THE SCHMIDT OFFSHORE REPORT
(Vol 2, no 2)
Contents
NEWS
Are you looking for a new (tax-free) home?
Go tax-free in the UAE
UK taxman closes in on offshore bank accounts
Tax blow for offshore share traders
KPMG former staff fight back
Switzerland refuses to be bullied
US Treasury have Ireland in their sights
Good news for UK companies trading overseas
The Isle of Man fights back
Singapore and Hong Kong ignore EU
Lichtenstein refuses to be cowed
In this issue of The Schmidt Offshore Report I will be covering all the latest news stories, including the UK Revenue’s recent success in attacking both offshore banking and offshore share trading, the good news for UK companies with overseas trading losses, an attack by the US Government on Ireland’s tax practices and the tax-saving opportunities presented by the recent treaties signed between the United Arab Emirates (UAE) and various EU countries. However, before I get into these and other topics, I thought I would start by explaining how two unexpected countries offer amazing tax benefits to expatriates looking for a beneficial tax climate.
NEWS
Are you looking for a new (tax-free) home?
As far as I know, the wealthiest Irishman in the world, Tony O’Reilly, is not a tax resident in any one country. Despite running some of the biggest companies in the world, including the Independent Newspaper Group, Waterford Crystal, Wedgwood, Weight Watchers and Heinz – Mr O’Reilly manages not pay any personal tax by the simple expedient of not living in any one country for long enough to be claimed as a resident. While this practice has been common amongst multi-millionaires and billionaires for many years, it is only recently that less wealthy – but none the less affluent – individuals have adopted a similar policy.
Motivated, doubtless, by the high level of personal taxation in so many developed countries and aided by the availability of inexpensive air fares, as many as one million European expatriates are believed to be ‘perpetual travellers’. If you are happy to move around regularly not spending more than 90 days a year in the UK, 120 days a year in Ireland, 180 days a year in Australia and so forth, it is definitely possible to avoid tax on your personal wealth. However, that doesn’t mean the tax authorities in each of the countries you visit won’t take an interest in you. Under these circumstances it is much better if you can point to one country and say – quite definitely – that that is where you live.
The question facing every perpetual traveller is which country to choose as their tax residence. Obviously, it wants to be one where personal taxation rates are low. But, at the same time, it is important not to pick somewhere that appears to be an obvious tax haven. This will only act as a red rag to tax authorities in more developed countries. In the past, I might have recommended Malta, Cyprus or one of the other countries recently accepted into the EU. However, for this very reason, I no longer consider them as safe options. Instead, I would like to suggest two unlikely alternatives. The first is Belgium and the second is Egypt.
Belgian personal-income taxes are excessively high and act as a major disincentive for the recruitment of foreign employees. Some time ago, the Belgian Government realised that this was a problem and granted a special expatriate fiscal regime for foreign employees with a specialist skill, an academic background or management expertise who were required by a coordination centre or other Belgian corporation. Basically, the thinking was to provide incentives to encourage multinationals to invest in Belgium by minimising salary costs for foreign executives.
In theory, the assignment given to the foreign employee must be temporary; in practice the special regulations apply for an unlimited time period. The application for non-residential fiscal status should be applied for within six months of arrival. The foreign executives must prove that their primary economic interests are maintained outside Belgium. The financial benefits offered to such foreign executives are extremely generous and include:
- no tax on income that relates to activities conducted outside Belgium
- no tax on moving expenses given to any employee taking up residence in the country
- a range of other tax-free benefits including losses incurred on the sale of a car or house, a generous cost-of-living allowance, a generous housing allowance, unlimited travel expenses when travelling abroad, tax-free income where provided by the employer to the employee to cover emergency trips and a tax-free allowance to cover children’s school fees. On top of all of this, the personal, tax-free allowance may be up to €29,750 per year.
Put in plain English, if you were to set up a special company in Belgium exclusively for the purposes of employing you, any monies paid to you by that company could, pretty much, be provided tax-free. The only catch is that you must be able to prove that the company being set up in Belgium is a bona fide business or the subsidiary of a bona fide business. It is, though, possible to get an advanced ruling from the Belgian tax authorities – so this should not require any risk.
The story in Egypt is completely different: personal taxation is charged at 10% on any income received there, with all worldwide income (for non-domiciled individuals) being entirely tax-free. The Egyptian Government are delighted to collect any penny of income tax it can and, therefore, disinclined to investigate too closely the source of that income or the whereabouts of the person receiving it. Thus, it is possible to declare yourself an Egyptian resident, barely spend a minute in the country, pay yourself a minute amount of money and yet have legitimate papers to show that your tax affairs are in order as far as the Egyptian authorities are concerned.
As anyone who is a perpetual traveller will attest, one of the key problems is that every time you fill out a form or travel to a different country you are asked where your residence is. If you have no residence, it alerts suspicion. Furthermore, if you are keen to be seen to have severed links with your original country of residence/your original domicile, it is important to be able to prove this by demonstrating that you are actually resident somewhere else. Perhaps Belgium? Possibly Egypt?
