Nice 1976 meeting

1. The Canadian `Stepping Stone’

A Canadian company or trust may be used as a `stepping stone’ between a high-tax jurisdiction to a low-tax jurisdiction. For a successful `stepping stone’ transaction, the outgoing must be deductible in the high-tax country, there must be no (or little) withholding tax on payment out of the high-tax jurisdiction, and there must be little tax in the `stepping stone’ jurisdiction and no withholding tax on payment out of it.

Canada is free of exchange control and is cosmetically attractive. The non-resident-owned (NRO) investment corporation managed, controlled and operated in Canada – does not incur normal tax liability but only the equivalent of the withholding rate – 15% or 25% depending on DTA provisions, if any. The NRO corporation is suitable for debt or equity investment in Canada, though it has (at present) the disadvantage that the five points reduction in withholding tax allowed to corporations in which Canadians have at least a 25% interest doe snot pass through the NRO corporation. The NRO corporation is a better vehicle for Canadian investment than, eg a Panamanian company, because it can be avowedly managed in Canada without fear of additional taxation.

Suppose royalties flowing from US to Canada under the US/Canada DTA, withholding tax is reduced to 15%, the Canadian company may pay the corresponding royalty to a tax haven company free of Canadian withholding tax, section 212(1)(d)(vi).

Copyright royalties may be paid from US to Canada without withholding tax under Art. XII (c) of the DTA and again from Canada to a tax haven under section 212(1)(d)(vi). One must always consider the danger that the IRS will `look through’ the structure. Suppose the Canadian company is an NRO corporation, paying on to the tax haven only 80 cents of each dollar received from the US, the effective tax rate on the remaining 20 cents is 25% and the investment in Canada of the residual 16 cents presents the opportunity of giving the corporation a degree of business purpose which may help to defeat any attack by the US tax authorities.

Suppose a Canadian corporation carries on business in the US. Without a permanent establishment there is no US tax liability; with a permanent establishment there is a US tax liability – but if the Canadian company pays interest to a tax haven it is (a) deductible in computing the US business profits and (b) exempt from US withholding tax under Art. XII(1) and from Canadian withholding tax – either on a more than five-year arm’s length debt under section 212(1)(b)(vii) or because the money is borrowed for the purpose of carrying on business outside Canada – section 212(1)(b)(iii)(E).

2. Investment through Canadian Parent

Assume a foreign group has an established operation in Canada in the form of a Canadian subsidiary of a foreign parent.; Retained profits of the Canadian subsidiary may be utilised to finance the group’s non-Canadian activities, rather than for declaration of dividend. Profits of a `foreign affiliate’ located in a country with which Canada has a DTA may be remitted to the Canadian parent free of Canadian tax. This may average out the Canadian tax on domestic income so that foreign tax credit may be fully utilised, eg by a US parent.

A. In Cyprus

Chrysses Demetriades

Law 37 of 1975 provides full exemption from Cyprus tax to partnerships of non-residents and to companies owned by non-residents, whose objects are achieved outside Cyprus.

Shares in such companies are free of Estate Duty. There is no capital gains tax in Cyprus. Exchange control permission is required, but is given by the Central Bank as of course, so long as capital is provided from external funds and the company does not borrow locally. Sometimes disclosure of the beneficial owners to the Central Bank is required, but where it is, the information must be treated by the Central Bank and its staff as confidential. Companies are formed on the pre-1967 English pattern. If annual accounts are not to be filed, any foreign company which is interested in the company should have its interest held by a local nominee.

The Cyprus tax authorities are anxious to make these provisions work – so long as the company sticks to the rules. Transshipment of goods and invoicing through the Cyprus office is permissible, but the import of goods for the local market or export of goods of local origin are not. A free zone in Limassol is expected shortly: it is possible that new tax exemptions may be enacted in connection with this.

If a Cyprus off-shore company pays salaries to employees who work outside Cyprus, the employees suffer a tax of 2.5% on their salaries: this is beneficial to eg Dutch residents. If only part of the employees’ duties is performed outside Cyprus, an apportioned part of the salary receives this favourable treatment.

