THE SCHMIDT OFFSHORE REPORT
(Vol 3, no 1)

Contents

News

Features

Editorial

NEWS

Liechtenstein informant in hiding
Heinrich Kiber, who sold stolen bank account data from the LGT Group, which is owned by Liechtenstein’s royal family, to German tax agents for an estimated €5 million has gone into hiding. Kiber engaged Jack Blum, a US lawyer, to collect his fees, including the money which will become available to him from the US authorities for providing details on those of its citizens who were mentioned in the data stolen. Since Kiber, who is a computer technician, stole the details of 1,400 customer accounts, over 15 countries have begun investigations. Liechtenstein’s authorities would very much like to get Kiber back. There has been an arrest warrant out for him since March. A number of the 1,400 customers are also said to be keen to get in contact with him and there is, reputedly, an $8 million bounty on his head.

UBS private bank helped to hide US$20 billion
Bradley Birkenfeld, a former employee of UBS’s private banking unit, has pleaded guilty to conspiring with the bank’s largest client, Californian billionaire Igor Olenicoff, to help him evade $7.2 million in income tax. Birkenfeld admitted to helping Olenicoff hide $200 million in assets through Bahamian corporations, Liechtenstein trusts and Danish corporations. Birkenfeld claimed that many of UBS’s American clients banked with UBS specifically because they assisted with the evasion of tax. “Rather than risk losing the approximately $20 billion of assets under management in the US as undeclared business, UBS assisted these wealthy US clients in concealing their ownership of the assets held offshore,” Birkenfeld said in a written statement accompanying his guilty plea. Some of the advice that Birkenfeld offered to UBS clients included telling them to put cash and jewellery in Swiss safety deposit boxes, buying artwork and jewels using offshore accounts and setting up accounts in the names of others, techniques that, without a whistleblower, would have been extremely difficult to uncover.

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FATF to step up financial protection
Ministers and representatives of the 34 Financial Action Task Force (FATF) countries and international organisations have agreed to continue working together to protect the international financial system. They have agreed a new mandate, which includes:

  • greater global surveillance through regular FATF reporting of emerging and fast-evolving criminal and terrorist threats
  • global efforts to raise standards, especially among low capacity countries
  • building stronger partnerships with the private sector, which is at the front line of the global fight against money laundering and terrorist financiers.

Vanatu abandons banking secrecy
As a result of pressure from Australia, the government of the Pacific island of Vanuatu has agreed to reverse its long-standing policy of banking secrecy. George Andrews, the commissioner of the Vanuatu Financial Services Commission, has said that the regulator would, in future, penalise Vanuatuan institutions that provided services allowing Australians and other foreigners to evade tax in their own countries.

Cost of administering non-doms prohibitive
The introduction of the new non-dom rule in the UK – whereby non-domiciliaries would become liable to UK tax or to a flat £30,000 annual charge – is going to mean substantial extra costs for those affected. Accountants Deloitte has recently produced a report saying that administering the new scheme will be a nightmare for employers, employees and all qualifying non-doms caught. It also argues that the rules reduce the attractiveness of the UK to foreign nationals.

Second Liechtenstein bank hit by secrecy woes
A trial has recently started in Germany against four men accused of blackmailing the Liechtenstein bank LLB with threats to reveal compromising data on over 2,300 bank customers suspected of tax evasion. The four allegedly attempted to blackmail a number of customers directly by threatening to take the sensitive information to the German tax authorities, but prosecutors say tax was exchanged. They then apparently obtained US$14 million from LLB in August 2007 in exchange for returning data on 1,600 individuals. According to the bank, the information consisted mainly of internal receipts. Claims have been made that the four men still possess data on at least 700 LLB customers and that their lawyers are negotiating for a lower sentence in exchange for its return. The group purportedly sought to extort an additional €4 million from Liechtenstein for the return of the last set of data.

Travelling with cash becomes even harder
More countries within Europe have instigated new legislation designed to combat money laundering. Guernsey, Jersey and the Channel Islands have all introduced legislation which states that any person travelling in or out of these jurisdictions must declare the nature and amount of cash (€10,000 or more or equivalent) that they are carrying. They must provide personal details, including their name, date and place of birth and nationality, the full name and address of the owner of the cash (if not themselves) and the full name and address of any intended recipient of the cash. They will also need to declare the provenance and intended use of the cash, the transport route and the means of transport. Failure to declare the cash may render the person importing or exporting liable to prosecution and may result in a prison sentence, fine or both and the cash will become liable to forfeiture.

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FEATURES

Paradise islands

Some three million Britons have already left the country and an additional one million Britons are planning to do so between now and 2012. About half of those who leave do so in order to further their career and so their choice of destination is, to a certain extent, prescribed. The other half, however, are entirely free to choose their new home. Whether they are in search of a different culture, a better lifestyle or a warmer climate, many will opt for some sort of island existence. The most attractive islands, of course, are those offering the additional benefit of low- or no-tax regimes. So, if you are looking for a paradise island, where should you be considering? Here are some different ideas.

