Vienna 2007 meeting

The social-liberal government was re-elected in 2006. The revelation that the Prime Minister had concealed his communist past triggered public unrest. There are signs that the crisis is passing, though the economy has suffered. Hungary has developed as a centre for investment in the region. In 1994 it introduced a classical offshore regime, but this came to an end in 2005. The country has to maintain a balance between offering international tax planning facilities and satisfying the demands of the EU and the OECD. The “New Equilibrium” has required more taxes, including a “solidarity tax” and a local business tax. Hungary still offers advantages as a site for holding companies – now including a participation privilege for capital gains; it has a favourable regime for royalties and opportunities for group financing – at least for highly-capitalised groups. It also has a very extensive tax treaty network – notably the treaty with Malaysia. Since 2004, there have been tax incentives for production of motion pictures.

Real estate investment may be made through a Fonds Gemene Rekening (“FGR”), a fund for joint account. The FGR is treated as a corporation if open but transparent if closed. Other possible entities include the NV (public company) and the BV (close company with limited liability). The BV regulations are being liberalised. A company pays tax at 25.5% on profits over €60,000; there is limited amortisation and a debt/equity ratio limited to 3. Shareholders with “substantial interest” (5%) pay tax at 25%, those with less have “box 3 income”. The participation privilege is available to corporate investors with a 5% interest (subject to conditions): it exempts income and capital gains (the conditions have been liberalised), but certain investments are excluded – “Fiscal Investment Institutions”, low-tax passive investment vehicles (but 10% suffices and all taxes – federal, regional and cantonal – count). Pure real estate companies qualify. There are some special cases to consider – Malta, Gibraltar, Belgian Finance Companies, Cyprus. Foreign REITs may not qualify.

It appears that income to which a partner may in future become but is not yet entitled cannot be regarded as income. This opens the door to tax deferral – perhaps beyond the applicable period of limitation. Moreover, the expectation – the “Discretionary Asset” – may have no ascertainable value for inheritance tax, estate tax and the like, and also for exit taxes, wealth taxes and gift taxes, and the concept may be useful also in providing “asset protection”. A liability owed to a group of discretionary beneficiaries can be of an ascertainable amount – and therefore deductible in computing the profits of the debtor, even though there is no corresponding asset of any ascertainable value. This phenomenon may have many uses, both domestically and in the context of tax treaties.

In England at least, divorce has become a greater threat to wealth than tax. This notably affects non-domiciled individuals who become resident in England. In a divorce, the Court has a wide discretion. Since the decision in White v. White, equality has become the benchmark of divorces of ‘long term’ marriages (over 13 years) involving ‘big money’; the Court has recently said that 33% should be the minimum. Resources include expectations, future earnings and trust funds. The Court may vary a “nuptial” settlement – even if governed by foreign law; it looks at the reality, not the Chancery niceties, and resources may be taken to include what a party may expect to get from trustees if they are asked. If the English Court orders the variation of a foreign settlement, an application must be made to the foreign court to enforce it. It has become necessary for advisors to consider these aspects of wealth protection. With this in mind, the terms of any new settlement need to be considered. If the true purpose of the trust is “dynastic”, this needs to be documented. The husband and wife may be excluded from the class of beneficiaries. The letter of wishes may include a direction to resist spouses’ claims. Trustees often do not appreciate that their files may be disclosable in matrimonial proceedings. Some jurisdictions have provisions excluding foreign law, but these may be overridden by the doctrine of comity. An underlying company can leave the trustee with a lack of liquidity. Robust trustees are a great asset in this context. ‘Holistic planning” requires a total view of the husband’s overall asset position. Pre-nuptial agreements are not enforceable, but are nevertheless persuasive and may in future be enforceable, at any rate so long as the agreement is reasonable. A post-nuptial agreement, a ‘living-together’ agreement, a multi-generational family protocol, and life assurance wrappers may also be considered. There may be possibilities of jurisdictional shopping. Regular reviews are required.

Almost all life insurance has an investment element. In the United Kingdom, no risk element is required (Fuji Finance Inc. v. Aetna Insurance Co. Ltd and another). The non-domiciled are not outside the tax regime for single premium policies. The management and solvency of the insurance company are of prime importance to the policyholder. The UK doctrine of “insurable interest” extends to Ireland, but not to the Isle of Man. In Luxembourg, the consent of the life insured is required. The UK tax regime distinguishes between “qualifying” and “non-qualifying” policies and strongly penalises the holder of a “personal portfolio bond”. The “offshore trust/company bond” structure was popular in the United Kingdom until the 2006 Finance Act. The UK taxpayer may own redeemable preference shares in a non-resident company, which holds the policy, and can redeem the preference shares to draw down each year 5% of the total premium paid, and may ultimately sell the ordinary shares to a non-resident purchaser. “Management and control” and “deemed director” problems were dealt with by using a trust to hold the shares. Nowadays a limited partnership may be used instead. The personal portfolio bond is not penalised where the policyholder can only nominate an investment advisor and specify an investment policy. The penal provisions have limited effect if the premium is low. The UK LLP structure can afford capital gains tax deferral. Premium financing is popular in the United States and is beginning to find traction in the United Kingdom. A private life insurance company seems theoretically possible.

