Nice 2006 meeting

An alternative investment is “alternative” to investment in the bond and stock markets. Hedge funds are now major class of investments: they have a number of techniques for hedging risk. Commodity futures present investment opportunities – e.g. in gold, grain, energies. Many agricultural products, metals, currencies, financials and industrial goods are actively traded. Investors in these markets have sophisticated systems of analysis. A successful trader has a pre-determined plan, diversification and reserves. Long-only commodities are risky investments. Infrastructure bonds, revenue bonds, forestry, wine, antiques, fine arts and coins, REITs (Real Estate Investment Trusts) and AIM (the Alternative Investment Market in London) present investment opportunities. An individual who is neither a US resident nor a US citizen can invest and trade in the US without capital gains tax liability; but he will actually use an offshore company to avoid exposure to estate tax. Tax treatment of gains varies widely from one country to another.

Settlors commonly want to retain powers over the trust fund. Will the trust be a sham? The trustee who makes an imprudent investment remains responsible to the beneficiaries: his duty may conflict with the settlor’s reserved powers. The trustee’s duty of care must be paramount. A proposed new Article in the Jersey law provides that the reservation of certain powers does not invalidate the trust and empowers the trustee to comply with directions given pursuant to such powers. A trustee must still consider whether each direction falls within the powers and may have to apply to the Court for its directions if he is not satisfied as to the wisdom of the settlor’s direction. The 1989 amendment to the Jersey law prevented any invalidation of a trust on the grounds that the settlor infringed forced heirship rules applicable to him – i.e. for want of capacity. This provision is being widened by the proposed amendment. A draft law provides for foundations in Jersey. It is expected to come into force in 2007. The foundation will have no perpetuity period. The charter will be a public document, but will contain little information. It may be easier for a settlor to understand and make it easier for a settlor to reserve powers. The duties of a council member will be similar to those of a director of a company. The constitution of a foundation may restrict a beneficiary’s right to information, in a way similar to the US “quiet trust.” The law will provide for a trust to convert to a foundation and vice-versa. The cell company is a single entity. In the incorporated cell company, each cell is a separate entity. The provisions of a trust can mirror the requirements of Sharia law. Alternatively, a discretionary trust may be used, with a Sharia-compliant letter of wishes.

The 3rd Money-Laundering Directive can be seen as an example of the present trend towards increased regulation, much of it stimulated by international bodies. Prevention of terrorism and accessing proceeds of crime are its ostensible objects. It is also aimed at tax evasion. The Directive was published last November. It has to be enacted by Member states within two years. The domestic laws will inevitably have some differences. Why trusts are targeted is not known. There seems to be a widespread view that there is something unsavoury about trusts. The Directive makes a number of demands on those subject to the Directive who deal with trusts. They are expected to understand trusts. Very few people understand trusts – even fewer in countries where English is not the native language. The language of the Directive is vague, the requirements numerous. A licence is to be required for everyone who provides trust services. The licensing authority will need staff who understand trusts. “Politically Exposed Persons” seem impossible to define. The period for implementing the Directive is very short.

The Treaty guarantees four freedoms – of goods, persons, services and capital. It forbids direct or indirect discrimination. In De Lasteyrie, a French resident had moved to another Member State; the ECJ held that the French exit tax was incompatible with Art. 43. The principle may have wider implications – e.g. in the UK, on the appointment of non-resident trustees in another Member State, or even – perhaps – elsewhere. InLankhorst-Hohorst, the taxpayer successfully challenged the German thin-capitalisation rules. The Court may extend the principle in this case to non-EU parent or subsidiary companies, although the issue is not certain. The Finnish resident taxpayer in Manninen got a less favourable tax treatment on a Swedish dividend than he would have had on a Finnish dividend. The Court did not allow this. A similar principle was applied by the EFTA Court in Fokus Bank, in respect of ‘outbound’ dividends, paid to taxpayers resident in countries other than Norway. In the D case, the German resident taxpayer was charged wealth tax in the Netherlands, to which he would not have been liable if he had been a Belgian resident. The Court sided with the tax authority in the Netherlands: most-favoured nation treatment was not required by Community law. CFC rules may infringe Art.56; the UK rules seem particularly vulnerable: Cadbury-Schweppes. The Marks & Spencer case is well known. The Court found that denying to losses of foreign subsidiaries relief available to domestic subsidiaries was discriminatory, but prevention of double dipping or other tax avoidance could in principle justify discrimination or restrictions which would otherwise be in breach of the EC Treaty. The Halifaxdecision applied the “abuse of rights” doctrine to VAT, where tax avoidance was the essential aim of the transactions. The doctrine may well spill over into other taxes.