The Caribbean
Anguilla, Bermuda, Barbados, the Bahamas, the Cayman Islands, Granada, Nevis and the Turks and Caicos… even the names of Caribbean islands have a romantic feel to them. The tax rules vary, of course, from island to island but in general there is no income, capital gains, sales, VAT or wealth tax. Many also don’t impose any sort of death duties or inheritance tax. At the top end of the scale you could pay tens of millions of dollars for a home… at the bottom end of the scale you could buy somewhere for a few hundred thousand dollars. Either way, if you become resident you can look forward to a fantastic (and virtually tax-free) lifestyle as well as, in some cases, effective double-taxation agreements, meaning that you can opt to pay the lower tax there than in, say, the UK.

The Seychelles
Foreigners have only been able to own property in the Seychelles for the last three years. Now, however, the Seychellois government is keen to attract inward investment and so is bending over backwards to make property ownership and residency easy. There is no income, capital gains or inheritance tax and resort developments by leading hotel groups such as the Four Seasons, Banyan Tree and the spa company Per Aquum ensure that the luxury lifestyle is available.

Southern Cyprus
Believe it or not it’s estimated that one in five retirees will be living abroad by the year 2020 and that as many as one in ten of these will be living in southern Cyprus. Why? The climate obviously is a big influence, and so is the tax regime. Pensions are only taxed at 5%, which can be a huge saving for someone who would otherwise pay tax at the higher rate in the UK of 40%. Cyprus’s double-tax treaties with 33 countries including most of Europe is an added bonus.

Mauritius
Property ownership has only been available to foreigners since 2005. Its favourable tax treaties with more than 30 countries can be compared with its offshore-company laws to produce very good results. The purchase of a villa allows for residency and qualification for its 15% tax rates. What’s more, there is no inheritance or capital gains tax either.

The Islands of the World Development, Dubai
There is no income or capital gains tax in Dubai and there is also an extensive network of double-tax treaties, ensuring that anyone who moves there doesn’t have to pay tax in their home country as well, which makes the Islands of the World Development – a 300-island verisimilitude of planet Earth just off the country’s coast – extremely attractive to those in search of an island paradise.

Malta
Malta is frequently referred to as ‘the Switzerland of the Mediterranean’. It is politically stable and has many favourable tax laws for both individuals and companies. Since it joined the EU, its property prices have increased but still represent extraordinarily good value considering its climate and location.

Jersey and Guernsey
The Channel Islands do have numerous low-tax incentives for individuals. However, you really have to be a millionaire to make moving there fiscally advantageous. Furthermore, you will still have income tax at 20%. On the other hand, getting back to the UK is fast and relatively inexpensive, allowing you to see family and run a business with relatively little effort.

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Is banking secrecy still possible?

The history of modern banking secrecy can be traced back to the eighteenth century, when the Roman Catholic French royal family was borrowing money from Protestant Swiss banks to finance its extravagant lifestyle. The various sovereigns involved did not want the public to know that they were dealing with people the established Church considered heretics. So French royalty insisted that its Swiss bankers keep their arrangements secret.

The idea that a client’s financial arrangements would remain 100% secret extended outside Switzerland in the following decades until, in the years after the Second World War, it became widely accepted in many jurisdictions around the world but, especially, in offshore financial centres. What began to change the picture was the US government’s need to crack down on organised crime. Criminals, and especially drug dealers, were using the guaranteed secrecy of offshore centres to ensure that their illegal gains remained beyond the grasp of the law. The Americans began, from the 1970s onwards, to pass legislation designed to frustrate organised crime but, it has to be said, that they weren’t having a huge amount of success prior the events of 911. Once the so-called War on Terror began, America, other high-tax countries and a range of international bodies such as the OECD’s Financial Action Task Force (FATF) had the leverage they needed to crack down on smaller tax havens. There is an irony to this. To start with, major terrorist attacks are relatively inexpensive. The attacks on the World Trade Centre and the Pentagon cost less than $500,000 to organise. Secondly, the country with the most effective banking secrecy is the US.

Those who would see an end to banking secrecy have been further assisted by the actions of a certain Mr Kiber. For many years, Kiber worked for a bank called LGT based in Liechtenstein. From this bank, he stole data on 1,400 trusts and many more individuals, which he then sold to various tax authorities around the world. The significance of this cannot be understated. Whereas the primary attack on banking secrecy had previously come from governments now it was coming, as it were, from within. Other bank employees, afraid of being prosecuted or else keen to make more money than they ever dreamed of, are now coming forward with similar data. The main threat to banking secrecy is no longer from legislation or government threats. It is from bank staff.

