Liechtenstein has some 85000 companies, 50,000 foundations and a population of 30,000. A small picturesque country, it has a number of social problems. The theft of the DVD with information was very damaging to the banking sector, but profitable to the thief Mr Kieber. Customers who have suffered damage are taking proceedings against the bank. The sums involved are very large. The information was bought by the German secret service, who passed it on to other countries. It may be that there were other moles within the bank trust company: one was entrapped in Switzerland. There is a long history of spies in Swiss banks, and of officers of banks encouraging tax evasion. Things are now changing. Various schemes are being marketed to make money compliant. Information even about the Princely Foundation found its way into the hands of the IRS. Liechtenstein has now an information exchange agreement with the US and the Prime Minister has promised to clear up the past. Other TIEAs are in the pipeline, a new tax law is under discussion, and a new foundation law has been enacted. The outlook for the future is positive.
Outside the US, international agreements have priority over domestic legislation. In the UK, however, domestic legislation limits the right of UK residents to benefit from tax treaties. Limitation on benefit articles are now part of all US treaties. A treaty is to be interpreted in good faith: a tax treaty is expressed to be for the purpose of preventing the avoidance of double taxation and fiscal evasion. This may offer the courts the opportunity to deny benefits to treaty shopping. The US Stop Tax Haven Abuse Act strengthens the substance doctrine. The UK CFC rules exempt activities test involves substance. The EU Parent/Subsidiary Directive cannot be used for the purposes of abuse. The beneficial ownership test requires conduit companies to have a proper degree of substance. Revenue authorities are often keen to show a Permanent Establishment (PE). It is thought that an independent server should not be a PE of an e-commerce business. This is the UK view even if the server is not independently owned. Dealing in real estate uses tax treaties to shelter the profit. In the UK the Double Guernsey structure has been used for years, but now HMRC claim that a development is itself a PE. Now that Guernsey companies pay no tax, does the treaty apply at all? A Hungarian company may be used instead allowing a 24 month presence without constituting a PE. The Luxembourg company which used to be used for French real estate now has a more limited use. The UAE treaty may be used in some circumstances. A Luxembourg company can now pay dividends without withholding to a taxable company with a treaty with Luxembourg e.g. in Hong Kong. The EU investor may invest in China via Belgium and Hong Kong: there is an effective 5%income tax charge and no tax on capital gains. Mauritius is the stepping stone to Uganda and other African countries. It has IPPAs with 12 African states. Mauritius and Cyprus may be used for investment in India. In Singapore, the authorities are not helpful, but it has possibilities. Trusts may still be useful for Italian taxpayers, if discretionary and irrevocable. The UK is introducing a form of participation exemption. The US has an exit tax. Section 409A targets deferred compensation schemes and has the concept of constructive receipt of income which is likely to become more important as a tool of Revenue Authorities. Private equity funds are an important area: Dutch co-operatives have been used, but seem unlikely to last.
To live in Switzerland, a residence permit is required. This is easy for EU and EFTA citizens. For others, there are several categories pensioners (over 55), those with fiscal and economic interests, those creating economic benefit, those with needed work skills. The permit also extends to family members or registered partners. The procedure takes about eight weeks. There are restrictions on purchase of residential real estate ownership but not for EU and EFTA nationals with residence. The lump-sum taxation regime is for resident foreign nationals with no gainful activity within Switzerland, having sufficient funds for their income and medical insurance. The tax is calculated on a level of living expenses and extras, taken as five times the rental value of his house or flat. The taxpayer can elect to pay ordinary tax on specific foreign income (for treaty relief). Ordinary taxation is levied at a federal, cantonal and municipal level. There is also a cantonal wealth tax and inheritance and gift taxes (applicable to residents and non-residents owning real estate on the value of the real estate, estimated in accordance with its ability to produce income). An individual becomes resident after 30 days if working, 90 days if not. The only capital gains tax is on real estate. Zürich has by popular vote abolished the lump sum regime as from 31st December 2010. The future of the lump sum regime is uncertain, but it seems that it will survive but be more expensive and limited to persons over 50 and not pursuing a gainful activity anywhere. Pre-immigration planning may include trusts: a non-resident settlor trust (discretionary and irrevocable) is not taxable to Swiss beneficiaries if no distribution is made, but query the position if the settlor retains rights and the possible impact on the lump sum calculation. Distribution of capital gains could be regarded as taxable as income. Regarding estate planning, the inheritance tax effect of the will needs consideration if the Anglo-Saxon type is used with trustees to hold the estate for beneficiaries. If the individual acquires Swiss nationality, forced heirship will apply. Switzerland generally follows the principle of applicable law of the jurisdiction of the last domicile of the deceased, as opposed to citizenship (as, for example, in Germany).
In the Members Pages of the ITPA website, there is the Portfolio of Laws, the more recent publications, the transcripts of talks given at past meetings, Working Papers of the previous meeting, the Yearbook, and summaries of ECJ judgements and international trust cases. The BNA Daily Tax Report and Tax Analysts Worldwide Tax Daily both appear five times a week and cover tax news applicable to a number of countries. The International Tax Journal is bi-monthly and appears on the CCH Tax Research Network. The BNA Tax Management Memorandum, June 8th issue, has an article on voluntary disclosure. The June 12th Tax Management International Journal has a piece on management and control. The IBFD website has information about several new TIEAs and tax treaty protocols entered into by Luxembourg. There are several free websites. The OECD has many tax pages. The Council of Europe has the text of the Convention on Mutual Administrative Assistance in Tax Matters and an explanatory report. There is an EU site in all the EU languages. The Chetcuti Cauchi website has all the Malta tax treaties. FITA’s Really Useful Sites has a link library including an International Taxation section, with papers on many onshore jurisdictions.Findlaw, World Press, Wikipedia are all useful sites. Hieros Gamos has links to many other sites. All My Faves has a huge number of links. eTaxBooks.com contains articles by the speaker.
