Cross-border problems are more frequently found nowadays: there is more international travel, communication, cultural and religious diversity, cross-border investment. Most systems favour the family unit, though in different ways. National governments and supra-national bodies regulate and control, but only to some extent. Family jealousies and disappointed expectations are powerful influences; the adviser has to live with a variety of aspirations and decisions. As families spread out across the world, a number of cultural and legal influences affect the devolution of an estate and the expectations of the beneficiaries. The residence of executors can have tax consequences, and can determine what due diligence is required of them. An executor can find many unexpected problems, depending on the residence, domicile or citizenship of the deceased, in relation to tax and to the entitlements of the beneficiaries. The prime duty of the executors is to protect the assets of the estate and minimise its exposure to tax. Inheritance taxes are less popular and raise proportionately less money than formerly. The distinction between forced heirship and testamentary freedom is now better understood. Less well understood is that some countries (e.g. France and Ireland) have a donee-based tax. The proposed European succession directive may create problems for individuals domiciled in a common law country.
In Ireland, the rules for residence are very cut and dried. Ireland taxes remuneration on the footing that its source is where the employment contract can be enforced. This means that a non-resident employee can work in Ireland without suffering tax. Ireland has virtually no withholding taxes and little anti-avoidance law.Exemption is afforded to artists in respect of earnings from “works” of a specified kind e.g. books, plays, music, painting, sculpture. There are difficulties in interpreting the law; the Irish Revenue Commissioners have issued guidelines, but they are not altogether helpful. “Works” do not include newspaper articles. The artist must be resident in Ireland and not resident elsewhere; this can require the artist to be very careful about spending time elsewhere. As an Irish resident, the artist is entitled to treaty relief on royalty income.Ireland has a “remittance basis” regime for the non-domiciled similar to, but wider than, that of the United Kingdom. A year of non-residence will enable a non-domiciled taxpayer to remit the unremitted income of previous years. Treaties sometimes limit benefits by excluding income taxable on a remittance basis and not remitted.A non-resident entertainer or sportsman performing services in Ireland under an employment contract enforceable outside Ireland has no Irish tax liability. He may nevertheless have treaty relief in his country of residence. In nine countries the relief takes the form of exemption. The OECD model treaty and commentary give guidance as to the meaning of “entertainer” and “sportsman”. An entertainer may become resident in Cyprus and be employed by a non-Cypriot and non-Irish company. He may work in Ireland for up to 180 days in the year. His remuneration will not be taxed in Ireland or Cyprus. A claim by his former country of residence would be subject to the tie-breaker clause in its tax treaty with Cyprus. An Irish employment company may be used in connection with a Cyprus trust, or to channel US-source income, despite the Limitation on Benefits Article in the Ireland/US treaty.
Gibraltar is a UK Overseas Territory. It is not part of the United Kingdom, but it is part of the European Union. Its regulatory infrastructure has been overhauled and is now first class. It has for many years provided zero-tax Exempt Companies and trusts and shipping registration.Gibraltar has a unique status within the European Union. It enjoys exemption from VAT and Customs Union and access to the Single European Market for financial services. The Single Market gives Gibraltar companies freedom of establishment and freedom of services. The current debate with the European Union concerns only tax on companies. The Exempt Company until 2010 is zero tax; the Qualifying Company paid (until 2004) a rate of tax between 0%-35%; onshore companies pay tax at up to 35%. A limited number of new Exempt Companies may be established until June 2006; these will have exempt status until the end of 2007. Gibraltar has proposed to the EU Commission a new regime with a zero tax rate for all companies (except for financial services and utilities), introducing a payroll and property tax and grandfathering existing Exempt Companies. The Commission, on the grounds of “regionality” maintains that Gibraltar is part of the United Kingdom and should adopt the UK tax system, and on the grounds of “materiality” maintains that the proposed new regime effectively continues major aspects of the old one. At present, the date of the termination of the old regime has been determined, but the date for the introduction of the new one is uncertain, pending European Court adjudication.The insurance sector is prospering: the EU status of Gibraltar provides passporting rights. Gibraltar has a tax programme which attracts retirees and other new residents. The gaming industry is hugely successful and benefits from Gibraltar’s membership of the European Union. Property management, securitisation, commodity and futures trading are well established. The immediate outlook is uncertain but the future seems prosperous.
Inward investment, mergers and de-merging, takeovers all have tax consequences and offer opportunities for tax planning. Structured finance is often tax-driven e.g. two jurisdictions each giving tax relief on the same asset. Asset finance generates many tax problems. Much professional time is devoted to disputes with tax authorities and settling them. It is the duty of a professional adviser to minimise the tax his client pays, but he will not encourage his corporate client to spend shareholders’ money on egregious schemes. The UK did not, in the end, adopt a GAAR: the Inland Revenue were not prepared to give up the specific anti-avoidance provisions, and could not find personnel with the ability to operate a clearance system. A company can acquire an unsavoury general reputation if it tries to take advantage of every available fashionable tax avoiding scheme. Typically, a UK multinational will want to take advantage of available tax credit. A French multinational may be content to pay 30% in the United Kingdom, while taking a deduction in France for its borrowing costs. The US has provided a kind of tax amnesty to encourage multinationals to bring money from abroad. On a merger, the adviser needs to identify what the client wants to achieve, what losses can be utilised, where the intellectual property is best located, where the gearing is beat done, and so on. Relocating these can have transfer-pricing implications. Advance pricing agreements are now more frequently used in particular, to agree an allocation of profit between jurisdictions. Businesses like certainty. The United States will often look on a transaction differently from the United Kingdom: this can offer a tax advantage in one jurisdiction or the other. The influence of the European Court is not beneficial to the coherence of Europe’s tax systems.
