Part 7
THE SCHMIDT OFFSHORE REPORT
Vol 1, no 7 - Jun/Jul 2005
CONTENTS
NEWS
- Country-by-country News
- Money Laundering
- The FATF Blacklist
- Trust Symposium
- New BVI Companies Act
INTERNATIONAL TAX PLANNING TIPS
- Tax-Saving Opportunities in the UAE
- Benefits offered by Limited Liability Companies
FEATURES
- Setting up your own bank for $20,000
- Panama versus Liechtenstein
- Good News for Portuguese Property Owners
- Treaty shopping in Luxembourg
This issue of The Schmidt Offshore Report is divided into four sections. To begin with there is an extensive news round-up on a country-by-country basis. The next section offers a round-up of topical international tax-planning tips. Then there are a couple of short feature articles. Finally, our panel of experts have provided answers to questions submitted by readers.
Once again, I must apologise for the slightly erratic publishing record for The Schmidt Offshore Report. Let me assure you that we are now back on schedule.
This seems a good opportunity to remind you that we offer a free ‘Ask the Experts’ service to all our readers to which, if it is sensitive, you may submit your question anonymously. We will then answer it in print in the next available issue.
Thank you for your continued support.
N. L.
ANDORRA
The tiny principality of Andorra has, until recently, resisted attempts by the OECD to force it into either greater tax transparency or effective exchange of information with other OECD governments. Now, however, Andorra has decided to attend the next meeting of the OECD Global Forum on Taxation, which will involve representatives of more than 50 OECD and non-OECD governments. The purpose of this forum is to achieve a global level playing field in relation to tax matters. While Andorra will not necessarily implement the OECD’s transparency and exchange-of-information policies, the decision to attend the meeting is something of a u-turn for the Andorran Government. Readers using Andorra for banking or other financial services would be well advised to consider whether the current levels of confidentiality will continue indefinitely.
BARBADOS
The Barbadian Government have announced that there will be a referendum on whether to become a republic or remain a UK overseas territory. On one hand, Barbados benefits from the stability offered by the British legal system; on the other hand, the country can sometimes be subject to political pressure that goes against its own best interests. Conflicts frequently arise in relation to tax. Barbados’s status as an offshore financial centre means that the Barbadian Government do not always wish to follow the UK’s policy regarding tax harmonisation, the eradication of low-tax jurisdictions and greater tax transparency. As a republic, this would not be an issue for the country.
BELIZE
Readers using Belize as a tax haven should note that the country is currently suffering from something of a political crisis. While there is no evidence that this is going to affect its suitability as a financial services centre, this may not be the case if the situation worsens. The trouble began when there was a strike at the state telephone company followed by Opposition demands for elections. The army was called out to deal with rioting and looting in May and one person was killed. Incidentally, earlier this year Belize’s Government began a major review of its tax structure. Such a review is only likely to affect those who own land in the country.
BERMUDA
Bermuda, like Barbados, is currently considering whether to become independent and end its status as a UK overseas territory. The Bermuda Independence Commission have proposed a referendum on independence, and the British Government have backed this suggestion. Independence could bring a number of benefits to the Caribbean jurisdiction. For instance, the country’s shipping register is restricted by the country’s constitutional status. As with Barbados, the UK’s international tax haven policy is not favourable to Bermuda.
FRANCE
For the first time ever, a French court has recognised the concept of a ‘trust’ and has sought to analyse the rights of the beneficiaries under a trust deed. What makes this so notable is the fact that under the Napoleonic Code (the French legal system) trusts are simply not deemed to exist. The court case offers hope to the thousands of people who have suffered as a result of the French legal system.
GERMANY
In April of this year, a new law came into force that allows tax officials as well as social and financial supervisory authorities to request secret banking information on German citizens. Within weeks, Germany’s High Court ruled that both tax and welfare officers could have access to private bank accounts where they suspected fraud and/or tax evasion. Under the new legislation, designed to ‘promote tax honesty’, officials are entitled to know an account holder’s name, date of birth, address and the dates the account was opened and closed. If the account has not been declared to investigators, banks are also obliged to provide balance, deposit and withdrawal information.