Over the last few years the UAE have signed a number of tax treaties with EU countries. Most notably in 2005 an agreement was reached with Austria that all dividends, interest and other passive income paid from Austria to an individual or company resident in the UAE would be exempt from tax in both countries. What this means is that an individual or company resident outside the EU – but having investments in the EU – can avoid a substantial amount of tax. EU directives make the transfer of investments from one EU country to another easy and tax neutral. What is harder, of course, is to avoid withholding tax when investment income leaves the EU. However, if the money leaves an Austrian company and goes to a UAE individual or company, no withholding tax will be imposed.
Are there any catches? Happily, Austrian law does not restrict treaty shopping. True, the Austrian courts have denied treaty benefits in abusive cases. But the Austrian authorities are less likely to attack more normal planning involving an entity that is clearly resident under the treaty and the other country’s law. Pretty much all income – including private pensions – can be transferred this way through Austria to the UAE.
Interestingly, the UAE also have tax treaties in place with Malta and Spain. These also offer tax-planning opportunities for anyone wishing to take income out of the EU in a tax-efficient (or rather a tax-free) way.
UK taxman closes in on offshore bank accounts
The Inland Revenue are urging hundreds of thousands of investors to declare money held in offshore bank accounts following a landmark decision by an HMRC tribunal last month. Accountants and lawyers have estimated that the legal ruling forcing Barclays to hand over details of customers’ offshore accounts held on their computer systems will have huge ramifications for anyone who holds cash offshore, potentially resulting in billions of pounds being clawed back from taxpayers. The Revenue is now expected to turn its attention to the 36 banks that offer both offshore and UK accounts.
Basically, if your UK bank has any record of your offshore dealings, before too long those records will be then in the hands of the Revenue, who will be checking whether funds have been declared for tax. The Inland Revenue believe that £1.5 billion of tax or undeclared bank interest is involved. However, many of those accounts will contain funds that were never taxed in the UK in the first place. Following their victory, the Revenue will be in a position to trace money and launch investigations into businesses and self-employed individuals who have used offshore accounts to hide undeclared income.
The penalty for non-declaration is the tax due, plus interest, plus the penalty – which can be up to 100% again of the tax due. This means that businesses and individuals could be hit by a crippling tax double whammy. Customers will be required to provide evidence that tax is being paid on the capital itself. If this cannot be proved, they will be required to pay the back tax as well as the penalty charges. Substantial reductions in the penalty levels can be negotiated, however, based on the level of disclosure and cooperation given to the Revenue.
If you are in any way concerned about this, it would be better for you to contact the Revenue before the Revenue contact you.
Incidentally, if you have an account in Austria, Luxembourg and Belgium – three EU countries that have refused to participate in the exchange of information agreed as part of the European Union’s Savings Directive – you should not assume that those accounts will remain confidential. If any data relating to these accounts is held by a UK-based banking institution, it is likely to end up in the hands of the Revenue. For instance, many credit and debit cards are processed onshore in the UK even though they are issued by overseas banks.
Tax blow for offshore share traders
Thousands of the wealthy investors who have been trading in stocks and shares through offshore companies are facing tax bills for hundreds of millions of pounds as the Government crack down on evasion. HMRC have asked an unnamed US investment bank to disclose records of their clients who live in the UK and who have been using it to conduct share transactions by a company registered in a tax haven. The move, which follows a ruling by the Special Commissioners Tax Tribunal, is aimed at clamping down on efforts to evade capital gains tax.
In recent years, thousands of wealthy investors based in the UK have set up offshore companies specifically to trade shares. Interestingly, the Inland Revenue appear to have known nothing about this practice until a voluntary disclosure by a group of five City traders who had set up an offshore company based in the British Virgin Islands through an unnamed bank to trade shares and avoid paying tax on investment gains. The five set up a nominee offshore company that was used to open accounts with the unnamed investment bank, which acted as prime broker. These accounts were then used to fund the purchase and sale of shares, with only some of the profits being disclosed to the Revenue. Tax experts have said that investors who set up similar nominee companies in other offshore jurisdictions are also likely to be targeted.
It should be noted that there has been media speculation that the Revenue would enforce criminal prosecutions for anyone who has tried to avoid paying tax when dealing shares through haven-based companies unless they confess to it in the near future.
You may remember that the US Department of Justice are bringing charges against thirteen former KPMG US tax professionals arguing that they participated in the scheme to sell fraudulent tax shelters, which allowed wealthy individuals to avoid paying at least $2.5 billion in tax. The thirteen former KPMG tax professionals have now challenged the US Department of Justice’s arrangement with KPMG. Under this deal, KPMG pay $465 million in penalties in exchange for admitting that they committed fraudulent conduct in the design and marketing of certain tax shelters and for agreeing not to support their ex-employees. Basically, the US Government have dictated that KPMG, on pain of corporate death, express a Government-approved version of facts and convert to a strict view that the tax strategies at issue in this case are inherently fraudulent. Clearly, this makes it almost impossible for their ex-employees to have any hope of a reasonable and fair trial. It is not impossible that this argument will get them off the hook.