B. In Denmark

Robert Koch-Nielsen

Two types of co-operative society are defined for tax purposes – purchasing societies and production and marketing societies. There are no capital requirements; a society is created by agreement – no permission or registration being required. But the constitution must provide for an annual meeting of members and for each member to have one vote. The constitution may provide for limited liability (AMBA). Profits – and any surplus on liquidation – are to be distributed among the members in proportion to business done with members, but a member may also be paid normal interest on any loan he makes to the society.

Tax is payable on an artificial income, which is calculated as 4-6% of the equity investment. For this favourable tax treatment, trading with non-members must be very limited.

Exchange control consent is required for a non-resident to invest an amount exceeding the equivalent of US$6,000: this will certainly be forthcoming when the investor resides in a common market country and will probably be given where the investor resides elsewhere.

C. In Greece

Gerasimos Vlachos

In 1961 `technical enterprises’ whose objects lie outside Greece where accorded exemptions from Greek income tax and customs duty. In 1967 and 1968 these exemptions were extended to commercial and industrial companies whose operations are controlled in Greece but effected outside, including shipping companies, ie those which carry out ancillary services as well as those which own ships. Commercial and industrial operations may extend to a variety of functions: such companies commonly accommodate `visiting firemen’, ie constitute an Athens or Piraeus office which deals with problems arising in the group’s operations in the Middle East, Africa or elsewhere in Europe.

In addition to the exemption from income tax accorded to the profits derived from sources outside Greece, exemption from customs duty is given on the equipment of the office and on the household effect of foreign personnel (including one car per family).

Books may be kept in any language. General permission is given for the free movement of foreign exchange. Residence permits and work permits are given as a matter of course.

The company taking advantage of the 1967 and 1968 laws must lodge a bank guarantee of US$5,000; shipping companies must exchange $30,000 each year into Greek currency, but commercial or industrial companies are generally required to exchange a larger annual amount to cover the running expenses of the office in Greece.

D. In Ireland

Francis Brennan

Export tax relief is given for two types of profit: that arising from manufacturing anywhere in the Republic and that arising from activities in the Shannon Airport Area.

Reliefs are available to companies, and not to individuals or partnerships; the benefit of the reliefs pass to shareholders through tax-free dividends.

`Selling by wholesale’ and `manufacture’ give rise to exempted profits – the meaning of `manufacture’ being extended for this purpose. For a new trade, relief is currently available until 1990.

Companies manufacturing in Ireland may be financed by preference shares – this gives the bank or other person providing the capital income free of Irish tax, and accordingly a lower rate of `interest’ may be negotiable.

Profits and losses of exempted trading operations in the Shannon Airport Area are not taken into account for corporation tax purposes: losses are therefore wholly unrelieved and so is depreciation (though capital allowances can be `sold’ by a form of leasing transaction). The operation requires a certificate by the Minister: the permissible class of operation is set out in section 70 (5) of the 1976 Act. In practice, these provisions will be widely interpreted, so long as the operation in question creates jobs.

It is advantageous for the Irish company to be held by an `open’ company or by a trading company, so as to avoid the incidence of wealth tax: the same result follows under the double tax treaty with Switzerland if the Irish company is held by a Swiss company.

E. In Luxembourg

Francis Hoogewerf

A `holding company’ – which may have its own office and staff – is exempt from tax; other types of company suffer a tax at the normal rate of 40%.

A holding company may purchase, hold and sell shares, stocks and patents; it may raise finance for its subsidiaries; it pays dividends free of withholding tax; it is excluded from Luxembourg’s eight double tax treaties.

Employees in Luxembourg pay usual taxes – which raise to 57%.

F. In Monaco

Francis Hoogewerf

The Principality is a suitable location for the management of foreign-based trading companies. It has no personal income tax. A management office may be, for example, a Monegasque office of a Panamanian company: the local tax is 35% of 8% of the expenses. Alternatively, a management company can carry out the management, paying tax of 35% on the fees it earns.

