Monte-Carlo 2007 meeting

Five aspects of Guernsey call for special mention. 1) Captive insurance enables a group to bring some of its risk within the group. Tax is not the main motivating factor: the aim is to spread risk, reduce premiums and improve cashflow. “Rent-a-captive” makes these facilities available to smaller users; a cell company may be used. 2) Mobility pensions for the internationally mobile. The Income Tax Act permits the “RATS” (the Retirement Annuity Trust Scheme). The build-up of the fund is tax free. 3) Private Trust Companies. The personal liability of the directors is to be removed, and provisions for purpose trusts are to be introduced. 4) Collective investment. Growth here has been helped by the popularity of the Channel Islands Stock Exchange (partly as a way of obtaining a UK listing at lower cost). 5) The Incorporated Cell Company is a protected cell company. It derives from the 1997 Ordinance – which originated the concept, since copied in some 39 other jurisdictions. The present version is governed by the 2006 Ordinance, which was preceded a similar enactment in Jersey. The separate cells of the ICC have separate legal personality. The Guernsey Ordinance permits the re-domiciliation of a cell. The ICC can be thought of as a group with common directors and administration. It is used in captive insurance, holding investment funds, franchising and many other activities. Guernsey has a rolling modernisation programme for laws governing the financial industry.

Luxembourg is an EU Member. Apart from steel, its major industry is investment and financial services. It invented the virtually zero-tax holding company in 1929. Under pressure from Brussels, this “state aid” is to be phased out. Instead, an SPF (Société de Participation Familiale): it has no listing, no treaty advantages, no proactive management of subsidiaries, no bearer shares and no shareholders outside the family or club. It can be converted into a SOPARFI. Since 2004, securitisation vehicles have become widely used. They are effectively tax transparent, because dividends paid are deductible in computing profit. The venture capital vehicle is the SICAR. It is not liable to capital gains tax or tax on dividends. It is lightly regulated. The SOPARFI and the Real Estate Fund are the vehicles for property investment. The new tax treaty with France will take effect on 1st January 2008. Where French property is held by a Luxembourg vehicle, it may be wise to transfer to a SCI (a French tax transparent vehicle) or to substitute a Danish company before the end of the year. The new trust law facilitates portfolios, bond issues and off-balance sheet financing. The new vehicle for investment funds and hedge funds – the SIF – is lightly taxed and lightly regulated. With Ireland and Austria, Luxembourg is positioned to be a centre for the pooling of EU pension fund management. The single premium insurance policy has a well-established home in Luxembourg. Those over €2.5m have freedom of investment. Luxembourg is now an attractive jurisdiction for HNW residents.

Foundations have a long history – deriving from religious foundations. The Private Foundation is more recent – starting in Liechtenstein in 1926, spreading to the Caribbean in the last five years. It is an incorporated entity. It has no shareholders. The Founder may reserve various powers. The Council or Board administers the foundation assets. The foundation has a charter and will generally have by-laws. It is not subject to a perpetuity period. It may be re-domiciled. It is said to appeal to clients in civil law jurisdictions, but civil law founders are probably quite sophisticated enough to understand trusts. In the context of English law, a foundation may be a settlement as well as a corporate body, and taxes may be levied on either basis. Does the Founder have the equivalent of a general power of appointment? If the Councillors’ duties are contractual, with whom do they contract? There is a paucity of statutory provisions dealing with rights and interests of beneficiaries. The law in Malta is unusual in conferring specific rights. Even the right to information is generally subject to the terms of the foundation. A few jurisdictions make specific provision for beneficiaries to take steps to enforce the foundation. Settlors sometimes want to exclude beneficiaries who challenge the acts of trustees. Some jurisdictions permit a Founder to do so – but it may be that the Court would not necessarily support such exclusion. In reality, the beneficial ownership of the assets is vested in the beneficiaries. Trust beneficiaries clearly have the right to enforce the trust and they have an equitable interest in the trust assets. Discretionary beneficiaries under a trust have the right to apply to the Court to protect their interests, and the collective right is conferred by the rule in Saunders v. Vautier. The foundation does not enjoy the many rules developed by equity, but the draftsman may embody many of these in the constitution of the foundation, drawing on trust precedents.

Is the UK exit tax on trusts contrary to EU rules? Or the deemed disposal on the change of residence of a company? These questions have been considered by the ECJ – in De Lasteyrie, in “N”. While not opposed to the principle of Member States allocating their taxing rights, the Court found the instant ones contrary to the Treaty. In X&Y, the Court ruled against a Swedish distinction between domestic and EU share transfers. The Commission expressed its view in a Communication of 19th December 2006, recognising the need for tax allocation and suggesting ways in which this could properly be achieved. In the Daily Mail case, the ECJ ruled that the UK requirement for Treasury consent to corporate emigration was not contrary to the Treaty; the Commission suggests that this case is no longer good law, but points to the need for ways of allocating the ultimate capital gain between the former and the later Member States. There is still the possibility of transfer to a Member State which does not itself levy any capital gains tax. Some clarification of the company transfers and emigration is expected from the ECJ – see the Cartesio case. The Commission thought that exit taxes on transfers out of the EU might be justified. In Lankhorst-Hohorst, the ECJ said that anti-avoidance measures are justified in wholly artificial arrangements. The point has been further considered in Marks & Spencer, Cadbury Schweppes and OyAA. But a genuine exercise of Treaty benefit should not be a taxable event.