The reason for this draconian new legislation is that the Government are trying to stem the flow of money from Germany to international tax havens. This, in turn, is a result of the high levels of personal taxation in the country. It is to be noted that the new legislation does not require any authority to provide evidence of wrongdoing prior to applying to the courts for information. Nor need prior notification be given. Not surprisingly, there is expected to be a major campaign by human rights organisations to change this legislation.
GIBRALTAR
The British Government have finally acknowledged that the Gibraltar ‘exempt company regime’ will be phased out by 2010. Existing ‘exempt’ companies will be allowed to carry on with their 100%-tax-exempt status until 31st December 2010, unless they change ownership or activity. Although they do not have to pay any tax on profits, they will still be required to pay a fixed annual levy of between £225 and £300. It is estimated that there are some 8,500 exempt companies in existence. New exempt companies can still be formed – though they won’t benefit completely from the current system. Nevertheless, if you need an offshore company for a short period of time (up to four years), Gibraltar may still be a viable option.
GUERNSEY
Guernsey recently published a consultation document on future taxation strategy in which it was proposed to reduce the level of tax paid by high-net-worth individuals resident on the island. It is likely that the new, reduced income tax will be designed so that the tax charge falls as your income increases.
ISLE OF MAN
There are two significant news stories from the Isle of Man. First of all, following the plans for tax reduction in Guernsey, the Isle of Man is also intending to reduce income tax levels for the super rich. As it currently stands, the maximum rate of income tax on a resident’s worldwide income is 18%. At the same time, the Government also intend to promote the island’s role as a ship-management centre.
The second story from the Isle of Man relates to a warning recently issued by the Manx Financial Services Commission. Apparently, a number of bogus Internet banks have been claiming that they are licensed by the Manx FSC to undertake banking business and other regulated activities. In particular, the FSC mentioned the following bogus deposit takers:
- Atlantic Trust Bank
- Express Trust Bank
- Morgan Finance Bank
- Royal Pacific Bank
- First State Online Trust Bank
- Global Monetary Organisation
- Standard Offshore Bank
- Pacific Assurance Trust.
None of these companies is registered in the Isle of Man and nor are they licensed. For more information, you can visit the FSC’s website at www.fsc.gov.im.
IRELAND
There are two important pieces of Irish tax news.
First of all, the Government are currently reviewing the artistic tax exemption. This particular ruling, which has been in force since the 1980s, means that Irish writers, poets, artists, musicians, film directors and others in receipt of royalties as a result of their creative endeavours need not pay any income tax. It is likely that as a result of the review this tax break will be capped at a level of anything between €100,000 and €1,000,000 a year. The reason it is coming under attack is that there are a number of high-profile artists – such as the members of U2 – who earn millions of euros a year tax-free.
Secondly, the Revenue Commissioners are seeking court orders compelling all Irish-based life assurance companies to reveal information on customers who have taken out investment products to evade tax. During the 1980s and 1990s, many insurance companies sold life policies to individuals with undeclared income. These were, essentially, investment products with only a tiny amount of life cover. The benefit was that when the policy matured it would provide the beneficiary with an apparently tax-free lump sum. Irish Life and Permanent have already said that they will not cooperate with the Revenue Commissioners and have refused to write to their customers informing them that they may have a tax liability.
LABUAN
The Labuan offshore financial centre has proved to be an enormous success. Located off the coast of Sabah, and part of Malaysia, the Labuan Offshore Financial Services Authority (LOFSA) have managed to attract over 3,000 international companies to the tax haven. Recently, TM Net, the Malaysian telecoms company, have brought broadband to the island thus helping it to compete on an international level.
PANAMA
Readers should note that the Panamanian National Assembly have recently introduced a new company tax which is linked to gross receipts rather than profits. As it currently stands, this new tax is unlikely to affect those with offshore Panamanian corporations. However, the annual company fee has been increased from US$100 to US$350 and new late-payment penalties have just been put in place.