G. In Switzerland

Richard Pease

A `domiciliary company’, ie a company which has no business in Switzerland, is exempt from cantonal tax in almost all cantons but pays up to 9.8% Federal Tax: the rules and exemptions vary from canton to canton and the particular treatment is to some extent negotiable. Typically a Swiss domiciliary company would act as a European sales company. Special tax rulings may be obtained by a `mixed’ company (ie one which has some Swiss-source income or local personnel); a branch of a foreign company or an administrative or service company may also be favourably treated to cantonal tax purposes. It is a particular feature of the Swiss tax scene that the cantonal tax authorities are approachable.

H. In the United Kingdom

Milton Grundy

The United Kingdom is a suitable location for an office which confines itself to the gathering of information, or to an administrative or co-ordinating function or to other activities not of a trading nature, eg a representative office in the City of a foreign bank. It is generally possible to agree with the UK Revenue a figure of the order of 10% of the outgoings as a kind of notional profit on which tax is to be charged.

A. In the United States

Marshall Langer

Interest on bank deposits and deposits and loan associations and insurance companies are tax free to a non-resident alien if not `effectively connected with the conduct of a trade or business within US’: such interest is presently treated as having a non-US source by section 861, and this treatment is likely to be continued by Congress.

The US Treasury has proposed to Congress the abolition of withholding tax on interest and dividends; it is possible that Congress may approve a modified version of this proposal, eliminating withholding tax on interest derived from portfolio investment.

Foreigners have always been able to invest in US securities without paying tax on capital gains, whether or not the disposal takes place within six months. Investment in low-yield bonds or shares may therefore be indicated.

No tax arises to a foreign investor from investment in `raw’ land. The investor should be careful not to engage in any development of the land – which can give rise to a US tax liability.

Foreign individuals should generally invest through a genuine foreign company, so as to avoid estate tax. A company is `foreign’ for these purposes if it is incorporated outside US. Bank deposits have an exemption from estate tax; but practical considerations indicate the use of a foreign company if the amount of the deposit is significant.

Suppose a foreigner invests in improved real estate, eg an apartment block or shopping centre. Here a Netherlands Antilles company is indicated. Article X of the Netherlands Antilles Treaty refer to an election: since 1966, foreign investors may elect to be taxed on a net income basis instead of paying 30% tax on thegross income. Generally, taxpayers cannot withdraw the election, and tax is payable on the capital gain arising on disposal of the property for which the election is in force. Under the Treaty, however, the election may be made a year at a time: this opens up the possibility of making the disposal in a year where no election is in force. If a foreign company does business in the US, tax is charged on dividends declared by the company: Article XII, as interpreted by Ruling 75/23, exempts a Netherlands Antilles company from this tax. The Article also exempts interest payments, and – so long as the debt/equity does not exceed 3 to 1 or 4 to 1 – the interest may be deducted in computing the net income of the company. The treaty also offers other advantages (too technical to be included here).

The `80/20 rule’ enables interest and dividends to be paid free of US tax to foreign investors, so long as at least 80% of the company’s income has a non-US source.

A separate exemption covers interest paid to a foreigner by foreign branches of US banks – even if the foreigner is engaged in trade or business in the US.

B. In Canada

Bruce Verchere

Canadian government policy has for some years been to encourage debt rather than equity investment. Much Canadian industry has tended to be foreign-owned: the purpose of the Foreign Investment Review Agency and of tax incentives for companies controlled by Canadians (notably the reduction of the 25% withholding tax by 5 points) is to reverse this trend. (Note that the criterion is `control’ and not necessarily equity majority.)

Generally, the acquisition of any Canadian real estate will fall within the purview of the Foreign Investment Review Agency: the Agency has a wide discretion, but will generally approve acquisition where real estate is leased to a Canadian operator, even if the rent is variable and in effect gives the investor a substantial interest in the underlying operation. The Agency is not difficult to deal with.