The attack on confidentiality is widespread. The aim of the EU Savings Directive is more to gather information than merely to gather tax. Is all this part of the “war on terror”? It does not appear to have caught many terrorists. The truth is that governments need money: many European governments need it desperately. Wealthy families face a number of risks. There are the political risks – war, domestic unrest, the risk of ransom seekers or theft, or economic risk, the risk of family dispute, inexperience or fraud. Confidentiality is an essential element of personal protection against the expropriation and loss of all kinds – including taxation. It is wise to take care not to part with information unnecessarily: one should answer the questions asked. Once one has parted with information, one loses control of it. Trusts, companies and other structures need to be established in such a way as to minimise the dissemination of information. The use of a bank trustee company means that the bank has an undesirable amount of information. At the other extreme, a family office in Monaco enjoys (for the time being at least) a high level of confidentiality.

This is a change of tax jurisdiction. There are domestic rules – which are not necessarily the same in each country, as well as treaty rules, which may include a “tie-breaker”. The change may create opportunities – the new country may offer incentives, or treat insurance policies favourably. But the old country may impose exit taxes – general (Canada, Australia – perhaps soon United States), limited (on substantial shareholdings), extended (Scandinavia, Ireland, Spain, Italy – to prevent “floating”), limited extended (US, Germany, Australia, Sweden, Norway, UK and New Zealand), or recapture of deduction or deferral. These liabilities may be modified by treaty or by EU rules. Four case studies – the Canadian/Australian moving to UK/Ireland, the Canadian/Australian moving to US/France/Germany, the Swede/Irishman moving to the UK, the Swede moving to US/France/Germany. Leaving home involves opportunities and traps: home country taxes need to be considered – a period of residence in a third country prior to the final country may be helpful.

The offshore world has grown into a very large international industry. The public attitude to privacy changed at 9/11: fighting terrorism is paramount. Privacy is something to which the individual is entitled; governments are taking steps to limit it – monitoring movements, digital communications and financial affairs. But they have not caught Osama bin Laden. Monitoring has focussed on the affairs of ordinary citizens. The US government has access to immense amounts of information – via credit cards, the Swift exchange, Google search records. Surveillance breeds an atmosphere of mistrust, and cost/benefit analysis is seldom undertaken. The new surveillance environment is destroying the freedoms they purport to protect. Financial services are growing rapidly. “Offshore” is not necessarily palm-fringed: it is any cross-border financial service. The initiative of the OECD and related agencies and the EU Savings Tax Directive have their differences, but they are driven by the dominant countries, which frequently do not implement the rules imposed on smaller countries. The small jurisdictions bowed to the OECD demands, because they would have otherwise been denied access to banking and securities markets. But the dialogue has advantages, and at least the OECD approach – information on request – is preferable to EU plans for automatic and comprehensive exchange of information. And the offshore centres are seeking to force the “onshore” jurisdictions to abide by similar rules. The individual who values his privacy should limit his use of digital technologies. The OECD could better secure the co-operation of offshore financial centres by exchanging market access for information. Despite these pressures on the offshore world, demand for services is surging, due to increasing client sophistication, and a greying population with growing wealth.

Israel no longer has a territorial tax regime: it taxes residents, but non-resident citizens are not taxed. Trusts are still little used. A settlement made under Israeli law terminates on the death of the settlor. But trusts governed by foreign law appear to have a future.A new regime for trusts came into force at the beginning of 2006, though the regulations are still incomplete. An Israeli “resident” is an individual whose centre of interests is there. There are four kinds of trusts, each with its own tax treatment: (1) The Israeli Resident Trust has at least one resident settlor and one resident beneficiary. It is fully taxed. (2) The Foreign Resident Beneficiary Trust is an irrevocable trust with a resident settlor and only ascertained non-resident beneficiaries, specifically excluding resident beneficiaries. This is tax exempt. (3) The Testamentary Trust has a resident testator and is treated as non-resident if it has no resident beneficiary. (4) The Foreign Resident Settlor Trust has a non-resident settlor and non-resident beneficiaries. It is a discretionary trust. It is not taxed on its non-Israeli income. It must not in any way be under the control of the beneficiaries. It can have an Israeli or foreign holding company which will be tax transparent – its income is not taxable. There are Israeli reporting requirements – even if to do so is contrary to the law governing the trust. An Israeli trustee, individual or corporate, of a Foreign Resident Settlor Trust will not be taxed and will have no reporting obligations with respect to foreign beneficiary distributions. Treaty shopping is embryonic. Pending any jurisprudence, it is considered that in general the trustee is a resident of Israel and entitled to the benefit of Israel’s treaties, though the treaty with the United States treats the trust itself as a resident. There is a “pre-ruling” procedure. On the other hand, “aggressive tax-avoidance” has to be reported.