ST VINCENT AND THE GRENADINES
The St Vincent and the Grenadines’ financial services authority have just cut the annual fees imposed on offshore companies incorporated and located in the jurisdiction.
UNITED KINGDOM
The two important UK offshore stories from the past two months relate to offshore bonds and UK-based trusts. With regard to offshore bonds, UK investors could now be hit with a 15% annual tax bill. To quote one expert: “It is possible that the Inland Revenue could treat offshore bonds containing certain types of non-UK funds as personalised assets. This could turn a tax-efficient offshore bond into a tax-penalised portfolio bond.” It is to be noted that personalised portfolio bonds are subject to 15% tax regardless of the performance of the underlying investments.
The second UK offshore story is that Transparency International have recently issued a report in which they criticise the UK Government for not regulating company and trust service providers in a more rigorous manner. “While many offshore financial centres have introduced legislation to regulate those that form and administer companies and often trusts as well, the UK and other offshore centres have not followed suit.” It is ironic that the UK Crown Dependencies and Overseas Territories have been pushed to introduce legislation but the UK itself doesn’t even have definitive plans to do so. Transparency International are an NGO whose main purpose is to combat corruption around the world.
UNITED STATES OF AMERICA
There have been a number of interesting offshore developments in the United States over the last few weeks including the following:
- The US Government have requested an additional US$500 million from Congress to spend on IRS enforcement activities. “Increasing enforcement not only catches tax cheats but discourages others from avoiding their taxes,” said Treasury Secretary John Snow. If Congress approve the money (and this is by no means certain), the extra money will be spent providing more resources to examine additional tax returns, collect past due taxes and investigate cases of tax avoidance.
- The Treasury Department have announced that additional pressure will be put onto other countries to improve their procedures to counter money laundering. The American Government already invest a substantial amount of time and money seeking out ways to increase levels of anti-money-laundering compliance from foreign banks.
- The IRS have announced that their international task force to monitor aggressive corporate-tax avoidance is proving extremely successful. The task force – which the US runs in cooperation with Canada, the UK and Australia – depends primarily on the exchange of information in order to catch (and deter) international companies and groups from using international tax-avoidance schemes. It is to be noted that officials from these four countries now exchange confidential information about taxpayers much more quickly than in the past. The task force is, currently, focusing on transfer pricing.
GENERAL NEWS STORIES
A Court of Appeal judgment in the UK provides protection for legal professional privilege, according to a report in Tolley’s Taxation. The judgment makes it clear that lawyers owe a primary duty to the court and to their client and it exempts them from making money-laundering reports. The Law Society intervened in Bowman vs. Fels to establish what steps solicitors must take when suspicions of money laundering arise when they are acting for a client in litigation. Robin Booth, chairman of the Law Society’s money-laundering task force, said: “the judgment has made it clear that where lawyers are advising on litigation, or negotiations, to reach a consensual agreement where there is litigation in the background, they are exempt from requirements to report suspicious activity.”
The Financial Action Task Force (FATF) have recently updated their blacklist of countries that fail to cooperate in the fight against money laundering. Indonesia, the Philippines and the Cook Islands have all been removed from the blacklist after all three improved their monitoring of suspect transactions. Myanmar, Nauru and Nigeria remain the only territories left on the blacklist. However, the US State Department’s Bureau for International Narcotic Law Enforcement Affairs simultaneously issued a report criticising almost every single offshore centre in the world. From Antigua to Singapore, over a dozen jurisdictions were attacked for failing to clamp down on money laundering.
Last month, STEP (Society of Trust and Estate Practitioners)held a symposium entitled ‘Trusts and International Tax Treaties’ in the UK. Some of the interesting points raised by speakers at the symposium follow:
- The symposium was reminded that there were two doctrines of tax and income: the first is tax and income in the jurisdiction where the income arises (the source doctrine), and the second is taxing the recipient in the jurisdiction where the recipient is resident (the residence doctrine). There are many exceptions to these rules. For instance, although UK residents are normally subject to the residence doctrine, non-domiciliaries are subject to the source doctrine except where the income is remitted to the UK. By using trusts located in low- or zero-tax jurisdictions, it is possible to ensure that the source doctrine reduces or removes entirely any liability to tax.