The “Swiss Trust” is something of a misnomer. Switzerland is a civil law country. But in 12 days’ time, on 1st July 2007, the ratification of the Hague Convention will take effect. Switzerland has been doing trust business for many years. There was always some uncertainty as to how the court would treat a trust and there was no way of isolating trust assets from the insolvency of the trustee (unless the trustee was a bank). Unlike Italy, Switzerland decided to amend its law in anticipation of the ratification – to recognise trusts of various kinds, to give effect to choice of law, to provide for property registration, to recognise orders of a foreign court and the ring-fencing of trust assets. Article 5 and Article 13 of the Trust Convention is disapplied. The new regime may be expected to increase business for the Swiss sole trustee. The money-laundering regulations and the provisions for bank secrecy and exchange of information will apply. The tax position of a trust has to be considered at a Cantonal and Federal level. An ‘international trust’ – with a non-resident settlor and non-resident beneficiaries – will be free of tax, except for the trustee fee. Other considerations affect trusts with a Swiss settlor or Swiss beneficiaries. These particularly affect the new resident taking advantage of the forfait (which does not apply to inheritance tax). An irrevocable settlement is treated as a separate entity, but not a revocable settlement or one having the settlor as a beneficiary. If the settlor is resident when the settlement is made, there will be gift tax issues (which are different in the French-speaking and German-speaking Cantons). The irrevocable trust is not taxable, but beneficiaries are subject to tax on distributions, and a usufructory interest will be taken into account for wealth tax. The Swiss tax authorities say that a trust is not a resident of Switzerland for tax purposes and Switzerland will not recognise the trustee as the “beneficial owner” of dividends, interest and royalties. There may be an opening for treaty benefit as regards capital gains.

Austria has over 70 tax treaties, of which six merit special attention. Austria has no general anti-avoidance rule, but may be influenced by section 50d(3) of the German 2007 Income Tax Act (Jahressteuergesetz 2007). Austria’s treaties do not have a limitation on benefits article, but conduit arrangements and the like will not be tolerated if they attempt to save tax for Austrian residents. Austria has no thin capitalisation rules, but applies the usual rules on transfer pricing and has a kind of CFC regime, in that dividends from a low-tax passive income company should not have the benefit of the participation principle (though they may if the ultimate shareholders are non-resident). There is no tax on the liquidation of an Austrian company or on its redomiciliation. There are useful treaties with Barbados, Belize, Cyprus and Ireland. The route via Kuwait does not seem to be viable, nor those via Liechtenstein or Malaysia. The treaty with Malta appears useful. Holdings in Russia can be via an Austrian company with a Cyprus parent. San Marino and Switzerland offer no benefit but Singapore may. The treaty with the UAE is much the most promising, especially now that Revenue Canada has issued a favourable ruling.

The REIT is a “transparent” entity, which avoids the two levels of tax which investment through a company generally involves. It holds property and receives rents; it can dispose of property without capital gains and pays no tax on rent received. The dividend is treated as rent and suffers withholding tax: the corporate investor pays 22% (soon 20%) and the individual 40%. The REIT can borrow; this reduces the rent to be distributed. For the foreign investor, capital gains tax is not an issue – whether or not investing through a REIT. A REIT has to satisfy certain conditions. It must have at least three properties, no one of which must be worth more than 40% of the total. It is allowed to have up to 25% of non-rental income, which is taxed in the normal way. The company becoming a REIT pays a 2% “entry charge” and gets a tax-free uplift on the base cost of its property. The regime is advantageous for UK investors, but the offshore investor is better off using other structures. The liquidity of investment in a REIT is of course advantageous to both kinds of investor, and balanced by its volatility. The offshore investor may alternatively use an offshore company to invest in property with gearing. (Gearing is also advantageous when investing through a REIT.) The interest should comply with the UK Revenue’s guidelines on foreign-source interest. Sharia-type borrowing lends itself to having a foreign source for “interest”. The bold may use an Isle of Man partnership to trade in UK land, even where the investors are UK-resident.