied to aliens who become treated as residents of the country.

      Regarding the second category, the questions are as follows:-

      4a. Is there any bar to ownership of property by foreigners.

      4b. What formalities have to be gone through to acquire a residency permit, assuming that one is needed.

      4c. Is the Government generally favourably disposed to potential immigrants or not.

      4d. Are there any wealth or self-sufficiency requirements.

      Please note that the would-be immigrant would not be proposing to work in the country in which he takes up residence so I am not asking you to deal with the question of work permits etc.

      5. Please give me a very brief summary of the principal rates of tax applicable to residents.

      6. Are resident aliens taxed on a worldwide basis?

      I very much hope that your replies will not take up more than a few minutes of your extremely valuable time, but since Elizabeth wants the working papers in by May 7th I would be extremely grateful if you could let me have your reply in the very near future.

      Yours sincerely,

      Huw Griffith

      Country 1 2 3 4 4a 4b 4c 4d 5 6

      Bermuda n/a no n/a Licence Premium Value Licence yes n/a n/a n/a
      Cyprus 182 no no yes no Permit yes yes 40% yes but
      France 182 some no no no Permit yes yes 56.8% yes
      Guernsey 90/182 yes no no Value no yes no 20% yes but
      Ireland 90/182 yes no no no Permit ? yes 48% no
      I.O.M. 90/182 yes no no Means Means yes yes 15/20% yes
      Jersey 1 (but) yes no (but) no Value Licence yes yes 20% yes (but)
      Malta 182 (but) no yes (but) no Value Permit yes yes 15% no
      Monaco n/a Essential n/a n/a no Permit yes yes n/a n/a
      Spain 182 no no no no Visa no-ish yes 56% yes
      Switzerland 90 no yes in practice yes yes Work Permit under 65 no yes 25/40% yes but
      UK 90/182 yes no yes no n/a no yes 40% no
      USA 182 no no no no (but) Green Card yes-ish yes 40% Fed yes

  • AnguillaJacques Leuba
    • Anguilla is British Colonial Territory, intent on catching up with its more developed sisters in the Caribbean. There is a new Companies Act. There is to be provision for limited duration companies. There is also to be legislation providing for the IBC. A level of regulation will be provided through a Companies Management Act.
      The Companies Registry will be entirely electronic and the most advanced in the world. On-line access will be available 365 days a year.

      New Acts on insurance, trusts and partnerships are also on the way within the next 2-3 months.

  • Investing in and through PolandAnthony Amhurst
    • Poland has developed hugely in the last few years. Some 50 of the largest companies in the world are now trading there. Inward and outward investment is growing. Its population is much larger than that of the Czech Republic or Hungary. Forgiveness and deferral of debt to Western lenders has fuelled the economic growth of the country. It has fixed exchange rates and a tough tax policy. Inflation is high but growth appears assured and the free market economy well-established.
      The tax system is based on a mixture of legislation of the 30’s and directives of the 60’s but significantly changed in the 90’s. Certain investments by foreigners require a permit, but most do not. A foreign investor can repatriate after-tax profit or proceeds of sale, without any exchange control permit. Special treatment is often requested by foreign investors: major investors – of more than two million Ecus – may obtain it.

      Tax legislation is complicated and changing rapidly. The basic rate of corporation tax is 40%. There is limited carry-forward of losses and write-off of capital allowances. There is also some scope for interest deduction and limited scope for management charges. Social security contributions amount to 45% of salaries. Dividends, interest and royalties suffer a withholding tax of 20%. This may be reduced by treaty. Poland has a classic VAT system – at a maximum rate of 22%.

      After a lengthy debate, a programme of privatisation was initiated in 1990 and it is still continuing actively. A further 200 or so medium-sized companies are now about to be privatised. Investment trusts are to be established. Twenty-four companies were listed on the Stock Exchange by April of this year. The workers still have considerable power in Poland and are always given special terms on the privatisation of their employer company; there is nevertheless a serious unemployment problem.

      There is a securities law of 1991. This forms the basis for the flotation of companies on the Stock Exchange.

      There is a strong and sophisticated property market in the major cities. The German presence is strong: Germany takes 30% of Polish exports. Permission for investment by foreigners is required but obtainable without complication. Such investment must be made through a Polish-registered company if repatriation of after-tax rents or sale proceeds is required.

      Poland is party to 51 tax treaties. The treaty with Cyprus concluded in 1992 but is not yet in force. Presently, the Netherlands holding company is commonly utilised. There are thin capitalisation rules – something between 40% and 70% of loan may be approved.

      A substantial growth in investment in Poland is foreseen over the next 10 years.