- In the UK, there has been a growing use of trusts instead of wills. This allows the costs and delays involved in obtaining probate and the risks of dispute to be reduced. With a lifetime gift, the transfer of funds into a trust can be virtually transparent and the operation of the trust can allow far more flexibility than a will.
- While it has been fairly common for trusts to be used to hold an interest in a business, there are now increasing instances of trusts actually operating a business. A potential advantage of this approach is that trustees, by charging a management fee, can eliminate the business’s profits and take out one level of taxation. Such an arrangement can also be used to avoid challenges under the settlements provisions.
- The USA should not be discounted as a possible home for your trust. A foreign domestic trust is taxed in the USA only on its US source income. Such a trust requires a US institution or individual to be a trustee and must be governed by the law of one of the 50 states. One potential pitfall that must be avoided is that every substantial decision of the trust must be controlled in the USA.
- By the same token, the USA should not be forgotten as a suitable home for an asset protection trust. Such trusts allow irrevocable discretionary settlements to be established whereby the settlor can continue to benefit but the assets remain out of the reach of the settlor’s creditors. Asset protection trusts in Alaska and Delaware can be set up where the assets are kept outside the net of US estate tax. A number of US states have also abolished the rule against perpetuities. This means that there is no longer a requirement for the trust to be wound up by a fixed date. This relaxation of the law allows longer-term planning, simpler transfers from other jurisdictions and is attractive to clients with dynastic aspirations.
- As reported in the country-by-country news column (above), France has recently started to change its attitude to trusts. Although trusts have been an alien concept in France since the time of Napoleon (and the country has not yet ratified the Hague Convention), the French courts now recognise trusts that are created under foreign laws, providing they do not contain any fraudulent or abusive elements.
At the beginning of this year, the New British Virgin Islands (BVI) Business Companies Act came into force. Its main concern was the incorporation of international offshore companies, although the legislation also covered locally owned companies doing business in the BVI. As the legislation is so sweeping, there is a two-year transition period.
Under the new legislation, there are seven different types of companies that can be incorporated:
- companies limited by shares
- companies limited by guarantee not authorised to issue shares
- companies limited by guarantee authorised to issue shares
- unlimited companies authorised to issue shares
- unlimited companies not authorised to issue shares
- restricted-purposes companies
- segregated-portfolio companies.
In general, the new legislation offers far greater flexibility when establishing a company. For instance, the new act provides for three types of members – shareholders, guarantee members and members of an unlimited company who are not shareholders. The rights of members can be spelt out in the Memorandum and Articles. This means, for example, that one member might have votes, another member might be entitled to dividends and a third member might only be entitled to any capital gain on the sale of the company. It is to be noted that there is no longer a concept of authorised share capital or, indeed, of share capital at all under the new act. Speaking of shares, the new act retains the same division between registered shares and bearer shares as existed before. In the case of registered shares, title is prime face evidenced by entry on the register of members that must be kept by the company. A company may not issue bearer shares unless specifically authorised to do so by its memorandum. Bearer shares must be deposited with a custodian authorised or recognised by the financial services department – otherwise the shares are immobilised and the rights normally attaching to them are disabled.
When the BVI initially became an offshore tax haven, it quickly established itself as a market leader thanks to the innovative features it offered. The new legislation shows that the jurisdiction’s Government are still able to come up with new and highly advantageous corporate vehicles appropriate for anyone seeking to establish or relocate an offshore vehicle.
INTERNATIONAL TAX-PLANNING TIPS
Tax-saving opportunities in the UAE
The United Arab Emirates (UAE) has been extending the tax breaks and funding offered to companies interested in relocating in, or near, Dubai. Some of the recent developments include:
- Construction of the Dubai Biotechnology and Research Park – the world’s first free zone dedicated to the biotechnology industry and offering 100% exemption on corporate and personal tax for the next 50 years.
- The Dubai Technology and Media Free Zone – which, in addition, to tax exemption, provides for full foreign ownership, full repatriation of capital and profits, no currency restrictions, support services, simplified incorporation and a fast-track visa service.
