Monte-Carlo Conference 2019

Investment treaties provide an effective and economical way of managing political risk.  They are often overlooked by planners. Political risk is present even in countries which appear stable.  It can take many forms – e.g. a change in the regulatory environment. Investment treaties offer a broader cover than is available through insurance.  There are over 3,000 investment treaties.  The ICSID Convention and the New York Convention offer remedies, as does NAFTA.  Treaties differ in types of investor and investment covered, including expropriation, absence of “fair and equitable treatment”, breath of a “most favourite nation” clause and actions of tax authorities.  Investments may be structured to take advantage of protection offered by investment treaties alongside those offered by tax treaties.  Third-party funding of claims is available in appropriate cases.

The 4^th and 5^th AML Directives are the source of public registers in the E.U. As of next January, the company information will be available to everyone, the trust information to people with “legitimate interest”, registration been required if the trust is administered in the Member State, or has real estate or a business relationship in the Member State.  But if an EU trustee owns a non-EU company, information is available to everyone on request – if Member States implement this requirement.  Members States are in course of implementing the Directives in different ways.  In Germany, the founder of a foundation is not registered.  Austria requires good reason for requiring information.  France requires a judicial procedure.  “Beneficial owner” of companies is one who has more than 25% interest or controls “by other means”.  Definitions vary from one country to another.

Asset protection trusts became popular in the 1980s and are now used for protection against a wide range of risks.  Bermuda is a tax neutral British Overseas Territory, known for its expertise in trusts and insurance, with a focus on quality rather than quantity.  The ultimate court of appeal is the Privy Council in London.  The current legislation affecting asset protection trusts are 1994 fraudulent transfer provisions and the 1989 firewall provisions as amended in 2004 (protecting against claims under foreign law, inheritance law and personal relationship).   Claimants have several lines of attach.   A sham is difficult to prove.  In Pugachev the trust was hold to be “illusory”.  There are various ways to strengthen the trust.  The Bermudian legislation provides a safe harbour for the asset protection trust.

The US has a uniform trust code, which is adopted with variations in the separate States.  The US has no public registers.  Innovation is encouraged – director trusts, probate trusts, asset protection trusts, qualified spendthrift trusts, incomplete grantor trusts, extending or eliminating the perpetuity rule, mixed charitable trusts.  A series LLC has separate cells.  A close corporation is an innovative variation on the partnership.  FATCA can also apply to US trusts, and CRS may be on its way.  The altitude to foreign trusts is presently benign, but this may change.  Foundation legislation has been passed in Wyoming: it offers a flexible vehicle with minimal public exposure.  Blockchain holding of assets are in an advanced stage of development.

Base Erosion and Profit Shifting (2016) and the Multilateral Instrument (2017) are initiatives of the OECD to counter perceived unacceptable corporate tax avoidance, commercially the most important were American companies and their subsidiaries.  Tax planning ideas were widely used – particularly those involving interest deductions.  The 15 BEPS action plans required implementation in member countries, four necessarily and 11 recommended.  BEPS is relevant to digital services and the expansion of a business from the merely domestic to the fully international.  Profit shifting by debt financing is among the techniques attacked by these measures.  Other measures counter avoidance with intellectual property.  Various treaty changes were effected by the Multilateral Instrument, without the need to change treaties one-by-one.

The Criminal Finances Act 2017 in the United Kingdom introduced Unexplained Wealth Orders applicable to Politically Exposed Persons and persons involved in serious crime.  The response of a client needs to be carefully considered.  The Hajiyeva case has been considered by the Court.  The Act introduced also Account Freezing Orders and Account Forfeiture Orders.  They are easier to obtain, but may be resisted.  The Act created offences of failure to prevent UK or foreign tax offences, which may be committed by companies and other bodies.

The modern world is increasingly strewn with risks and changes, in which context the unit-linked life insurance policy offers a useful protection.  Wealthy clients are increasingly mobile: a policy can be tax-efficient across jurisdictions, and compares well with foreign trusts and companies.  The policy can accumulate income and gains, tax free, and income can be postponed.  Or it can provide the funds needed to pay the tax.   Succession and inheritance present major risks to wealthy families.  Insurance has advantages in this context: beneficiary nominations do not form part of the estate and can provide a more certain benefit.  Policy provisions can play a role in avoiding family disputes and facilitate the passing of wealth of one generation to another.

The Bahamas has many taxes, including VAT, but no taxes on income or capital gains.  The country has co-operated in the BEPS initiative, to ensure that companies have the necessary substance, requiring that a number of activities are performed in the Bahamas.  A pure holding company is still possible.  There are penalties for companies which fail to show substance.  There is a carve-out for investment funds, and a private trust company is lightly regulated.