Where a non-resident derives income from Canada from equity or debt securities or from real estate, the liability is for the Federal tax only: it is enforced in the first instance by a withholding tax, generally at a 25% rate. There is no general exemption for non-profit organisations, but there are exemptions from tax on business profits derived by non-profit organisations.

Canadian law imposes penalties for failure to withhold; accordingly, withholding agents tend to over-withhold.

Gains on sales of publicly-held securities are exempt – clearly and by statute. A less clear -and non-statutory- exemption applies to the disposal of privately-held shares.

It is thought that the Canadian government cannot levy withholding or other tax on foreign sovereign governments. Rulings used to be available in some circumstances.

`Qualified’ organisations are exempt on post-1963 bond interest. To quality, the organisation must be of a type to be exempt domestically, eg charities, labour organisations, non-profit organisations; they must reside in a country which imposes tax, but be exempt from income tax there.

Employee Pension Funds and Retirement Funds can obtain exemption similar to charitable exemption, ie on post 1963 bond interest. Certain types of interest are payable to non-residents free of Canadian tax or subject to a lower withholding tax:

a) Non-residents receiving interest on instruments guaranteed between 1966-79 by the Canadian government or its agencies are not subject to withholding tax.

b) Interest paid by a chartered bank, where the principal and interest is expressed in a currency other than Canadian dollars is again free of withholding tax.

c) Where a non-resident lends to a Canadian corporation on an arm’s length basis, on terms that no more than 25% of the capital is repayable within 5 years, the interest is tax free. Existing debts due, eg from a Canadian subsidiary to a foreign parent, may be refinanced via a foreign bank; this is regarded as `arm’s length’ for this purpose, but the situation is less clear if the foreign bank requires a `back to back’ deposit; probably the loan is to be treated as `arm’s length’, unless the foreign bank is interposed as a mere agent of the parent to make the loan to the subsidiary. A ruling may be obtained for a particular case.

d) Where a Canadian company raises finance for a business carried on outside Canada, interest may be paid tax-free to a non-resident – the tax authorities take a generous view of what is `outside Canada’ and will give rulings in particular cases.

e) In view of the preferential treatment of interest, the current trend is to lit the amount of interest to the underlying profit by way of a so-called `Bonused Debt’.

Non-residents can, like residents, elect to be taxed on the yield from a real estate investment on a net basis. If, for example, an investment is made by a foreign trust which borrows on second mortgage from a related non-resident lender (the interest being high but not unreasonable), the net taxable profit can be reduced virtually to nil, and no Canadian tax liability arises on the interest itself. A capital gains tax liability arises on disposal. This may be postponed if the shares in the non-resident company or the beneficiaries; interests in the non-resident trust are sold instead of the real estate itself. If the property were bought for speculation or resale within a limited period, it seems that no tax liability arises if the entire sale transaction is effected outside Canada, and such a transaction is, of course, exempt if it falls within the terms of a DTA – so that, for example, a Netherlands company without a permanent establishment carrying on a trade of dealing in real estate is liable to no Canadian tax on its profits.

C. In the United Kingdom

Milton Grundy

Individuals investors domiciled outside the UK and anyone investing trust funds in the UK should protect their investment from capital transfer tax by interposing a company incorporated outside the UK. Capital gains tax is not a practical problem since persons not resident or ordinarily resident in the UK are not in general liable to it. Non-resident individuals are in theory liable to the higher rates of income tax applicable to individuals (unless they have the benefit of a DTA): although this liability is rather laxly enforced, one will usually find it better to eliminate any possible liability by interposing a non-resident company.

Non-residents are in principle liable for income tax at 35% on UK source income, and this is generally withheld at source. However, interest on certain British government securities is free of income tax ( and the capital free of capital transfer tax) in foreign hands, and a wider measure of income tax exemption is available for approved pension funds and charities.