- Funding and financial assistance to research initiatives, incubators and joint projects.
- Two Internet initiatives – Dubai Internet City and Dubai Media City – hi-tech environments designed to make the UAE a pioneer in the field of information and communication technology.
If you are looking for an extremely tax-friendly jurisdiction in which to launch or relocate a business, Dubai and/or the UAE could be an attractive option.
The benefits offered by limited-liability companies
One of the key advantages of trading as a sole proprietor or in partnership is that your income/profits will only be taxed once. This is different from the situation with a limited company, where you may have to suffer first corporation tax and second personal income tax. One of the disadvantages of being a sole proprietor or in partnership is that you have unlimited liability when it comes to claims against you. This means, of course, that your personally held assets remain at risk at all times.
Limited-liability companies offer you the best of both worlds. You won’t have to suffer double taxation or a liability exposure. Indeed, thanks to a limited-liability company you can enjoy asset protection and lower taxes. Furthermore, if you locate your limited-liability company in a suitable offshore jurisdiction, you can enjoy the protection of the corporate structure with the benefit of a ‘pass through’ tax structure.
St Kitts and Nevis was one of the first offshore havens to start offering limited-liability companies. As such it can offer a number of significant benefits when compared to other jurisdictions. One such benefit is that you only need to have one ‘member’ (or shareholder) to establish a limited-liability company. This is different from many other jurisdictions, where you normally need two or more people to operate such a vehicle. It is to be noted that the details of the beneficial ownership of a limited-liability company established in Nevis remain confidential.
From a tax perspective a limited-liability company established in Nevis does not get taxed as a separate entity and – therefore – for those not resident there should be minimum or zero taxation. Because the limited-liability company is considered a complete and separate entity, only the entity itself can be held liable for its debts. Thus, the members can only lose what they have actually invested and creditors cannot attack members’ personal assets to satisfy any liability incurred by doing business with the company. As one expert put it: “the Nevis limited-liability company is one of the most user-friendly, lowest-cost and yet strongest offshore asset-protection tools available today. With minimal paperwork and generous tax exemptions, it is a simple structure that can be readily coupled with other asset-protection tools to create a non-taxed and incredibly strong asset-protection vehicle.”
FEATURES
Setting up your own bank for $20,000
The idea of a ‘captive’ bank – the banking equivalent to captive insurance companies – is starting to gain popularity in the boardrooms of international and multinational companies. One place where establishing such a bank is both relatively inexpensive and potentially advantageous is the Cayman Islands. The Cayman Islands issue two different types of banking licences. The first are ‘A’ licences, which are, essentially, only available to very substantial financial services companies such as the branches or affiliates of established international banks. ‘B’ licences are divided into unrestricted licences (again, you need to be a fairly major heavy hitter to obtain one of these licences) and restricted licences (this latter type allows an existing company to carry on the business of offshore banking but only to specifically agreed parties). A restricted ‘B’ licence also allows one to establish a genuinely ‘private’ bank.
Perhaps the most interesting thing about restricted ‘B’ licences (or restricted trust licences) is that the company need only show that it has US$20,000 by way of net worth. In other words, for US$20,000 plus fees you can establish a private bank in the Cayman Islands.
Why should you wish to do so? The answer is that if you have large or frequent banking transactions you may find it is very profitable and convenient to own and operate your own bank. Owning your own bank will mean that you are not subject to any unnecessary restrictions. Lending limitations, investment restrictions, reporting requirements, taxation, double taxation, compliance with burdensome governmental regulations and public disclosure of transactions all constitute restrictions that limit a businessman’s ability to act as freely as he wishes. The use of a Cayman bank enables a businessman to do business with very few restrictions. Furthermore, if you own such a bank, there is no reason why you shouldn’t issue letters of credit and bank guarantees as well.
It would be wrong to suggest that establishing a Cayman Island bank is an easy process. But if you would like to know more, we recommend contacting the Cayman Islands’ Monetary Authority at www.cimoney.com.ky.
