St. Petersburg meeting 2004

Meeting Summary
  • CYPRUS: THE NEW REGIMEPeter Economides
    • A major tax reform, EU membership and the 2003 referendum have made important changes. The plan put to the referendum provided for a federal state with two constituent states, and for property and settlement rights. However, the plan provided for Turkey to intervene and to maintain an army in Cyprus. Most of the Turkish Cypriots approved; most of the Greek Cypriots did not. There is hope that a settlement will be reached by the end of the year. Under the new tax regime, the “remittance basis” is abolished. The regime is EU– and OECD–compliant. Resident companies pay 10% on worldwide income, and there are no longer IBC’s or other privileged companies; dividend income and profits from permanent establishments abroad are however exempt. There is no exchange control, but non-EU investors need Central Bank approval to form a company. There is no tax on capital gains arising abroad. These features make possible the use of a Cyprus Holding Company – incoming dividends benefiting from the EU directive or a tax treaty, and the company enjoying the exemption from tax on foreign dividends and distributing dividends to non-resident shareholders free of withholding tax. The Cyprus Holding Company works well for investment in the United Kingdom, and also for Russia (though Russia withholds tax at 5% on outgoing dividends). Foreign investors are effectively exempt from the Cyprus Defence Contribution. Cyprus is used as a location for a UK “non-resident” company. A company incorporated in Cyprus, with non-resident shareholders and directors may be recognised as non-resident; such a company is not taxed in Cyprus. Cyprus trusts are unaffected by the new regime, but a draft EU directive is expected to regulate trustees. Shipping companies and their management companies are to be free of tax until 2020.

    • Russia has never been like other countries, and today the environment is very different from that of western countries, and nothing is what it seems to be. The Russian Federation has a population of 144 million. Some regions have extensive powers; these have been reined back under Putin. The rise of the oligarchs is deeply resented. But they appear to be tolerated, so long as they keep out of politics, though this is not entirely clear. Nevertheless, the Government is not “anti-business.” The biggest obstacle to doing business in Russia is corruption; this varies from region to region, but is pervasive. The Soviet economy effectively collapsed in the early ’90’s. The new economy generated prosperity, but 1998 saw a crisis: Government defaulted and the value of the rouble plummeted. There has been considerable improvement since, and it continues, helped by the oil price, real wage decline and other factors. There are still problems: small and medium enterprises need to be encouraged; poverty needs to be reduced. But the economy has great potential. For the foreign investor, a Russian partner is virtually essential. But reliable partners are hard to find, and foreigners have had their fingers burned. There is money to be made from investment in Russia: the country is a market waiting for investment. Bureaucracy and corruption present problems. But these, like other problems, can be surmounted.

  • HOLDING ENTITIES – Luxembourg & United KingdomFrancis Hoogewerf and Matthew Cain
    • Holding Entities: Luxembourg – Francis Hoogewerf Luxembourg is the principal centre after New York for international investment funds. Luxembourg acts on the principle that income which has been taxed should not be taxed again. As a founder member of the EU, its tax regime has always been EU-compliant. The 1990 SOPARFI is a fully taxable company. The 1929 Holding will lose its tax-free status if more than 5% of its dividends come from low-tax territories. It can still have bearer shares. There is no withholding tax on outgoing dividends to other EU countries. Luxembourg has a wide treaty network, including treaties with Malta and Mauritius. On liquidation, reserves may be distributed free of tax. Outgoing royalties are to become tax-free. The treaty with France offers advantages for holding French property and (subject to some problems) French shares. Partial liquidation offers a route for tax-free distributions. New features since 12 May 2004 include the SICAR, a risk capital vehicle in the form of a company or limited partnership. Luxembourg tax authorities will provide rulings. Holding Entities: United Kingdom – Matthew Cain Six points call for special mention: (1) A UK trust can be income tax and capital gains tax free to a foreign resident and domiciled settlor. (2) A UK company can be “exported” to a treaty country – e.g. Barbados, Cyprus, Mauritius, Switzerland. (3) A holding company of a trading group may qualify for the “substantial shareholder” exemption. (4) The Limited Liability Partnership is a body corporate, but fiscally transparent. If all the members are non-resident and it carries on business abroad, it will operate as a zero-tax vehicle. The LLP (unlike other partnerships) is transparent for inheritance tax. (5) Overseas Life Assurance Business of a UK insurance company is not taxed, but permitted assets are limited. (6) The Qualifying Investor Fund is taxed like other unit trusts.

