The legislation has not been finalised. A Bill is expected by next March. But a number of provisions are already in force, and future legislation is likely to be retroactive. Non-US citizens have few problems. US citizens had few problems until 1966 if they expatriated. The Foreign Investor Tax Act introduced the 10-year rule and extended the rules to green card holders. But few people are affected, and the IRS appears to ignore the provisions. There are now two sets of proposals, both retroactive. The Senate proposes the loss of nationality or surrender of green card will be a taxable event. The rules relating to trusts will in effect prevent some beneficiaries from having enough money to pay the tax. The House Bill keeps the old 10-year rule and introduces a 30-day residence rule for expatriates. A number of US companies have expatriated in recent years: these are the outbound inversions. A domestic corporation enjoys no dividend received deduction for foreign dividends and relief for foreign taxes are complex and inefficient. A new company may be incorporated in e.g. Bermuda: this offers almost indefinite deferral on foreign income. US companies may move into this position by way of merger typically triangular. Opportunities then arise for earnings-stripping. Insurance businesses are going to Bermuda. Bills in similar terms are proposed by the Senate and the House, as part of a widespread change in US tax rules. They provide that non-US entities may be treated as domestic (though not so as to have any tax treaty benefit) after pure inversion. More severe provisions will be applicable to limited inversions. These rules are to apply only to publicly-traded companies, but where they apply the consequences will be draconian.
The US tax regime is more accessible to tax planning than is generally supposed. It is, however, extremely complicated, and any tax plan requires a careful consideration of the relevant statutory provisions, regulations, cases and administrative practice. US persons are, moreover, subject to a number of provisions designed to combat tax deferral by the use of foreign entities e.g. those relating to CFCs, foreign personal holding companies etc. The LOB provision in a treaty is the last test of eligibility for treaty benefits a test to be passed by an entity which otherwise satisfies all the other requirements. All recent US treaties have an LOB article. The anti-conduit regulations have effect in addition to the treaty article. The landmark case is Aiken Industries, in which the interposition of a treaty-benefitting entity was held ineffective. In Northern Indiana Public Service Company, the Antilles intermediary was held to be entitled to treaty benefit. In Del Commercial Properties Inc., a circular transaction was held ineffective: the parties took shortcuts, but the tax plan essentially failed because the structure had no business purpose. This was a crucial decision, and put the pressure on the IRS to renegotiate old treaties. The UK treaty of 1945 is the earliest example of an LOB article. The Luxembourg treaty of 1962 denied benefit to a Luxembourg holding company. There were no further LOB articles in the 1960s. A recognisably modern LOB article appeared in the 1981 treaty with Jamaica. Publicly held companies come largely outside the LOB provision there is no base-erosion or ownership test. Use of a Dutch licensing company can circumvent the LOB article and probably the anti-conduit provisions.
A UK vehicle may be used simply for its cosmetic advantage. Sometimes a UK company is inserted between a high-tax payor and a zero-tax recipient, or non-residents form an English or Scottish limited partnership. A UK trust can have treaty-shopping as well as cosmetic advantages. A trust with a UK trustee but formed by a non-resident is exempt from capital gains tax, but may nevertheless take advantage of the capital gains tax article in a tax treaty. The trust may be transparent for income tax; in that case there is no treaty benefit, but the non-resident beneficiary suffers no UK tax on the non-UK trust income. Where a settlement made by a non-resident has two or more trustees and one or more is non-resident, the UK-resident trustee is deemed non-resident for domestic purposes but is still resident for treaty purposes. A resident but non-domiciled trustee is taxed on the remittance basis.A UK company may function as an agent for an offshore company or as a stepping-stone for royalties or dividends; it may be a non-resident (if resident in a treaty country e.g. Barbados) or enjoy tax freedom and treaty benefits as an insurance company.
Non-resident aliens (NRAs) want to make provision for family members resident sometimes temporarily in the United States. Asset protection is an important consideration. US residence and consequent liability to income tax and transfer taxes can stem from citizenship, holding a Green Card or substantial presence. For transfer taxes (estate, gift and generation-skipping taxes) residence means domicile. The NRA engaged in trade or business within the United States is taxed on effectively connected income. All NRAs are taxed on income involving US real property and suffer 30% withholding tax on US-source income. Gift tax and estate tax apply to NRAs only to some extent: tax-planning techniques include inter vivos gifts of non-US assets. US bank accounts do not have a US situs. Transfer to a spouse is generally tax-exempt, but there are limitations if the spouse is not a US citizen though these can be circumvented. A US person must report receipt of a gift from a foreign person in excess of $100,000. An offshore holding company offers advantages but can generate problems. The goal is to avoid US transfer taxes at donor level, to avoid US income tax and transfer tax and obtain asset protection for the donee. A US trust can be used e.g. a dynasty trust: it involves income tax, for the trust or for the beneficiaries; but it can be structured to avoid transfer taxes. An offshore trust can be used e.g. in a jurisdiction with favourable asset protection rules; but distributions trigger heavy tax liabilities, and distributions include loans and other benefits. A foreign life insurance policy, together with an irrevocable trust offers a solution to these problems. An alternative solution can be offered by a foreign dynastic charity, which enable family members to draw fees and determine investment opportunities.