The idea of private family foundations originally came from the miniscule principality of Liechtenstein. These foundations, much favoured in Europe, traditionally offered absolute secrecy and zero exposure to taxation. They were much favoured by those banking in Switzerland. However, over the last few years both Swiss and Liechtenstein banking secrecy no longer look as secure. Recognising that this presented a business opportunity, the Panamanian Government enacted legislation which allowed Panamanian ‘private foundations’ to be established.
What is a foundation? In a way, it is very like a trust. To begin with, it is a legal entity created when a founder submits a ‘foundation charter’ with the public registry. Having submitted this charter, the founder then endows the foundation with assets. Once this has been done, the founder is no longer the legal owner of the assets, thus creating a separation by which the assets are protected from potential creditors. Foundations are, therefore, a very valuable tool in asset protection. Unlike a trust, the founder can still maintain a certain amount of control over the way the foundation operates. So, although the foundation will be managed and controlled by a ‘council’, the founder can guide them.
It is to be noted that in Panama there is no need for any public mention of the name of the founder. Furthermore, the founder may or may not belong to the council managing the foundation. The list of council members must, however, be lodged with the public register.
Unlike Liechtenstein family foundations, the Panamanian private foundations are relatively inexpensive. The initial endowment need be no more than US$10,000 and the annual franchise tax is – unbelievably – just US$150 (the same as for a Panamanian corporation). Although anyone establishing a foundation for someone else must ‘know their client’, strict secrecy and confidentiality rules are built into the foundation’s legislation.
With regard to taxation, it should be emphasised that the Panamanian private foundation is completely tax-free on all income generated from sources outside Panama. As a result, there are no annual reporting requirements.
Panama has some of the strongest banking privacy laws and lowest taxes anywhere in the world. If you are looking for a safe and inexpensive location for some sort of offshore trust, a Panamanian private foundation could well meet your needs.
Good news for Portuguese property owners
In 2003, the Portuguese Government introduced some dramatic changes to its tax legislation with the result that many non-resident property owners holding real estate in Portugal through ‘offshore companies’ found themselves liable to punitive levels of tax. In particular, Portugal blacklisted companies set up in a wide range of offshore locations including Gibraltar, Jersey, the Isle of Man and the British Virgin Islands. Many property owners have suffered the new level of tax because they were not being properly advised on how to avoid it. In particular, surprisingly few property owners have switched their ownership to a Maltese company. The benefit of using a Maltese company is that:
- Portugal does not view Malta as an offshore jurisdiction
- a double-taxation treaty exists between Malta and Portugal
- Malta is now an EU member state, which will make it hard for Portugal to act against Maltese companies owning Portuguese property.
It is remarkably easy to move the domicile of an offshore company from a potentially blacklisted jurisdiction to Malta. Indeed, the Maltese tax authorities have pre-approved a large number of jurisdictions, making the country an ideal location for anyone who holds Portuguese property through a blacklisted offshore company. Once the company is domiciled in Malta, no taxes will be payable – providing the Maltese company does not receive any income. If the property does generate income or a capital gain is made on a future sale by the company, some Maltese lire will have to be paid. However, the maximum amount such tax can be is 6.25% of the actual income or gain. Note that no capital gains tax is payable if shares in the Maltese company are transferred rather than the property itself.
Although it is not traditionally associated with international tax planning, Luxembourg offers non-residents a number of useful tax-avoidance vehicles. One of these is the single premium life insurance policy executed through a Luxembourg insurance company. What makes investing in a life insurance policy so advantageous? Basically, a single premium life insurance policy shares many of the benefits of a trust. That is to say when the policy is taken out the insurer becomes the legal owner of the assets paid in as a premium. As the policy is written in Luxembourg, the insurance company will be exempt from tax on any income or gains made from the investment or investments. Furthermore, there are no Luxembourg taxes on surrender, maturity or death benefit proceeds. Such a policy offers other benefits:
- The policyholder may switch the beneficiaries of the policy at any time during his life.
- The policyholder will not be liable to any personal tax on any of the gains made within the policy until the end of the policy term.