Leasing can be a form of defensive tax planning. Although it is perceived as a commercial structure, it can also have relevance for individuals as part of their tax planning. Leasing separates ownership and use. The focus here is on movables and, to a lesser extent, intangibles. Leasing can be long-term or short-term. Finance leasing gives the lessee the use of the asset for its useful life. Hire purchase, operating leasing, a wet lease, monthly and daily rentals are all forms of leasing, moving from rights in specific assets on one side through to pure service with no interest in the asset used to provide the service on the other. The lessor may rely on financing. In international leasing, the lessor (or its assign) and lessee are in different jurisdictions. Aircraft, rolling stock or footballers for example – may be leased through international leasing structures. This has some of the advantages of equity, but with greater security or control. Until recently the rental flow could be securitised, and this market will probably return, modified, in the coming years. The lease of an aircraft can involve many jurisdictions and opens the door to tax planning. The finance is pre-tax; leasing can be a tax-efficient alternative to equity finance and can offer tax deductibility of payments and depreciation. International leasing can also offer the opportunity to use different countries in the structure, access to sources of finance searching for a tax advantage, an alternative to venture capital or a possible shelter for non-doms or other similar taxpayers. Aggressive tax planning is now being used by tax authorities to block legitimate tax avoidance structures. They see this as a scheme a transaction done for the sake of the tax consequence. A lease has substance; real assets and services are involved, and therefore represents a quite different way to deliver tax efficiencies to corporate and personal clients. There are arbitrage possibilities: rent deductibility, depreciation, interest deductibility, tax treatment, tax rates and VAT liability vary from jurisdiction to another. Using an offshore jurisdiction needs to be approached with some care there are no treaty benefits, there are management and control risks and the danger that wet leasing gives rise to an onshore profit. The credit risks should not be forgotten. Looking to the future, more information-sharing, more regulation, tax harmonisation need to be taken into account. International leasing is a legitimate form of finance: it can offer some excellent tax planning opportunities and needs to be defended.
The treasury manages risk and minimises the (post-tax) cost of funds which involves tax management. There are pitfalls: an inter-company borrowing may prove ineffective, if the borrower does not have enough profit or if withholding tax on outgoing interest is introduced. The treasurer needs to be able to move cash from the group company which has a surplus to one which has a need by way of debt, equity, repayment of share capital or capital contribution, by structured finance or more complicated routes. The waiver of a loan may give the borrower a tax charge without giving the lender tax relief. Converting the loan to equity before the write-off may help but not necessarily. A transaction may result in an unexpected and avoidable tax charge. The use of treasury centres has grown over the last few years. This is not driven by clever tax wheezes which are prone to go out of date before they are used. The simple solution is the best: if it gets closed down, an alternative can easily be created. There can be an advantage in moving the treasury centre elsewhere e.g. to Ireland or Switzerland.
Swiss taxes are stable. Rulings are available. There are federal, cantonal and communal taxes. The average corporate rate is 21%. In some Cantons it is lower down to 11.3%. There is a participation exemption, and there are no CFC rules. There are special regimes applying an exemption method for holding companies, as well as for domiciliary companies and mixed companies. A domiciliary company pays only federal tax (at 7.6%) on its foreign income; the EU is not happy about this regime, and discussions continue. Switzerland levies 35% withholding tax on outgoing dividends. Exemption may be available under a treaty or Article 15 of the Savings Tax Agreement; substance may be required: this does not so much focus on staff and office space, but may mean 30% of the finance of the holding company represented by equity. Gains made by a fund manager on his own investment in a hedge fund may rank as a tax free capital gain if it is not disproportionate. His income may be taxed at a rate of 10-30%. An offshore structure may be allowed for a certain proportion of the fund profits; this may be agreed with the tax authorities. Switzerland used to be very reluctant to allow the use of the exchange of information article in tax treaties. This changed in March of this year and information is now available upon specific and justified requests. The revised treaty with Denmark awaits a referendum; treaty negotiations are on foot with Japan and the US is pressing for banking information.
Switzerland is not the only country which has built a wealth management industry on the basis of helping clients to break the law of their home countries. The US, Luxembourg, Singapore and Dubai and others have done the same. Now, the world is becoming transparent: bank secrecy is becoming increasingly irrelevant. This is not a recent development: the QI regime began in 2000, forcing banks and countries (most recently Liechtenstein) to make agreements with the US government. US Estate Tax applies to non-residents assets in the US: the liability can be avoided but is risky to ignore. Amnesty programmes are encouraging the repatriation of money. The days of hiding money are over: banks have to accustom themselves to the new reality. The amount of undeclared money is larger than people think; governments everywhere are in need of money. Money-laundering rules now extend to all crimes in many jurisdictions. Owners of undeclared money are going to find it difficult to find anyone to deal with it. The wealth management industry needs to adjust itself to a post-undeclared world, and to educate the clients to accept it also. Most importantly, clients need to be educated about their real needs. Aligning the interests of clients with the interests of the wealth management industry is crucial. The services presently offered by Swiss banks have a number of shortcomings: charging high fees for hiding money is not a long-lasting business. There is a need to understand the relevant tax systems, the uses of trusts, the impact of exchange controls, rules on divorce settlements and more. A focus on excellence in relationship management and the soft issues is critical, but an increasingly lost art.