In appropriate cases, UK source income can be `matched’ with trading losses, capital allowances, bank interest, interest payable gross under a deed kept abroad, or interest or royalties payable gross under a DTA. (The concept of a `thin’ company does not exist in the UK.)

Now that the use of Ireland as a `stepping stone’ for UK source purchasing the property in a UK resident company with overseas borrowing the residence of the company being changed before the fiscal year in which a capital gain accrues.

The Arab World

K Troller

Kuwait, Qatar and United Arab Emirates do not have any taxes and can be utilised like conventional tax havens. There are some practical difficulties, for which express provision is made in the 1975 Jordan Law. Generally, local participation is required by law – Dubai is an exception. These countries lack professional service; some lack company laws. Kuwait, however, has company laws – which impose strict rules, and require a 51% local participation. Communication may also be a problem.

A limited responsibility company in Kuwait appears to be the most suitable vehicle.

Costa Rica

Humberto Pacheco

A foreigner may obtain a legal and valid passport as a resident retiree or investor. He must have a minimum foreign-source income of $300 a month and own real estate in Costa Rica to the value of at least $10,000. The passport is a valid travel document but does not confer Costa Rican citizenship on its holder.

Costa Rica does not tax income arising outside the country, its companies are similar to those which are formed in Panama. Limited partnerships may also be formed.

France

M Degraux

The French SICOMI is exempted from corporation tax on commercial real estate investments; dividends to non-residents suffer 25% withholding tax – but the double tax agreements with West Germany and Lebanon provide for a zero rate.

A foreign group may maintain an information office in France which does not constitute a `permanent establishment’ under a treaty (if any) or does not conduct a complete cycle of transactions in France. No corporation tax liability is incurred, but payroll tax is due on salaries.

For more extensive activities in France, a branch or subsidiary is required and a subsidiary is generally to be preferred to a branch (except where the foreign company wishes to take advantage of branch losses). Corporation tax at 50% is charged on a notional profit of the order of 10-15% of the outgoings of the office and in most cases no payroll tax is due.

1) Interest

A. Cyprus

Chrysses Demetriades

Cyprus does not require a `stepping stone’ for its use, since it has the benefit of DTAs together with domestic tax-free facilities – which is unusual.

Management and control in Cyprus is requisite in order for a company to be `resident’ in Cyprus.

Dividends, royalties, gains from sales of patents, interest, trading profits and capital gains variously qualify for benefits under the DTAs.

A Cyprus company is a suitable company for the establishment of an office in Greece.

B. Denmark

Robert Koch Nielsen

Denmark has 28 DTAs, which provide for low or nil rates of withholding tax. Denmark imposes no withholding tax on payments of interest. But present exchange control regulations prevent any significant use of Denmark as a `stepping stone’ for interest.

C. Luxembourg

Francis Hoogewerf

A `holding company’ is excluded from DTAs/

As regards companies which are not holding companies, the rule is that there is no withholding tax on ordinary loan interest paid out of Luxembourg, though there is a 5% withholding tax on bond interest. Proper interest is deductible: a normal turn or spread – as little as 1/16-1/8% on large sums – will normally be acceptable. It is difficult to agree this in advance with the tax authority.

DTAs with Belgium, Ireland, UK and US provide for nil withholding tax on interest paid to Luxembourg; that with France, 10%.

Luxembourg has no exchange control.

D. Switzerland

Richard Pease

A `domiciliary’ company has a favoured treatment: it is exonerated from cantonal tax in many cantons, eg Zug and Fribourg. Switzerland has numerous DTAs, but no withholding tax on payments of interest to other countries. A debt/equity ratio should not exceed 6/1. The Federal Decree of December 14, 1962, prevents abuse of the DTAs. The Swiss recipient of income for which Treaty benefits are sought must not use more than 50% of it in satisfying liabilities to `non-qualifying’ persons. Exceptions to this rule are only made inbona fide commercial situations. Distribution of at least 25% of the income must be made: this costs 35% Federal tax (less if a DTA applies to this payment).