- At the end of the policy term, the policyholder will, obviously, only have to pay tax as stipulated by his country of residence.
- An extensive network of double-tax treaties exists between Luxembourg and other countries. As a result, if the investment being placed within the policy is located in another company, providing that country has a double-taxation treaty with Luxembourg, any profit arising from the investment could well be tax-free.
In plain English, you can take an asset – say shares in a privately held company – invest them in a single premium life insurance policy taken out with a Luxembourg insurance company and that policy will work very much in the same way as if you had set up a trust. Depending on what the assets are and where they are located, it could well be that absolutely no tax will be payable either on gains or disposal.
Using Luxembourg insurance companies and ‘treaty shopping’ (see ‘Ask the Experts’ below) are a relatively inexpensive way to protect and pass on your assets.
Q – My offshore financial advisor refers regularly to something called ‘treaty shopping’. I wonder if you could explain what this is and how I could take advantage of it. Are there any drawbacks I should be aware of?
A – International tax planning involves using, to best advantage, the tax laws of different countries. It is a complicated process because you need to know not only the tax laws of any country you may be considering as a home for yourself and/or your money but also how the tax laws of that country work in relation to your own country of domicile and/or residence. One of the key features of treaty shopping is that it involves using double-taxation treaties. A double-taxation treaty is where two countries have agreed that if a taxpayer pays tax in one country he (or in the case of a company or trust – it) will not be liable for double taxation in the second country. A good example of this was the use of Belgian residency by UK-domiciled citizens making capital gains. Because Belgium and the UK have a double-tax treaty, it used to be that if you left the UK and became non-resident for one year you could realise capital gains while you were overseas by becoming tax resident in Belgium where no capital gains tax would be due. This was particularly advantageous when capital gains tax was 40% on the sale of assets such as company shares. A more complicated form of treaty shopping may involve multiple locations. For instance, you may have a company in one place, a trust in another and yet live in a third location.
You ask about the possible downside. I recently read a fascinating article by a specialist in tax-treaty shopping called Charles Haccius. He lists seven different things to watch out for:
- Residence elsewhere than where intended. In all tax planning, it is important to make sure that you don’t become resident somewhere where you don’t wish to be. This often arises in the case of companies where the management may be deemed by tax authorities to be taking place in one location, whereas the taxpayer wishes it to be taking place somewhere else.
- Permanent establishment where none is intended. Countries are, of course, always keen to claim a potential taxpayer as their own. One way they frequently do this is by claiming that a company or individual has a permanent establishment and – therefore – should be liable to tax.
- Income classified otherwise than as intended. This is particularly true in the case of management fees, royalties, rent and other types of income. It is important that you can always prove that income is exactly what you say it is.
- Failing to follow the ‘operating instructions’. It is surprising how many taxpayers, having established a tax-planning structure, continue to carry on as before, oblivious to the structure that has been devised on their behalf. More tax plans by far come to grief as a result of careless implementation than from being intrinsically unsound.
- Failing to check out the local tax legislation and practice. If you are dealing with different countries, it is important to get someone local to advise you.
- Failing to check out ‘the transfer pricing’ provisions. The domestic tax legislation of most countries contains provisions based on an OECD ruling that empowers the tax authorities of the country in question to substitute the ‘market value’ of an asset purchased or sold for the price actually paid where the asset changes hands at an undervalue or overvalue. In plain English, if you enact a transaction at anything other than market value, the tax authorities may come down on you like a ton of bricks. Clearly, it makes sense to ensure that you are not breaking any ‘transfer pricing’ provision.
- Failing to check out domestic anti-avoidance legislation. Taxpayers often concentrate on the legislation relating to their offshore structure without considering how their offshore structure relates to their domestic situation. It is particularly important to make sure that the anti-avoidance legislation in the country where you live does not preclude you from doing what you intend to do overseas. If it does, you could be evading tax rather than avoiding it.