    • Tax competition is alive and well. A business is liable to tax in the host country: the amount may be reduced by income-stripping, but the host country will resist this. The shareholder may also be liable to tax in the host country on his disposal of his interest in the business. These liabilities may be reduced by tax treaties. The Parent/Subsidiary Directive on dividends can be interesting; more interesting generally is the Directive on interest and royalty payments, in relation to the new regimes in Cyprus and Malta; the Directives have no “limitation of benefits”, and since they do not “look through” a company, the residence of the shareholders is immaterial. The EU can also function as a channel for income arising outside the EU to reach a low-tax country in a tax-efficient way. Maltese companies are subject to a 35% tax, but non-resident shareholders are entitled to a refund. With trading companies, the result is an effective 4.5% tax in Malta. Five-year rulings are available. With a holding company, an effective zero tax can be achieved, and a similar benefit can be achieved with a finance company. An Estonian company pays no tax on its income; distributions (not including interest) are taxable. This suits a company with a treasury function. A gain on the sale of shares is tax-free. Some EU countries – notably France – may try to stop such manoeuvres. On the other hand, there seem to be opportunities for the use of companies incorporated in an offshore jurisdiction but resident in Malta, Cyprus or Estonia. Austria has a new holding company regime. Norway and Sweden offer attractive regimes. The Savings Tax Directive has been extended to the Channel Islands and the Isle of Man: will other directives follow? The general movement in Europe is towards tax competition. (Denmark is the exception). New immigrants are to be attracted to Spain by a five-year holiday. In the European Union there are many new opportunities – legitimate and transparent.

    • Historically, Russian investment has been domestic. But since 1989, many regions have moved from areas of domestic investment to areas of outward investment.Foreign aid may be regarded as outward investment e.g. the Soviet aid to Bangladesh. But conventional outward investment began with the demise of the Soviet Union. The investment may be short-term e.g. investment in nightclubs and breweries abroad, where the main benefit has been the acquisition of know-how. Roman Abramovich’s investment in shares in the UK Chelsea Football Club, is of course well known; he has since made large investments in players.Russia has tax treaties with 42 countries, 7 of which are former Soviet Union territories. They broadly follow the model of the OECD (of which Russia is not a member). The UN model is more favourable to less-developed countries. The Russian treaties do not have anti-treaty-shopping provisions. A real-life example may be taken from the shipping industry. Australia levies a freight tax; treaty partners may be exempt, but Australia has no tax treaty with Cyprus. In this example, the Cyprus subsidiary of a Russian parent leased its ship to its parent, which leased it on a time charter to a Cyprus company, which sub-leased it to a Dutch subsidiary. The Australia/Netherlands treaty provided exemption from the Australian freight tax, and the Dutch freight tax was very low. An Antilles company was interposed between the Dutch company and its Cyprus parent, to reduce the tax charge on outward dividends; now that Cyprus has joined the EU, this may not be needed. A new Russian enactment requires residents to give information about certain foreign income sources.