Domiciliary companies are excluded from the French and German treaties and (probably) from the new Italian treaty, but otherwise enjoy DTA protection..

The Federal Decree does not apply if interest is paid to Switzerland without withholding tax not under a DTA but by virtue of the domestic law of the payor.

A roundabout transaction is a complicated scheme to facilitate overseas borrowing by UK companies.

E. The United Kingdom

Milton Grundy

The UK has two uses in this field. First, a UK resident `stepping stone’ company may be used to take advantage of the very wide range of DTAs to which the UK is a party, eg to receive interest from Australia and pay it to Luxembourg. Second, a UK resident `stepping stone’ may receive income under a DTA and pay interest gross to a tax haven under a deed which is physically kept overseas.

F. The Netherlands (including royalties and dividends)

Robert van de Water

The general tax burden is high in Holland: tax is effectively levied – the tax authorities are efficient; the law gives them substantial powers; they have an authority to negotiate with taxpayers and also to give rulings.

A `stepping stone’ has the following characteristics:

(a) it should be in a position to receive interest, royalties or dividends free of (or at a low rate of) withholding tax;

(b) its income should be free of significant tax in its hands;

(c) its onward payments would suffer no withholding tax.

Interest to the Netherlands from UK, US and West Germany suffer no withholding tax; from Belgium, France or Japan the withholding tax (except for some bank interest) is 10%. A turn of 1/4-1/8% should be left with the Netherlands company. (For very large sums, as little as 1/16% may be negotiated.) No withholding tax is levied on the outward payments of interest.

Similar principles apply to royalties where a turn of 5-10% will be required.

The combination of reduced rates of withholding taxes on dividends flowing to Holland under the Double Tax Agreements and the `affiliation privilege’ (under which Dutch companies are exempt from corporate income tax on dividends received and capital gains realised in connection with qualifying shareholdings in other companies) makes the Netherlands a particularly attractive location as a base for active investment in other countries

Dividends from the Netherlands can flow to the Netherlands Antilles free of Netherlands tax and suffer only 3% tax in the Netherlands Antilles; in appropriate cases, this route can be an effective exit for European profits, though its importance has been somewhat exaggerated by some commentators.

(2) Royalties

A. Denmark

Robert Koch Nielsen

It is the policy of the Danish government to enter into DTAs following the OECD model: this provides for royalties to be paid free of withholding tax. Denmark has no provision in its domestic law for the imposition of withholding tax on outgoing royalties. Accordingly, Denmark may be a good `stepping stone’: it is better to use an independent company than a controlled company. It is desirable to leave one tenth of the royalty to attract tax in Denmark.

Exchange control consent is not required for royalty agreements up to five years.

B. Luxembourg

Francis Hoogewerf

Luxembourg has a withholding tax of 12% on patent royalties and 10% on other royalties.

C. United Kingdom

Milton Grundy

What is said above about interest applied mutatis mutandis to royalties – except patent royalties, which are expressly made liable to withholding tax.

D. Switzerland

Richard Pease

Suppose a royalty of $100 is received from the US `under the US DTA free of withholding tax. Suppose a payment to the head licensor in the Bahamas of $50 in compliance with the Federal Decree. Suppose Swiss company is a domiciliary company, liable to the top rate of 9-8%, ie $4.9. A distribution of 25% is required, which costs $8.75 withholding tax, ie a total tax bite of $13.65.

The Swiss withholding tax may possibly be avoided by use of the treaty with the Netherlands.

(3) Trading Profits

A. Denmark

Robert Koch Nielsen

A Danish co-operative society trading outside Denmark is generally free of foreign taxes under the double tax agreements (in the absence of a permanent establishment) but suffers Danish tax only on a notional figure.

B. Ireland

Francis Brennan

Tax sparing is a feature of most double tax agreements to which Ireland is a party, but the UK treaty is under re-negotiation and the US agreement does not provide for tax sparing.

C. Switzerland

Richard Pease

The domiciliary company is the usual vehicle for trading outside Switzerland. The 1962 Decree does not affect trading profits or other income unaffected by withholding tax.

