Monte-Carlo 2011 meeting

Meeting Summary
  • Asset Protection: Choosing a JurisdictionAndrew Penney
    • ‘Wealth Preservation’ is increasingly important. The general rule is that transactions that result in insolvency may be set aside. Asset protection in UK/US can utilise trusts, companies or life insurance. In France and Germany companies and life insurance may be used. The appropriate vehicle depends on the residence of the individual in question and the nature of the threat. A Delaware trust may protect again a claim by the UK tax authority. The US Court is inclined to bring pressure to bear on individuals to force trustees to meet US government claims. If the adversary is a spouse, the English Court should be avoided. Guernsey, BVI. Cayman and Bermuda have statutory provisions preventing claims by made pursuant to orders of foreign courts. The Guernsey Court has proved robust in opposing claims by disappointed heirs. Settlor-reserved powers should be avoided where possible, so as to avoid a ‘sham’. It is important that the assets are validly transferred to the trust.

      It is considered that the structure is the best kept to a single jurisdiction. ‘Designer legislation’ has been introduced in the Cook Islands and Delaware, limiting creditors to challenging transfers made within a 1-year and 4-year period respectively. There is a 2-year period in Cyprus and Bahamas and 6-year period in Cayman. Creditors need to be able to prove that the trust was intended for fraud. Assets situated elsewhere (and in underlying companies) are still vulnerable. Designer laws do not protect against sham or lack of capacity or pressure on individual protectors or others. But they can pressure assets from enforcement of judgements of other courts – e.g. in Guernsey.

      Guernsey or New Zealand may be the appropriate jurisdiction where the claimant is expected to be a family member. For protection against other claimants, the choice of jurisdiction is wide, but the Cook Islands law is strong.

  • BrazilJorge Veiga França
    • Brazil has had a long association with Portugal. The country offers many opportunities for investment in manufacturing and natural resources, by way of direct investment, private equity and portfolio investment. The foreign investor needs advice – in framing agreements, in dealing with local partners, in deciding on the appropriate vehicle and in appointing legal and tax representatives.

      Brazil has federal, state and municipal taxes. The regime is quite complicated: there are various rates; there are provisions for payment in advance and for deemed dividends from controlled foreign companies. There are some exemptions, designed to encourage investment from abroad, but these are not available to investors in blacklisted tax havens. Inbound investment is generally channelled through Luxembourg, Netherlands or Switzerland.

      Outbound investment by Brazilian residents is being made in mineral and agricultural commodities and other areas. Much of this is done through tax havens, but structures without economic purpose are open to attack. With its access to the Portuguese treaty network and its common language and culture, Madeira presents a favourable route for outbound investment from Brazil.

  • ChinaWendy Guo/Connie Ji
    • Foreign investment in China is large and growing, despite the financial crises in the West. The trend is for direct investment to move from the coastal area to the central areas. Joint ventures were the first foreign investment allowed; now they are not compulsory, but are commonly used. Partnerships may now include foreigners. Nowadays, it is more difficult to get money into China than to take it out.

      Tax is shared between central and local governments. The tax system is neutral between foreign and local investment. Advance Pricing Agreements are available. For treaty benefit, ‘substance’ is required. In tax cases, the Court favours the tax authorities, and companies are therefore well-advised to negotiate their differences with the authorities.

      Investment out of China is growing and is encouraged by government. Hong Kong is the principle platform used for the purpose.

      The current five-year plan foresees less reliance on low-cost manufacturing, the development of rural areas and improvement in marketing, medicine, education and infrastructure. Tax reform is in the pipeline.

  • Choosing a Base for the International CharityIneke Koele
    • The Anglo-american regulatory regime has a strict oversight by the state. This is also true of the Latin tradition. By contrast, the Dutch regime is very liberal. Dutch charities have complete tax exemption and advance rulings are given. The paperwork required varies: in the US, compliance us expensive. Charity status is generally required for exemption for incoming gifts and outgoing grants, and income tax deduction by donors.

      In UK and Netherlands, underlying companies also benefit from tax relief. In the Netherlands a non-resident donor with Dutch income obtains relief from Dutch tax.. In the US the rules are complicated and there are penalties for infringement. In most countries, there are tax consequences where charity status is lost, but in the Netherlands, the charity simply becomes in effect transparent. It is generally essential that transfers to the charity are irrevocable; however, it is desirable to include an exit strategy.

      In the Netherlands, the charity may accumulate income only if the terms of the gift to it requires this. Generally, a Dutch charity is a resident for treaty purposes. An EU charity should benefit from freedom of establishment and non discrimination rules, but this is still in progress.

      The Dutch foundation is extremely flexible. Philanthrocapitalism is a new development, but is proving difficult for tax authorities to accept. The hybrid L3C in the US is a corporate and charitable structure combined.

  • Company Migration: Planning OpportunitiesRoy Saunders
    • A company may want to move for a variety of reasons. Migration may be preferable to the incorporation of a new company. In some countries the move will be a constructive liquidation, or involve a deemed realization of assets, or an exit tax charge or loss of carry-forward loss relief. Migration can be effected in a number of ways. Migration by merger requires in the UK the assistant of the Court, and an existing company is needed. It may be that the assets can move across at a stepped-up value. A share-for-share exchange can give the shareholder a stepped-up cost for his shares. The Societas Europaea can migrate without a tax charge.