  • SWISS BANKINGAriel Goekmen
    • Swiss banking secrecy goes back to the middle ages but was codified formally in the time of the Nazis taking power in Germany: the law was passed in 1934. Art 47 imposes on the individual who breaches bank secrecy the punishment of fine or imprisonment. Secrecy has never been absolute and is certainly not a shelter for known criminals: information may be disclosed to the Swiss authorities, who may in turn disclose it to foreign investigators. SwitzerlandÕs government is based on direct democracy. It is assumed that private assets belong to individuals, not to the state as such: this assumption, together with the notion of in dubio pro reo is the basis on which Switzerland does not punish tax evasion by a prison sentence, though a fine (and back taxes) have to be paid. The financial sector is very important, with 5% of the work force generating 14% of the GDP. Bank information may be disclosed in accordance with a Swiss court order confirming the foreign court order – e.g. in relation to a foreign divorce, or if the relevant international agreement so requires – e.g. in the Sani Abacha case, where the Swiss Attorney General approved a request for legal assistance by Nigeria. In the Montesino case, the bank itself approached the Swiss Money Laundering Reporting Office, which obtained a ruling by a Swiss judge, who froze the accounts of the suspect at once. Switzerland has been negotiating a package of treaties with the EU, including a Swiss form of Savings Directive. For the last 50 years Switzerland has been imposing a withholding tax of 35% on interest and dividends payable to residents and non-residents, whether natural persons or legal entities. Agreement with the EU was reached on 19 May 2004: the bank client may choose to have his name disclosed and not suffer any tax; if he does not do so, 15% is to be withheld in the first three years on interest payable to EU residents – going up to 20% after another three years and 35% thereafter. This agreement can be subject to a referendum. Swiss tax will not apply to dividends, life assurance, derivatives, certain mutual funds, payments to corporate bodies, including foundations and (where trustees are corporate bodies) trusts. The tax revenue is passed on to the EU. Swiss banks have strict due diligence rules, with criminal sanctions. There are money-laundering reporting obligations, even as regards intending clients, where money laundering is suspected. Higher risk situations – i.e. politically exposed persons, risk countries, risk citizenship, risk industries (e.g. defence), large assets, large turnover etc. – require more thorough investigation. As far as money laundering is concerned, the numbered account is not essentially different from a standard account. Dormant accounts impose on the bank an obligation to ascertain and find the heirs or other owners. A power of attorney does not survive the death of the donor. Switzerland has not yet signed the Hague Treaty on the recognition of trusts, but recognises Swiss and other foundations. However, trust accounts will be opened in the name of the trustee(s), and can be operated in accordance with the trust instrument. Swiss life assurance can offer many advantages and in certain cases be used as an alternative to a trust. Echelon is an information-gathering system which can penetrate any form of confidentiality, by looking into messages world-wide, whether by e-mail, telephone, fax or telex. The EU has confirmed its existence in 2001 and advises the use of encryption.

    • Derivatives are generally seen as risky, but some are commonly used. A derivative creates synthetic ownership. The technology can be intimidating, but essentially a derivative is simply a contract – a financial future (the “contract for differences”), an option, a swap or stock loan or REPO. Generally, entering into the contract is not a taxable event; receipt of proceeds is. Generally the proceeds are treated as capital for tax purposes, which may turn what would otherwise be an income gain into a capital one, subject to any anti-avoidance provisions (notably found in the US). The derivative is opaque: it can change the character, the location and the timing of a receipt. Derivatives will be affected by the new UK reporting rules. Examples show the use of derivatives to diversify investment, limit risk, acquire economic participation, avoid foreign withholding tax or create a ÒmanufacturedÓ dividend (no longer tax-effective in the UK). Derivatives are here to stay. They can offer more “bespoke” structures than insurance. Cost and risk are important factors.

    • The service provider who acts as a kind of offshore butler to carry into effect the client’s wishes has pretty well come to the end of the road. For the UK resident, the future lies with the offshore company he can do business with – an “Offshore Business Partner”. An Offshore Business Partner can do things for the UK taxpayer that he cannot do himself. There are examples in the field of capital gains tax, income tax and inheritance tax. One should never underestimate the ingenuity – and the enthusiasm – of judges for finding that avoidance schemes do not work: the tax planner needs to move away from “schemes” and towards commercial transactions which have a fiscally advantageous result. One difficulty in discussing such transactions is that any wide dissemination of their details can act as an invitation to the tax authorities to promote (often very simple) changes in the law.

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