      Invoices rendered by a foreign entity in respect of goods supplied or services rendered to a Polish entity (“imported services”) are subject to Polish input VAT, current rate 22%, unless that foreign entity has registered in Poland for VAT. VAT registration is not available unless tax registration has taken place. However, services are not treated as imported if they are rendered wholly abroad. This concession has been confirmed by the Ministry of Finance only recently, and appears not to have been publicised. This deals solely with the VAT position. There is no merit in rendering an invoice unless it is deductible for Polish corporate tax purposes. The tax authorities take a commonsense and economic viewpoint towards management charges and are aware of levels of Western salary rates. The expense must relate to genuine services rendered, is commensurate to the financial benefit gained by, and does not lead to a tax loss in, the Polish company. There should be a written agreement to provide the services. Provided the expense is tax-deductible, the VAT levied on it is also tax-deductible.

  • New Developments in International Tax PlanningMichael Flesch (updated 1998)
    • The decision of the Special Commissioner in the Willoughby case is now fairly well known. Can a U.K. resident take advantage of an exempting provision in a tax treaty designed for the benefit of a non-resident? Professor Willoughby invested in a single-premium bond with a Manx insurance company while a non-resident. He acquired further bonds later. These were “personalised” bonds, the bond-holder being at liberty to tell the insurance company how the fund backing the bond is to be invested. When he became resident in the United Kingdom, he was assessed to tax under s.739 on the income of the insurance company allocated to his bonds.
      The taxpayer’s first argument was that a s.739 could only apply to a transfer made at a time when the transferor is ordinarily resident in the United Kingdom.

      His final argument related to the U.K./Isle of Man treaty: Professor Willoughby argued that the income of the Manx company was a commercial profit exempted by the treaty – the provisions of the treaty overriding the domestic law. Despite the Court of Appeal decision in Padmore, this argument did not find favour with the Special Commissioner. This seems wrong. The case is going to the Court of Appeal later this year. An analogous position arises for capital gains tax: the Inland Revenue appear to accept that where a treaty exempts the gains they cannot be attributed to the shareholders under s.13 of the 1992 Act.

      Can the U.K. Revenue invoke a provision in a treaty to increase the tax payable by a non-resident? Assume a Netherlands insurance company with a U.K. branch. The branch’s assets are less than would be required by a separate company. The Revenue claim that the treaty entitles them to attribute to the branch more income than that generated by its actual assets, so as to bring the income up to what it would be if the branch had the further assets. This also appears wrong.

      A recent decision of the Special Commissioner relates to “shadow director” emoluments. A non-domiciled investor in a U.K. home will commonly avoid exposure to inheritance tax by holding the property through a foreign company. The Revenue have argued that the individual was a person in accordance with whose instructions the directors were accustomed to act and accordingly deemed to have a taxable emolument broadly equal to the benefit of living in the house. Many taxpayers have settled rather than fight, but this taxpayer succeeded: it was held that he was – in fact – not a “shadow director”, but the Special Commissioner also held that he would not be liable to tax even if he were.

      AN UPDATE Much has happened since 1994.

      In Willoughby the taxpayer won in the House of Lords. But legislation has deprived taxpayers of the fruits of his success. The FA 1997 reversed (for the future) the House of Lords decision that s.739 only applied to a transfer made at a time when the transferor was ordinarily resident in the United Kingdom. And the latest Finance Bill introduces a new charge to tax on “personalised” bonds.

      The argument relating to the U.K./Isle of Man Treaty was unfortunately not pursued by the taxpayer in the Court of Appeal or in the House of Lords. It remains unclear in precisely what circumstances a U.K.-resident taxpayer can obtain treaty protection in respect of income or gains of a non-resident deemed to be his under U.K. domestic law.

      The Revenue occasionally repeat in correspondence their assertion that a provision in a treaty can actually increase the U.K. tax payable by a non-resident. It is, however, doubtful whether they really believe in the argument. The Revenue have not formally abandoned their argument that a ‘shadow director’ can be taxed under Schedule E where the company provides him with living accommodation. The Revenue have not, however, attempted to litigate the point again. If they do they are likely to lose again.

  • Organising Banking for Offshore TransactionsJohn Burrow
    • The identity of the banker’s actual customer may be determined by the tax adviser. A trustee has to be particularly careful when opening an account for the funds of a trust: he does not want the debits of other accounts in his name to be set off against such funds. The banker must “know his customer”. But he cannot e.g. know who are the unit holders in a unit trust.
      The speed of moving money is of importance both to customer and the banker: the customer must be careful not to be exploited.

      The client has a choice between the “deep pocket” trustee – usually owned by a bank, and an independent trustee. The bank subsidiary is inclined to use the services of its parent. The independent trustee will review its connections. In either case, there will be a choice between an onshore and an offshore bank and a need for a convenient time zone.

      Not every bank is adept in dealing with currencies which are not its base currencies. This can involve the customer in poor exchange rates and excessive charges. All banks have their chosen correspondents in other countries: the intending client should know who these are.

      The business of opening a bank account has become more complicated and expensive. The intending client should not be in too much of a hurry. He should be assiduous in examining the true cost and in finding out about the quality of service.

