International anti-avoidance initiatives are reflected in existing domestic legislation, but are generally friendlier to taxpayers. Domestic anti-abuse rules prevail over treaty provisions. Changes in the law are not required in order to adopt the BEPS rules. At the same time, it is government policy to encourage investment by foreigners in Italian enterprises, and a version of the UK Resident Non-Dom regime is being introduced for new residents, requiring an annual payment of €100,000 and available for a 15-year period – exempting foreign income and assets from income tax and foreign assets from estate tax. The taxpayer may elect to pay tax on income from particular countries, so as to qualify for treaty relief.
Exchange of information agreements have recently been concluded with Switzerland and other countries, including Monaco. Personal income tax rises to 46% for employment income and 26% for investment income. There is no wealth tax but an estate tax of 4-8%. The anti-abuse rules are severe, with penalties applicable, and rules against thin capitalisation are strictly applied. The income of settlor-influenced trusts are subject to tax, and ‘self money-laundering’ is punishable. Beneficial ownership rules are on the way.
Life insurance is a contract between a policyholder and an insurer. The policy may be linked to units or other investments and can be a useful tax planning tool. Unfortunately, private placement life insurance has been marketed as a way of hiding assets. But there are uses for legitimate insurance wrappers, offshore and onshore. In France – as elsewhere – the main benefit is that of tax deferral. In Spain, a very low level of inheritance tax may be achieved. Portugal allows tax deferral and lowers the tax base after five years. In the UK, tax deferral is achievable, as it is in Italy.
In Italy, it is clear that the underlying assets are non-distrainable, but the inheritance tax position is under review. Only ‘demographic risk’ is tax exempt, and this could be the trend for other jurisdictions too. It is important to make an assessment of the tax position of private insurance policies to fine-tune the planning and, if necessary, enter a Voluntary Disclosure in the policyholder’s jurisdictions.
Companies pay 8% Federal tax. Cantonal tax rates vary. There is also a capital tax. Holding companies can benefit from participation relief and pay no cantonal tax. Commodity trading companies have a low rate of tax on foreign profits. Under pressure from the EU, Switzerland in 2012 launched the Corporate Tax Reform III, which is expected to come into force in 2019. All companies will be subject to ordinary taxation.
There are transitional provisions, which can result in a five-year tax holiday, a notional interest deduction, a cantonal patent box (requiring complex calculations) and an R&D ‘super deduction’ of 150% – with a maximum of 80% tax relief in any year. The Cantons are afraid that they may cease to be competitive and are presently reducing their tax rates. Cantonal capital tax adjustments are being considered.
Offshore structures are regarded with suspicion. Tax authorities are going to receive huge amounts of information. They are actively investigating structures holding concealed assets. The CRS has now come into effect and the results are being seen. Historically, HMRC had very limited power to investigate foreign bank accounts. This is changing.
Once HMRC suspects tax evasion, it can issue ‘letters of request’ to foreign governments and invoke Conventions of Mutual Assistance. Extensive information on bank accounts can be obtained. An allegation of money laundering can often persuade reluctant tax authorities to cooperate. Information ceases to be privileged when it comes into the hands of a third party.
A foreign tax authority can be asked to put a suspect under surveillance. Intercepted material is not admissible in the UK, but this is not so everywhere. A request may be made for premises to be raided, for suspects to be interviewed, for their number plates to be tracked, or for them to be extradited.
The internationally connected client presents various problems. Lifetime estate planning is important and needs to fit with the relevant legal systems: the heir, deceased or assets may have different locations and may be governed by common law, civil law or Sharia or other religious law. In the common law, domicile governs personal property and situs real property, whereas civil law looks at the nationality of the deceased. Forced heirship is a feature of civil law and Sharia law regimes – Sharia law invalidating non-permitted dispositions, but civil law conferring on aggrieved beneficiaries a right to compensation from the recipients of a non-permitted disposition – Louisiana and California having rules of their own. There are community of property regimes in civil law jurisdictions; in the US; it is to be found in California. The advisor needs to consider whether a single-situs or multijurisdictional will is appropriate. Brussels IV attempts to simplify the treatment of estate of habitual residents. Consideration should be given to relocating assets, to inserting an intermediate entity and to ensuring there is strong evidence of domicile. There are drafting considerations in relation to scope, revocation, definitions, and choice of law.
Investors who are not US citizens or Green Card holders have significant exposure to estate tax on shares and real estate in the US. There is no 100% perfect investment plan. Property may be owned directly or through a (tax-transparent) LLC. This is good for tax on income and capital gains but the property remains fully liable to estate tax – a liability which may be reduced by debt. Owning property through an offshore company involves no exposure to estate tax, but a higher level of tax on income and capital gains. The partnership structure, though expensive, improves the position as regards tax on rental income and sale profits – using a two-tier partnership reduces the estate tax risk. The trust structure has the optimal results, but requires greater care in maintenance. The insurance wrapper offers protection from all these taxes.
The new rules come into effect on 5th April 2017. They will affect individuals not domiciled in the UK but resident there for 15 years. The onus is on the Revenue to show that an individual has acquired a UK domicile. Following the Autumn Statement on 23rd November, draft legislation will go before Parliament. This is not a tax raising exercise – rather a response to political pressure. Non-domiciled taxpayers will be deemed domiciled from the 16th year. It will require six years of non-residence to lose a deemed domicile. There will be an element of re-basing.
There are some things which might be done before 5th April 2017 – for example, an excluded property trust; a unit trust or private investment company; creation of promissory notes; emigration – following new statutory residence rules; crystallising income and gains; re-basing UK-sited assets – which can have side effects; an s162 reconstruction; de-enveloping; taking advantage of business investment relief.
The EU-UK relationship has existed since 1973. The vote to leave was unexpected. Immigration was the key issue, but exaggerated claims about saving money were influential. The vote cannot be undone. The Prime Minister says, “Brexit means Brexit.” The Supreme Court will sit on 7th December to consider the extent of the Prime Minister’s powers. The PM may be forced into a general election, which could be advantageous to her. EU leaders do not want to encourage people in other Member States to oppose free migration. The UK government is anxious to protect the business of the City. This business will not migrate elsewhere.
Passporting is the main issue. Equivalence is a possible option, but would still require a UK contribution to the EU budget, and would take considerable time to agree. There are, however, opportunities for new agreements, though the UK has a severe shortage of negotiators. The UK could attract with less regulation – for example, in relation to beneficial ownership disclosure.