Switzerland refuses to be bullied
The European Commission have been accusing Switzerland of distorting competition and violating a free-trade agreement by allowing companies based in certain Swiss cantons to pay corporation tax of just 6.6%. However, the Swiss Government have denied this and further stated that they do not believe they are granting unfair advantage to foreign firms by encouraging them to set up holding companies in low-tax cantons such as Zug and Schwyz. Switzerland’s cantons are free to set their own tax levels within the framework of the Federal Tax Harmonisation Act and it is unlikely that the EC will win this particular argument.
US Treasury have Ireland in their sights
Recently, Microsoft saved at least $500 million in tax by investing in an Irish company called Round Island One, because companies based in Ireland pay very low levels of Irish corporation tax. The US Treasury have announced their intention to tighten the rules on companies holding intellectual properties and patents in low-tax jurisdictions abroad. Furthermore, the US Treasury plan to crack down on US companies that report vast profits abroad in order to save tax before the end of this year.
Good news for UK companies trading overseas
The UK’s HMRC have announced that UK companies will be allowed tax relief on losses incurred outside the UK. This follows a ruling by the European Court of Justice in the Marks & Spencer case, which upheld the claim by M&S that UK group tax relief rules were contrary to provisions in the EU’s treaty on freedom of establishment. The UK legislation stops a company from offsetting losses made by an overseas subsidiary against profits made by a UK offshoot. However, this situation now appears to be reversed.
The Isle of Man, once one of the most popular tax havens in the world, is seeking to re-establish its status through the introduction of a number of dramatic new tax breaks. For high-net-worth individuals, personal-income tax is now just 18% with a cap of £100,000 a year. Companies, whether based in the Isle of Man or overseas, will now pay a standard zero rate of corporate tax unless they are a bank, in which case they will pay just 10% on their banking profits. Interestingly, the Isle of Man has recently managed to attract not just financial services but also e-business and film-making companies to its shores.
Singapore and Hong Kong ignore EU
As it currently, stands the Hong Kong and Singapore tax treaties with various EU countries allow exchange of information only where evidence exists that domestic taxes in Singapore and Hong Kong have been evaded. Put another way, neither jurisdiction cares what taxes have been evaded in relation to funds held in their banks, providing no local tax revenue has been lost.
Naturally, this arrangement does not please the European Commission, which have been putting enormous pressure on Singapore and Hong Kong to exchange information on potential EU tax evaders. This has become a live issue as an increasing number of EU citizens aim to avoid taxes by sending money to one or other jurisdiction – something that has occurred because the EU have effectively removed banking confidentiality for those of their citizens holding accounts in Jersey, Guernsey, Switzerland and other dependent territories linked to EU countries.
Both the Hong Kong and Singaporean Governments claim that they are committed to pursuing an effective exchange of information – but it is unlikely that either will give in to recent EU pressure.
Lichtenstein refuses to be cowed
Lichtenstein may have been branded as an uncooperative tax haven by the OECD, but in a recent interview Lichtenstein’s effective ruler, Crown Prince Alois, made it clear that the country will not do away with banking secrecy despite the threat of EU sanctions. In addition to Lichtenstein there are four other remaining jurisdictions on the OECD non-cooperation list. These are Andorra, Liberia, the Marshall Islands and Monaco.
I have recently been advised that I am the sole beneficiary of the proceeds of an offshore bank account. I believe the money was being held in trust, although the account is in the name of a relation who died nearly 20 years ago. The bank, based in Switzerland, although seemingly delighted to have tracked me down, are reluctant to offer advice.
Which tax, if any, would be paid on funds brought into the UK? Would the ‘Dead Settlor’ principle apply, whereby any tax is levied on the original settlor, even though they are dead? Presumably, the Revenue would want to see some original documentation, but I have none. I’ve been offered a debit card by the bank, which would give some limited access to the funds, but at this stage I am loath to accept one.
Reply to anonymous query
The recipient of an inheritance is not liable to tax on the amount received. If you can bring the amount to the UK as a lump sum and can obtain a letter from the Swiss bank confirming that the amount is an inheritance, you should have no tax liabilities. This will be the simplest course of action and the one most advantageous to you.
If you became entitled to the money some time ago, then any interest earned between then and now should have been included on your tax returns. However, obviously you could not have done this if you were not aware of your entitlement to the income. In these circumstances, you would be advised to make the facts clear to the Inland Revenue and to advise them of the appropriate figures for 2004/5 and 2005/6 if the bank are able to supply these. The Inland Revenue can only assess any interest received prior to 5th April 2004 if they discover that you have omitted income from your tax return. Clearly, since you were not even aware of the income, there can be no question of discovery by the Revenue.
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