Q – I have a six-figure sum in a bank account in the Isle of Man. The money was deposited over a number of years and represents commissions I earned but chose not to receive in the UK. Since the sources of the commission were all overseas and the transactions all took place over a decade ago, I am not really concerned about that aspect of the account. However, I must admit that I did not pay UK income tax on the monies involved. With the introduction of the EU Savings Directive, I am concerned that details of these accounts will now be forwarded to the Inland Revenue. What should I do?
A – It is probably of no consolation to you, but, judging by the number of letters we receive on this topic every month, a great number of people seem to be in an identical position. First of all, what you should do (although you may not choose to) is go to the Inland Revenue, declare your wrongdoing and face the penalty. You will be charged interest and you will suffer penalties. I doubt much of your six-figure sum will be left at the end of it. On the other hand, if you make a voluntary disclosure and if there are mitigating circumstances (perhaps you were poorly advised), it is extremely unlikely that you will end up serving a jail sentence. On the other hand, if you fail to disclose the money and do eventually get caught, you can expect no mercy. You don’t say what line of business you are in, but, if you are in any way involved in accountancy or the legal profession, you can certainly expect the Inland Revenue to pursue it as a criminal enquiry and should not be surprised if you end up in jail. It must seem strange that a newsletter dedicated to saving you tax should advise disclosure to the Inland Revenue.
There is no point in crying over spilt milk, but the fact is had your offshore tax planning been better conceived it is quite possible that you could have held this money outside the UK without breaking any UK tax laws. However, it is too late to repair that particular damage. In previous issues of The Schmidt Offshore Report, we have covered how it might be possible for someone who didn’t mind breaking the law to keep such a bank account secret.
You should be aware that in February of this year the UK published its draft Tax Information Exchange Agreement (TIEA) under which Jersey, Guernsey and the Isle of Man will be required to withhold tax on interest income paid to UK residents in keeping with the EU Savings Directive. Indeed, you may already have had a letter from your Isle of Man bank advising you of the action that the bank proposes to take in relation to your account. Most of the banks sent letters relating to the EU Savings Directive out during May. Essentially, if you are not exempt from the EU Savings Directive (in other words, if you are not resident outside the EU or exempt for some other reason), your account will be subject to the transitional arrangements that have been introduced.
This means that a small amount of tax – know as retention tax – will be deducted from your interest at source. Between now and 2008, the rate of retention tax will be just 15% of any interest paid to you. For example, if the balance of your account is £100,000 and you earn £300 interest a year, initially the retention tax would be just 15% of this – or £45 a year. If you don’t want to pay this retention tax, you must agree to your account details being sent to the Inland Revenue. If you do opt to pay retention tax, none of your personal information will be disclosed and your confidentiality will be fully maintained. In the Channel Islands and the Isle of Man, unless you specifically inform your bank that you should be exempt from tax or that you want information to be exchanged (in order to avoid retention tax), it will automatically be assumed that you:
- don’t want your information sent to the Revenue
- accept that you now have to pay retention tax.
As it currently stands, retention tax will be increasing to 20% from 1st July 2008 and to 35% after 1st July 2011. In theory, no details of your account will ever be released to the Inland Revenue. However, it is not unreasonable to suppose that at a certain point this situation may change, and we are advising readers to take action sooner rather than later. It must also be pointed out that sometimes banks make mistakes!
If you are determined to keep your money offshore, you should plan to close the account, take the funds in a non-traceable form (bullion, for instance, or, if your bank will cooperate, cash) and re-invest the money elsewhere. What you shouldn’t do is leave it there. However, we very much recommend coming clean with the taxman.
It is our intention to be as accurate in fact, detail, analysis and comment as possible. However, publishers and their representatives cannot be held responsible for any error in detail, accuracy or judgement whatsoever. The Schmidt Offshore Report is sold on this understanding. The Schmidt Offshore Report is commissioned and published by Wentworth Publishing Ltd, 17 Fleet Street, London EC4Y 1AA. Email: wentworth@online.rednet.co.uk Tel: 020 7353 6606. © Wentworth Publishing Ltd 2005. All rights strictly reserved. This publication may not be lent, hired, reproduced (in any way whatsoever) or re-sold. This information is authorised for personal consumption only.
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