New opportunities and new pitfalls are to be found in treaties not generally known to tax practitioners. A bilateral investment treaty deals with a wide range of investments; its anti-treaty shopping provisions are relatively unsophisticated. It provides for the host country to give national treatment and most-favoured nation treatment to the foreign investor. That is, it must give the same treatment to the treaty investor as it gives to nationals and third country persons in like circumstances. In a recent case, a US oil company, denied a VAT treatment in Ecuador which is afforded to a domestic company, succeeded in an arbitration under UN auspices. The investor in such a case does not need the assistance of the government of its own jurisdiction in order to pursue its claim. Many BITs are made between countries which do not have a tax treaty.There are treaties other than BITs e.g. free trade agreements. But note that the WTO agreements require sponsorship of the claimant’s state. Other types of pro-taxpayer treaties are international human rights and related agreements.Agreements effecting criminal assistance are on the whole less favourable to taxpayers. The earlier Mutual Legal Assistance Treaties did not cover tax; the newer ones do, and dual criminality is not a requirement. The United States has many ways of compelling disclosure of information in trans-national tax cases.Tax offences were formerly excluded from agreements on extradition. The modern approach is quite the opposite. But dual criminality is still required; this may be overridden in a proposed treaty between the European Union and the United States, now awaiting ratification by the United States and individual EU members. In practice, the United States tends to seek extradition only of US citizens, but this may theoretically be extended to others who have assisted a US citizen to evade tax. So far the number of cases has been very limited, but these powers have been exercised without much regard to legal niceties. The principle of “speciality” provides that an individual can only be charged with the offence for which he has been extradited.The ITPA could make it its business to make representations to governments in the framing of treaties of these kinds or at least monitor such developments.
Nigel Goodeve-Docker:The topic under consideration is the acquisition by a resident in Base Country of a second home in Host Country. The property is a home, not (primarily at least) an investment. The purchaser is not looking for a tax advantage, but he wants to avoid any tax disadvantage. The income tax position is generally straightforward. But the United Kingdom has its “benefit in kind” income tax, amounting to tax (at up to 40%) annually on 8% of the cost of the property. Host Country may levy a capital gains tax on disposal; the purchaser will expect a credit in Base Country, and does not want to pay tax twice. Similar considerations apply to inheritance tax. A company may be used. Or the net value of the property may be reduced by borrowing. Or the taxpayer may make an investment e.g. in a life policy to produce the income to pay the tax. Succession can give rise to conflict of law problems. The United Kingdom presents the non-resident with no serious problem. James Howes: In France, direct personal ownership is to be preferred to corporate ownership. Companies generally pay an annual 3% tax on the value of the property. An exemption may be claimed by treating the property as belonging to the shareholders for wealth tax purposes. Succession duty is levied on a sliding scale of 5 40%. This is not avoided by the use of an SCI. No capital gains tax is payable by individuals who own property for 15 years or more. Companies pay CGT at a higher rate than individuals (33.333% compared to 16%) and do not benefit from the same reliefs. Corporation tax returns are required of companies which own property, even in the absence of income. The income tax on deemed income of three times the rental value of a property is not avoided by corporate ownership. Jorge de Abreu: In Portugal there is a yearly property tax of between 0.2% and 0.8% on the property value and a property transfer tax of 5% (for residential property). If the property is held by a company in a blacklisted country, there is an annual property tax of 5% and the property tax is 15% when the property is acquired. There is no inheritance tax or gift tax.
The investment manager’s client feels that the tax aspect of an investment is very important. Europe is home to a high proportion of high net wealth individuals, though its growth rate is lower than elsewhere. Europeans are peripatetic, and European governments recognise the desirability of attracting HNWI’s from elsewhere, as well as retaining their own more so in southern than northern parts of the Continent. Investment returns are lower than formerly, structuring and management fees are higher and inflation is higher than the figures suggest. Tax mitigation is increasingly an essential part of wealth preservation. It is generally more tax-effective to emigrate, but there are domestic mitigation opportunities particularly in relation to capital gains (where “wrapping” techniques may be utilised). There are a number of tax-friendly jurisdictions in which an individual may become resident. Italy has become especially attractive. Other attractive jurisdictions include Switzerland, the United Kingdom and Ireland. Amnesties offer opportunities to whiten black or grey money. Rich-friendly regimes may not last. Europe has high unemployment, an aging population, an imminent pension crisis and low growth. But for now, at least, the EU is full of opportunities for tax-privileged investment.
A UK resident moving to Monaco discovers eventually that the devolution of his assets is governed by the law of England, which by renvoi, applies the law of Monaco which has forced heirship. He may utilise a Law 214 trust to regulate the devolution of his assets. This only applies to individuals whose national law comprises trusts. An Italian resident may look to Panama or Liechtenstein for the establishment of a foundation. (A trust in e.g. Jersey may be void by reason of Law 214). In Monaco, as in other civil law countries, a foundation can own real estate or have a bank account; a trust must do this indirectly by interposing a company.The French Court has gradually come round to recognising trusts. There have been a number of decisions. These are not easy to reconcile, but the Court has tended to give precedence to the reserved rights of relatives. A well known bank charges less for administering a foundation than for administering a trust. Jersey has published an interesting consultation paper on the merits of introducing the foundation into Jersey law. There is some general feeling that foundations are less prone to being used for money laundering, and this is reflected in the Jersey paper. The concept of the fiducie is again being considered in France.