      The ideal account is a daily interest checking account: the best account is one which most closely approaches this. Canadian banks have been pre-eminent in inventing new deposit services for clients.

      The variations in charges for such matters as telegraphic transfers is astonishing. The client must watch service charges. Bankers used to live off their deposits: competition in the early 70’s led to narrow spreads as banks competed for deposits. It took the banker a long time to feel the benefits of computerisation: staff numbers are now shrinking substantially. Meanwhile, service charges have gone up, to compensate the banks for the narrow spreads. Electronic banking is now bringing the bank statement onto the desk of the customer.

      Back-to-back loans have a very variable cost. A 1.5% differential may be asked for; 1% is traditional; they are now cheaper, and by shopping around it is possible to find a 0.25% to 0.5% spread. Sometimes the bank simply forgets to offset the credit interest to the loan account! It is of course risky to borrow in one currency and deposit in another.

      On making a loan, a banker will want to know:

      P – the purpose of the loan

      A – the amount of the loan

      R – the repayment arrangements

      S – the security

      E – the expediency – the connections and background of the borrower

      R – the rate

      Remarkably few bankers have experience in letters of credit. Many pretend to be able to handle them but do not carry the expertise. Among the pitfalls to be encountered are the bank with the poor credit rating, the co-mingling of trust accounts, poor observance of secrecy requirements. The shrewd client will examine the interest rate spread, the charges and the value dates.

  • Users of Offshore Facilities: The Client ProfilePeter Henwood (updated 1998)
    • Tax minimisation, cost reduction and risk management are the principal aims of the users of offshore jurisdictions.
      Demand for offshore facilities is growing: some 40,000 offshore companies are formed annually in the various offshore centres of the Caribbean, of which 40% are ordered from Hong Kong. Individual users include HNWI’s and expatriates. A high net worth individual is one with assets of over $2m. Most are now coming from S.E. Asia. They require offshore private banking: this includes investment management and a range of support services, and here we may discern a move to prime banks, after the BCCI scandal. HNWI’s are of course the main users of offshore trusts: these are now appealing to clients in civil law countries as well as to traditional users in common law countries.

      A relative newcomer is the Asset Protection Trust. The United States has become highly litigious. Asset Protection Trusts have appeal to individuals involved with the U.S.

      Expatriates and immigrants represent an important market for offshore facilities. An estimated 4m British citizens live or work outside the United Kingdom. Expatriates also come from other countries. They use offshore facilities for a variety of purposes.

      The corporate users of offshore facilities are also a significant market. Typically, a financial institution will have an offshoot in an offshore jurisdiction – e.g. Cayman, Luxembourg, Switzerland, Jersey, Guernsey. European insurance has gravitated to Luxembourg, and to a lesser extent to the Isle of Man, Guernsey and Dublin. Building societies have offshoots in the Isle of Man and elsewhere. The capital base of offshore funds is increasing at twice the rate of that of U.S. domestic funds. Specialised funds have recently been launched through offshore centres.

      Multinational companies and large conglomerates can no longer simply deposit their profits offshore and have become adept in showing that their offshore activities are not simply tax driven. Japanese companies are utilising Madeira holding companies. U.S. companies are investing in India through Mauritius. Oil companies have “mixing” companies to take maximum advantage of tax credits. Royalties present opportunities for offshore operations, as do treasury operations. Eurobonds and preferred shares have been issued from offshore centres. Almost 40% of companies quoted in Hong Kong are now registered in Bermuda. Cyprus, Hong Kong, Isle of Man, Madeira and Mauritius have a variety of on the ground operations – e.g. French oil companies are to utilise a new freeport in San Tomé.

      Captive insurance companies make up some 20% of the world’s property and casualty insurance business. Bermuda has the largest share of this market, but Cayman, Barbados, Guernsey, Ireland, Isle of Man and others share this business.

      The shipping industry is a long-term user of offshore centres – for ownership, financing and management of ships. Panama and Liberia are independent registers of long standing. Cayman is the principal British dependent registry. Yacht owners use the Channel Islands and other centres for registration.

      The owner-managed business uses offshore structures for international investment, property ownership, international trade, tax planning (including e.g. use of Cyprus for Russian investment, VAT triangulation), consultancy services and other activities.

      The main areas of discussion centred around Mauritius and the double taxation treaty network whereby Mauritius has the benefit, with particular reference to the Indo-Mauritian treaty and the structuring of inward investments into India. Discussion took place on Foreign Institutional Investors (F.I.I.’s), country funds and the availability of custodian facilities in India and Mauritius. The new treaties which Mauritius is presently negotiating with the People’s Republic of China, Luxembourg and Belgium were also discussed, as was the new treaty with South Africa. In addition, interest was expressed in Madeira and the SGPS Holding Company for inward investment into the major states of the European Union.

      Ship registration in Madeira was also discussed and the structure of Madeira companies such as minimum capital requirements, etc. and compliance obligations were discussed in some detail.

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