There is a growing interest in charitable giving. The Institute of Economic Affairs, and the European Association for Planned Giving have played an important role in spreading awareness of charitable giving. In the past, the functions of charities were performed by the Church. After the Reformation, it became necessary for the law to develop the concept of charity, separate from the Church. In the US, tax -exempt organisations are specified in IRC s501 (c)(3). New legislation has been enacted in Scotland and is expected in England. Charities in the English-speaking world are widespread, and play an important part in wealth creation – as explained by B. Bracewell-Milnes. Giving to charity and giving by charities increases the utilisation of assets. Private charities are more efficient than governments, and societies supported by charities are more resilient. Governments have discovered that there is a ceiling for taxation. The social services need to be taken back from the state and given over to the charitable sector. Charities compete and are efficient. They need to be encouraged. At the same time, there is now a huge creation of new wealth. The new rich have different priorities: they like power and enjoy control; they do not want to leave too much to their children or give assets to the government. A charitable arrangement can provide a way for the rich individual to achieve what he wants.

If money doubles every seven years, a twenty-one year deferral triples funds. Converting income to capital gains can defer the tax charge and reduce the tax rate. One form of such deferral places the growth in the hands of the younger generation. Other tools include roll-up funds, approved funds (e.g. UCITs), pension funds, life insurance, re-insurance, hybrid vehicles, trusts, foundations, establishments, derivatives. There are, however, a number of traps. Accumulated income may not be treated as capital. There can be valuation problems for gifts or inheritance. There are intervening law changes. What works in one country may not in another. Deferral may equal no tax. Conversion of income into capital gains and moving across borders can provide significant benefits.

The Spanish tax system is now similar to that of other EU countries – including wealth tax and inheritance and gift taxes. The Spanish tax authorities have access to a lot of information about taxpayers. The Spanish attitude to compliance is improving. As little as twelve years ago, tax evasion was a national sport. That is changing. But the system is still inefficient, unreliable and unfriendly. A taxpayer will take pains not to be noticed; he can never be sure that his tax affairs are in order. There is, however, a four year period of limitation. Relations between the tax inspectors and taxpayers are not good. If a taxpayer wants to appeal, he must first pay or guarantee the amount assessed. The system is always changing. The autonomous regions have power to vary the national tax system, and do so. Non-residents are liable to tax on Spanish-source income. The burden is on individuals to show they are fiscally non-resident; a foreign company needs to show that it is not managed and controlled in Spain. A resident who moves to one of the blacklisted jurisdictions only loses his Spanish residence after five years. Spanish-source income includes income from business, professional or artistic activities performed in Spain – even without a permanent establishment. The general income tax rate is 25%. There is a special regime for professionals who move to Spain.

French law does not allow the split ownership which is the basis of trusts, but nevertheless recognises trusts formed under foreign trusts. A trust cannot override the forced heirship rules. The main taxes in France are (i) gift/inheritance tax (paid by the donee/heir, and the rate varying according to the relationship); (ii) income and capital gains tax and (iii) wealth tax. A trust is not a taxable entity and does not feature in the legislation. A transfer to a trust will not itself be a gift, but a transfer to a beneficiary will be regarded as a donation from the settlor. Income is only taxable when distributed to a beneficiary, unless Art. 123 bisapplies. Accumulated income is not generally regarded as capital. The scope of Art. 123 bis is very wide but requires the French resident to hold at least 10% of the foreign entity: it cannot therefore apply to the beneficiary of a discretionary trust. A revocable trust is disregarded. A discretionary or defeasible interest in a trust has no market value and is therefore not subject to wealth tax. Gift or inheritance tax is chargeable on a distribution. Can a trustee take advantage of a tax treaty with France? Only those with Canada and the US refer to trusts. In other cases, the question is a difficult one. The 2005 draft law for the fiducie is very unsatisfactory. The fiducie is only for use in a business context. The tax transparency of the proposal may have undesirable consequences.