Chairman: Milton Grundy
Sir Charles Clore was resident in Monaco when he died. In 1984, the English court held that he was domiciled in England:  STC 609. He would have been “domicilie” in Monaco – by Monegasque law, but Monaco applies national law to an estate. (In the United Kingdom that means the law of the UK national’s domicile.) Civil law has a wider concept of the estate of a deceased individual, entitling family members to forced heirship rights. The judge decided that Sir Charles had an English domicile of origin and did not form a “settled intention” of residing permanently in Monaco and accordingly did not acquire a non-UK domicile. Lord Bristol made a “law 214” trust – which allows foreign nationals an exception to Monegasque inheritance rules. In 2014, the Monaco court ruled that a South African was not entitled to make a will subject to South African law by choice.
The Small Business Enterprise and Employment Act 2015 requires disclosure of beneficial ownership in a public register. Regulations extend the requirement to limited liability partnerships. The position of beneficiaries of trusts is unclear. There are definitions of a person with significant control (“PSC”). Corporates are excluded unless they are RLEs (relevant legal entities) or corporate partners or trustees. The Act imposes an obligation to make relevant enquiries and disclosures. The address of a PSC must be ascertained, but is not disclosed to the public. It is not clear what is required for the purpose of a request for information to be reasonable. There will also be a central register. There are limited exceptions for PSCs at risk of violence. There are penalties for non-compliance. There is some preliminary guidance as to the powers which are relevant. Fragmenting share ownership may escape PSC status, as may interposition of an offshore company or split share capital.
The 1996 US trust legislation indicated a move to US-based trusts. More recently, the HIRE Act and FATCA `discovery’ made foreign trusts disadvantageous to US persons. The “directed trust” is facilitated by the law in South Dakota. Asset protection there is strong, and bank secrecy is robust. The “Dynasty Trust” is possible, although the American Bar Association is not in favour of perpetual trusts. There are powers to alter trust deeds. The Governor has a task force, keeping the trust law up to date. The foreign grantor trust is advantageous for trusts with US beneficiaries, if the grantor is not a US person and has a power of revocation (s672). A “blocker” protects against estate tax on US assets – and probably on grantor’s other assets. Problems arise when the grantor dies: a step-up of base cost is available if action is taken promptly. The Dynasty Trust can exempt non-US assets from US estate tax for generations. A pour-over trust can be utilised to limit penal tax exposure of US beneficiaries on undistributed income. A FBAAR return will be required unless custody is in the US. Portfolio debt plus US trust structure can serve to reduce tax on US real estate gains. The US is not a signatory to the CRS, which offers an opportunity at least while the CRS settles in. There is more information on www.virtustrust.com.
There is a world-wide tendency towards transparency, which the changes in Russian law are following -involving disclosure of foreign companies and structures, and taxation of undistributed profits. Russian tax residents have obligations to disclose and may be liable for tax on undistributed profits. Control is the main factor: CFC income requires to be ascertained for foreign and Russian purposes and is taxable at 13% (individuals) or 20% (corporations). The income of an active foreign company with guaranteed substance abroad is not affected. A company seeking tax treaty benefit needs substance abroad. Actions taken before 1st January 2015 may be covered by amnesty. A Russian taxpayer needs to make a thorough review of foreign companies and structures, bank accounts, holdings and sales of securities. There is a Russian FATCA. Compliance needs to be checked, as does any claim to be non-resident. Transparency is needed.
Starbucks is a US corporation. One subsidiary buys beans, one roasts them, one receives royalty and interest – and makes most of the profit; overall, little tax is paid. The BEPS programme will require transparency and enable the profits to be re-allocated, in line with economic substance of the various activities. Detailed information is to be
made available to each of the tax authorities concerned, including details about any rulings in force and any harmful preferential regimes. A lot of IP structures will need to be modified. Treaty-shopping is to be targeted: treaty benefits will not be given to a shell company with little economic substance. Anti-abuse legislation is to be introduced before the end of the year. This will, for example, prevent abuse of the Parent-subsidiary Directive.
In the 1990s, there were few citizenship programmes, and none in Europe. Now there are programmes in many European countries, and many people are on the move. Rich people are looking for security, for healthcare, for freedom from pollution, for education for children. Tax is important, but it is not the most important factor. Visa-free travel is sought, as is a safe haven and freedom to move to other countries (e.g. within the Caribbean or within Europe). Some countries – e.g. China, India, Ukraine – forbid second citizenship, as does Germany to some extent. Malta has the most successful programme. It is a small island, but it offers the right to move to another EU country. Step 1 is the acquisition of a residence permit. This is to be followed by some visits and then investment of approximately €1 million, Cyprus is another possibility. An investment of €5,000,000 (or a joint investment of five investors investing €2,500,000 each) is required. The process takes three months. The tax regime is favourable. The UK has a successful investment programme. The London lifestyle is attractive. The UK programme is for individuals who want to live there. After five years, the investor can apply for a UK passport for himself and his family. The non-dom tax regime is very favourable for 15 years. The programme of Portugal makes a residence visa available to the non-EU applicant. Citizenship is possible after six years, but close ties are required and there is a language test. The Swiss residence programme is attractive. EU nations have free access. For the non-EU national, residence is possible if he pays tax at a level satisfactory to the Canton. Citizenship is hard to acquire. A low tax rate is available in some Cantons and a forfait ruling for the immigrant who is not working.
Family businesses make up a significant part of the world’s economy, but only a small percentage survive into the next and subsequent generations. Family owners have strong emotional attachment to their business. A solid governance platform is required to ensure continuity over generations – a family purpose, binding procedures and good governance. Giving up control can be a major obstacle. There is a need to deal fairly between family members. Discussing mortality can be difficult. Machinery to deal with conflicts needs to be put in place during the founder’s lifetime. The design of a structure may begin with discussions with all the parties, to arrive at agreed purposes, procedures, distribution and investment. The structure may make use of a private trust company, a family constitution, a family office, a foundation or executive entity. The second layer of good governance is a defensive strategy, regularly reviewed. Checks and balances are needed. Who can the founder trust? The need is for clear purpose, assessing risks, disincentivising attacks, securing the structure and best practice operation. A bilateral investment treaty can be useful. Different vehicles may be required for business and personal assets. As far as possible the differing rights and obligations of each of the family members need to be defined. A family office can help to solve many problems.
Lack of understanding is often displayed by clients – quite inappropriately giving instruction to trustees, seeking control of offshore companies etc. Communication with the client is crucial – e.g. explaining that making a settlement is not just like opening a new bank account. It is sometimes necessary to lose a client who is not prepared to take advice, but at other times, with patience and communication, problems can be ironed out: it is important to maintain the dialogue. Then there is the know-all client who complains about the way trustees are managing investments – who wants high return with low risk. It is sometimes possible to keep the client happy by setting aside a small amount for high-risk investment. An independent trustee can have a “beauty parade” of investment advisors. It is important to keep investment performance under review. The politics of a family office can be difficult. Its duties are many and various – calling for continuity, for guidelines on who is doing what and for organising trustees’ meetings. There is always a need for good quality legal advice. Care is needed to handle the grumpy client.