A Swiss company with a permanent establishment in the US is not taxed in the US on non-US source income.

A societe simple may claim benefit of some DTAs, ie the present agreement with the UK, the agreements with Ireland, Denmark, Japan and US – without suffering any tax in Switzerland: it is doubtful whether the Swiss tax authorities would give the certificate necessary for a claim for relief on interest on dividends, but this is not required for the exemptions afforded to trading profits.

A Swiss societe simple is free of Irish wealth tax. Its use in US seems limited by Treasury regulation.

The new protocol to the UK/Swiss DTA may remove the benefit of the societe simple.

The new Swiss/Canadian treaty opens up the possibility of using the societe simple in connection with Canada.

D. The United Kingdom

Milton Grundy

A company incorporated outside the UK but resident (ie managed and controlled) in the UK and acting as trustee is taxed on a `remittance basis’ only on income arising from a foreign partnership. Such a structure will normally qualify for DTA exemption (in the absence of a permanent establishment) without giving rise to any actual tax liability in the UK.

An Australian trust can make an annual election to have the yield from its US property investment taxed in the US on a net basis, under Art. XI of the DTA. When it is used as a vehicle for such an investment, an Australian trust has the advantages of a Netherlands Antilles company, but it is more flexible and mobile.

The Australian economy is in no way dependent on tax haven activities.

The Union Fidelity case decided in 1969 that trustees are not taxable on trust income arising outside Australia – the residence both of the trustee and of the beneficiaries being immaterial.

The report of the Asprey committee appears to sanction the exemption of the non-resident beneficiary from tax on income whose source is outside Australia, and indeed in principle, non-Australian trust income distributed to a non-resident beneficiary should be free of tax. This certainly seems true of dividends, but the position as regards royalties and interest is more obscure. While it seems clear that accumulated income ceases to be income, it may nevertheless be prudent to change the trustee to a non-resident of Australia and change the situs of the trust before the accumulated income is distributed.

There is no tax on capital gains in Australia except that imposed by section 26 AAA, which treats `short term’ gains, ie those arising from acquisitions and disposals made within one year as assessable income. It seems that the logic of the Union Fidelity case requires that short-term gains from property situated outside Australia be exempt from tax.

Australia has several DTAs, with the usual exemptions for commercial and industrial profits. Art.X of the US agreement and Art.IX of the Canadian agreement relieve royalties of certain categories. An Australian trust may usefully hold a second mortgage on Canadian property.

It should be remembered that Australia has extensive exchange control rules and anti-avoidance legislation.

The atmosphere of the present era indicates a more cosmetic approach to international tax planning. The best plan is one which arises with seeming naturalness from the commercial requirements of the transaction; it will tend to avoid the overt use of well-known tax havens. The underlying transaction should, of course, be proper and lawful, but so long as it is, a professional adviser may – and indeed should – assist his client in achieving whatever degree of confidentiality he may require.

Many `cosmetic’ points were raised during the conference. A tax haven company may acquire an address in France, Greece, Jordan, the UK or the US (not an exhaustive list) or may employ an agent in any one of a number of high-tax countries. Panama and Liberia permit a wide range of corporate names; a UK non-resident corporation or limited partnership or an entity in Kuwait may be utilised. An Australian trust, a Danish co-operative, a Swiss domiciliary company or societe simple or a UK external trust, with (in an appropriate case) a New York office – all these may combine DTA advantages with cosmetic features.

The Cyprus company is probably not yet known as a tax haven vehicle and the International Business Companies of the West Indies – which have been found in Antigua, Barbados and St Vincent for some time and have now arrived in Grenada – seem to have attracted little attention to themselves (outside the UK at least). The use of, say, a Canadian or United Kingdom `stepping stone’ has a cosmetic advantage as well as its substantive advantage under the relevant DTA. The ultimate in cosmetics is, of course, an operation which simply benefits from a tax opportunity deliberately created by a high-tax country, eg by manufacturing in Ireland, or by `matching’ in the UK or elsewhere a flow of income with losses or with allowances for capital expenditure.