      A BVI company may migrate to Luxembourg to get deduction of expenses from rent in France. A UK company may move POEM to Cyprus before disposing of Russian real estate. A Cyprus company may move to Malta to avoid Dutch tax on disposal of a Netherland’s BV. A French resident owning an Italian company owning Italian real estate may migrate the company to Malta before disposing of the shares; this may be done by a share exchange.

      Migration by merger requires in the UK the assistant of the Court, and an existing company is needed. It may be that the assets can move across at a stepped-up value. A share-for-share exchange can give the shareholder a stepped-up cost for his shares. The Societas Europaea can migrate without a tax charge.

  • IndiaNikhil Mehta
    • This year is the 20th anniversary of the introduction of the economic reforms in India. They have had a rocky ride, but are now a permanent feature of Indian society. The economy is growing, as is inbound investment. The population increases and is mostly young. The investment opportunities are numerous. Corruption remains rife, inflation is high and the country suffers from lack of skilled manpower and cumbersome legal and bureaucratic process.

      Indian tax authorities have an ambivalent attitude to inbound investment and are very suspicious of investments using Mauritius or other treaty countries. They are hostile to ”round trip” investments made by Indian residents via tax haven vehicles. A new – and not very satisfactory – Direct Taxes Code is due to come into force in April 2012. Non-residents pay capital gains tax on gains from Indian assets – a tax charge which has encouraged the interposition of Mauritius companies. There is a wealth tax but no estate duty. Non-residents investment is generally made through a local company.

      The new Code will provide rules on residence, withholding tax on offshore borrowing and payments to non-residents, and a GAAR. A rule on Vodafone situations is expected, as is the use of a ‘substance’ test in practice. The new GAAR is very wide-reaching.

      Indian individuals have a limited allowance of foreign investment and foreign investments are free of compulsory remittance rules.

  • RussiaOlga Boltenko
    • Understanding the law in Russia requires an understanding of Russian society, its conventions and its distribution of power. Foreign investors are surprised to discover that they are dealing with government officials who are themselves rich and are not above abusing their powers to become richer. Keeping on the right side of the authorities is crucial. Asset protection is effective if based abroad. One typically finds a trust established in e.g. Jersey or the BVI, which owns a company in Cyprus, which in turn makes investments in Russia and elsewhere, either directly or through the Netherlands, Luxembourg, Belgium, Austria, Sweden, Denmark or Spain.

      When using tax havens, it is always important to have “substance”. This requires visits to the jurisdiction concerned, and it is in practice important to choose a location which is convenient (and agreeable) to visit.

      Trusts and foundations are alien to Russian law. Russia has forced heirship rules. Many Russians have used Liechtenstein foundations, but some of them have not been genuine. Discretionary trusts are also used, but whether they would be recognised in Russia can be doubtful.

  • Switzerland comes in from the coldThierry Boitelle
    • Coming in from the cold’ is more work-in-progress than a complete event. Rules have been established for exchange of information. The Federal Ordinance has been in force since 1st October 2010, and the Federal Law is expected to be enacted this year. The rules are strict and are to be applied in line with the principle of proportionality. Practitioners in Switzerland need to be careful when imparting information to the tax authorities. Swiss domestic rules give the taxpayer the right to appeal against information exchange. The Global Forum wants exceptions to these rules.

      New treaties have been made with UK and Germany. There is to be a fixed withholding tax on investment income paid to German and UK taxpayers, but it is possible that the new EC Savings Directive will provide for automatic exchange of information and may be extended to Switzerland. New treaties have been made: there are now over 90. Present policy is to accord exemptions to pension funds and sovereign funds.

      Some Cantons have voted to abolish the forfait, but the Federal Council is proposing a general code, to preserve the system. Switzerland is under pressure from EU to modify cantonal taxation: negotiations are in progress. Measures are being introduced to reform enterprise tax and abolish withholding tax on repayment of capital contributions.

      Federal practices are making it easier for Malta, Cyprus, Luxembourg or Netherlands holding companies to qualify for the 0% withholding tax – applying a 30% equity test. The anti-abuse rules of 1962/99 are being relaxed, opening the door to the possibility of back-to-back royalty or interest arrangements.

  • The News from BrusselsTimothy Lyons
    • Firstly, there are new Directives. It is no longer true that courts will not enforce revenue laws of other countries. Directive 2010/24 concerns mutual assistance for tax recovery, and Directive 2011/16 provides administrative procedures for exchange of information. Bank secrecy is not a ground for refusing to share information. Officials of one member state may be located in another Member State. An ad hoc report on the Savings Directive Revision is now awaited. There is a proposal to establish a common consolidated corporate tax base. A number of consultations are in progress.

      Secondly, the Commission takes an interest in non-tax matters, and in particular in succession and property relations between spouses and civil partners.

      Thirdly, the relationship between the EU and third countries is developing. The EU is concerned to obtain access to other markets. The focus is on ‘tax governance’ – which is of wide application.

      Fourthly, the Commission is against anti-tax-avoidance rules which may inhibit cross-border trade. In the case of the UK, it opposes the ‘transfer of assets’ legislation and the controlled foreign company provisions. Competition on tax rates is to be encouraged. ECJ decisions enable taxpayers to be free to do business in such as way as to limit their tax liabilities.

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