Mexicos federal taxes are income, asset, value added, excise, payroll and estate taxes and customs duty. Reform is currently under way. An ultimate income tax rate of 30% is expected. Much tax planning stems from the rule that a taxpayer takes a deduction for purchases of stock in trade. The income tax paid by a corporation franks dividends paid out of post-tax profits; conversely, dividends not franked are taxed, but the company takes a credit for such tax. The asset tax of 1.8% is in effect an alternative to the income tax. Newly incorporated companies have a four year tax holiday. The VAT rate is 15% (10% in the border zone). Exemptions are being reduced; a dual rate is being discussed. Ten percent of taxable income (without inflation adjustment) is to be shared with employees. There are no State taxes. Non-residents are taxable on PE profits and other income with its source in Mexico. There are various investment and trading vehicles, some transparent for tax, some not. The asset tax makes thin capitalisation rules unnecessary. Only inflation-adjusted interest can be deducted. There are various rates of withholding tax on gross interest from 4.9% to 34%; under the tax treaties there are reduced rates. The US treaty has anti-treaty-shopping provisions. There are rules governing the purchase and disposal of shares and the tax position of the target company. Different rules apply to purchase of the target companys assets. The sale of publicly-traded shares is generally tax-exempt. Sale of private shares are taxed at 25% on gross proceeds (higher if vendor is in a low-tax jurisdiction) or 34% on the net gain (if vendor elects, and, if non-resident, then resident in a treaty country). Treaties with Switzerland, France and Canada exempt sales from tax; there is no treaty relief where the company is a real-estate company (except in the Belgian treaty). Other (similar) rules apply to sales of real estate. There are 26 treaties in force. The Maquiladoras are companies which process material in bond for re-export to other countries. They have special rules. Mexico also has anti-tax-haven rules.
A private trust company is formed for the purpose of acting as trustee of one trust or a group of trusts. In the United Kingdom, a trust corporation is needed to give a valid receipt for land, but there are otherwise no limitations. The private trust company can offer a greater degree of confidentiality, though the amount of information to be given to regulatory authorities varies from jurisdiction to jurisdiction. Such a company can offer a greater degree of control, and such control does not give rise to the tax and other problems associated with retention of powers in the hands of the settlor. Such control can be used to empower the next generation. The private trust company may be less exposed to claims against the trust fund. It can hold unconventional assets e.g. a yacht. Directors stand in a fiduciary position only in relation to the company, not to the beneficiaries. There can be claims against a director in tort, but these only arise if the individual acts in a trustee-like fashion. A dishonest assistance in a breach of trust can give rise to a claim of accessory liability. A right of action against a director may perhaps be trust property. In Jersey and some other offshore jurisdictions, directors have a statutory obligation to meet liabilities of the company. But in all jurisdictions, it is wise to extend exoneration to directors. A trust company effectively controlled by the settlor may give rise to argument that the company is resident where the settlor resides, or that the trust is a sham. The shares of the company may be held by a purpose trust; this requires a trustee and an enforcer and may have a protector. Merely holding shares in a trust company may not in itself be a purpose. A charitable trust may be less desirable: it confers powers on the local Attorney General. The shares may be held by a guarantee company or by a foundation. The shares can be held by one or more settlors or beneficiaries, but there may be tax consequences and provision for succession will be required. Any one of many jurisdictions can be used. Confidentiality is an important consideration. Is a licence needed or desirable? Are local directors needed? Are there capital requirements? What are the costs? It has to be remembered that regulation and audit add to the costs.
The United States is engaged in an unprecedented effort to reach assets abroad. There are many relevant enactments. In 1995, the Second Circuit Court held that an order of an English Court afforded the US a right of jurisdiction. This was followed in 1996 by a more extensive judgement. These in rem (not in personam) forfeiture remedies are based on very slight connection with the United States and may be sought simply for the purpose of enforcing the judgement abroad. There are statutory provisions for civil as well as criminal forfeiture: there are no juries and no right to choose legal representative. (The retainer monies are not exempt from forfeiture.) The procedural provisions in the anti-drug law are of general application. The racketeer statute is also of wide application. The Civil Asset Forfeiture Reform Act of 2000 limits the Governments powers, but only slightly. Waiver of the Fifth Amendment privilege against self-incrimination when parallel criminal and civil forfeiture proceedings are pending is often an issue. Money laundering is widely defined, including the intent to avoid taxes. Banks, brokers and dealers must have a Know Your Customer programme in place. The PATRIOT Act goes well beyond terrorist activity, and provides for forfeiture for foreign offences. Section 319 provides for forfeiture of US interbank accounts even where the money in that account is unconnected with the assets of the offender. The US courts have routinely upheld these powers against constitutional attack. There are numerous pieces of legislation authorising and encouraging assumption of jurisdiction. Bilateral assistance treaties and international agreements add further powers.
A swap is an exchange of cash-flows. The commonest is an interest-rate swap: the borrowers swap obligations; the lenders are not involved. A currency swap is similar. The United States does not tax the NRA on income from a notional principal contract (NPCI). A loan can be converted into a put option, which converts interest into NPCI. An equity holding can be converted into a call option (thereby converting a dividend into notional principal contract income). A collar can postpone a securities gain in the hands of a foreign investor. The variable pre-paid forward contract has a similar effect. The total return swap can convert dividends into NPCI. It can also convert a real property profit into NPCI a transaction with various degrees of complexity circumventing the FIRPTA provisions. Synthetic Equity-raising postpones the foreign investors profit. Principal Protected Notes are CDs which convert the gain from a protected and leveraged investment into NPCI. A Hedge Fund Swap with leverage offers a similar conversion. Is the intermediate entity a conduit? Not if the intermediary prices both sides of the swap at market price. Such transactions are likely to become more popular. The intermediary is a dealer and economically and tax-wise indifferent to the payments.