The UK may usefully serve as a base for a trust in four types of case. (It is assumed that the settlor is resident and domiciled outside the UK, that the beneficiaries are all non-resident and that the trust fund is invested outside the UK.)

1. Where the income is insignificant or nil. (Sometimes advantage can be taken of double tax relief for capital gains.)

2. Where the (non-UK) income is paid directly to a life-tenant and therefore not taxed.

3. Where income is taxed on a remittance basis only, ie where the trust has foreign-source income only and the trustee is resident but not domiciled in the UK (see under `Trading profits’).

4. Where the trustee is a company incorporated in the UK but resident elsewhere: such a company is free of UK tax on its non-UK income whether it received the income for its own benefit or as trustee of a trust.

A trust is a very flexible instrument: it does not necessarily require the settlor to part with the fund for ever, eg it may be revocable or primarily for the settlor’s benefit, or may reserve various powers to the settlor; a sufficient `platform’ for business activities may be created by a well-disposed friend or relative or even on a commercial basis

Use of the tax treaties by residents of other countries is curtailed in the US. The Swiss company in theJohannson case was held not to be fighting and not entitled to the benefit of the DTA. In the Bass case the taxpayer succeeded, having run a genuine Swiss company for some years before the dispute arose. In Aikenan assignment of a loan by a Bahamian company to a treaty company was held to be ineffective to obtain the DTA benefit: this is a case whose logic may be followed in other countries. Dicta in the Suez case suggest that the court should give effect to the `intent’ of a DTA, and should restrict its application to cases where, but for the existence of the treaty, there would be double taxation.

Foreign companies are now taxed in US on certain types of foreign-source income which is `effectively connected’ with a business in the US. Before 1966, when – for example – a company like Rolls Royce sold an Argentinian a car in their New York showroom, but effected delivery by shipping the car direct from Britain to Argentina, the profits were not taxed in the US; the 1966 Act, however, provided that such profits were `effectively connected’ with a US business. This rule may be negative by Art.III(1) of the Netherlands Antilles treaty or by the Swiss DTA.

A foreign company selling non-US real estate in the US has income from a foreign source: it is not liable to US tax even if it tracts to US purchasers has a US source and is taxable accordingly.

A non-US person may create a US `grantor’ trust: the income and capital gains of the trust are treated as those of the grantor even through the benefit of them goes to US taxpayers (Revenue Ruling 69/70). Assets in US should be held through a foreign company which is not a `sham’, so as to avoid US estate tax.

A `possessions corporation’ may manufacture in Puerto Rico and be free of Puerto Rican tax for a substantial period of time; Puerto Rico is within the US customs area. A 75% tax rebate may be available in the US Virgin Islands – which are outside the US tariff walls, but local manufacturers have the right to export to the US proper, free of customs duty.

The DISC is a US export company: it was intended to match the VAT rebate prevalent in Europe. The DISC rules do not forgive income tax – that would be contrary to the GATT terms; they postpone tax on one half of export profit indefinitely.

How can an individual who is not a US citizen spend considerable periods in the US but remain a non-resident alien? The Adamses cam from Canada: Mrs Adams occupied a house in Florida for 8-10 months a year; Mr Adams spent about 70 days a year there. However, they signed a `declaration of domicile’. Held: Mr Adams was, but Mr Adams was not, a resident of the US. It may have been important that Mr Adams lived for the rest of the year in Canada – where he paid Canadian tax.

There is little jurisprudence in this area, probably because information

regarding movements of aliens is not in general exchanged between the immigration service and the IRS – with the significant exception of entertainers. By taking elementary precautions, an individual may spend very substantial periods in the US without becoming a resident for US income tax purposes. An alien individual is unlikely to be regarded as domiciled in the US – which is what matters for estate tax and gift tax purposes – if he does not have an immigrant visa.