So, how are high-net-worth individuals who wish to keep their assets secret now doing so? The answer is, by a variety of means:

  • The super rich are undoubtedly hiding behind nominees and complicated corporate and trust structures. The well-used system of a discretionary trust establishing an offshore company which in turn does the banking still works.
  • There are still many countries in the world where banking secrecy remains relatively informal. Bankers in places like Labuan (Malaysia), Singapore and many of the Middle Eastern countries are still surprisingly lax when it comes to knowing their customers.
  • It is remarkably easy to buy an off-the-shelf corporation in the US (Nevada is notoriously lax) and using the same company agents to then establish a bank account.
  • Many people resort to the same technique described by John Le Carré in his bestseller The Night Manager. The novel’s protagonist employs someone to sign all his documents for him. On a much smaller scale I’ve heard of people in the UK and Australia paying foreign students to open bank accounts for them safe in the knowledge that there is unlikely to be very much investigation of such accounts.
  • Many people are resorting to holding their wealth in the form of physical assets such as precious metals, stamps and negotiable instruments.

So, although banking secrecy is no longer as certain as it once was, it can still be achieved by those who are determined.

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Becoming non-resident

There was a time when becoming non-resident from the UK was a piece of cake. All you had to do was announce to the Inland Revenue (as it then was) that you were off and, provided you stayed out of the country for at least nine months of the year, there was nothing else to it. Thanks to changes in legislation while Nigel Lawson was Chancellor of the Exchequer, it was even possible to own a home in the UK and to carry on business and other activities without fear of having the Inland Revenue challenge you. Indeed, even the so-called ‘90-day rule’ was relatively flexible. Days of arrival and departure were not counted, allowing non-residents to come for, effectively, three days and count it as one!

Now all that has changed. In the last Budget, it was announced that days of arrival and departure could be counted. The test was whether you were in the country at midnight. Additionally, the 90-day rule has come under attack. You may only visit the country for, say, 60 days a year and yet still be deemed resident if all your economic activity, family and other connections are based in Britain. There are other, somewhat bizarre, anomalies. When an individual is present in the UK at midnight, it is counted as a day of presence in the UK for determining residence, but there is an exemption for transit passengers. Basically, days spent in transit, which could involve being in the UK at midnight, will not be counted as days of presence in the UK for residence-test purposes so long as during transit the individual does not engage in activities that are to a substantial extent unrelated to their passage through the UK. HM Revenue & Customs (HMRC) has illustrated this with a series of examples. Take example four:

Phil lives in Jersey and is travelling to New Zealand by way of Gatwick and Heathrow. His flight from Guernsey is delayed by fog and he arrives too late to make his onward connection to New Zealand that day. His son had already arranged to meet him at Gatwick and drive him to Heathrow; now he drives him to a hotel near Heathrow instead, where Phil will stay overnight before catching his rearranged flight. At the hotel they have a snack together. These activities are substantially related to completing travel to a foreign destination – Phil would have eaten in the hotel even if he had been unaccompanied. The ‘transit passenger’ provisions will apply.

Individuals who became non-resident from the UK some time ago do not have as much to fear. Providing they have firmly established themselves in one or more overseas locations and they have severed or limited their family and business activities in Britain, it is unlikely that HMRC will trouble them. The one exception to this is, probably, those who have been non-resident for some time but are still running UK businesses. This will be of concern to those people who live in, say, Monaco and pop in and out of the UK by private jet on a regular basis.

However, the people who really need to be careful are those who have recently left the UK or are now planning to do so. If you are in this position, it is crucially important that you can show HMRC clear evidence that you are no longer resident.

Here are the conditions you have to meet to avoid being considered resident for UK tax purposes:

  • You have to actually leave the UK. This sounds obvious; however, there are circumstances in which HMRC can ask for proof that you have made a clear and distinct break from Britain even before considering the question as to whether or not you have done sufficient to achieve non-resident status. This is particularly the case if you are leaving for personal reasons, such as a lifestyle change or retirement. In these situations, it is important to be able to show how the pattern and circumstances of your life have changed and that your involvement and attachments to the UK have reduced substantially.
  • If you move abroad but continue to visit the UK very frequently while having a home available for your use or if your spouse and dependent children continue to live in the UK, it is unlikely that the Revenue would accept that you have left at all, unless you are also working abroad and maintain a settled lifestyle there.
  • Putting the above considerations to one side, what do the basic rules say? If you are leaving the UK to work, you must move abroad and live there while working in continuous full-time overseas employment (or self-employment) for a minimum period of one complete UK tax year.
  • If you leave for any other reason, you must move abroad and live there on a settled basis for a minimum period of three years from the date of your departure.
  • Under both situations, you then need to ensure that you subsequently spend less than 183 days in the UK during any complete tax year of non-resident status, and that you limit the total number of days spent in the UK to fewer than 91 per tax year on average. This average is taken over a four-year period from the point of your departure and is tested at the end of every complete tax year of non-residence status.

Once you have achieved non-residence status under the above tests, you will be exempt from UK income tax on all non-UK sources of income and your worldwide employment earnings. Once you have been non-resident for five complete UK tax years, you fall outside of the scope of UK capital gains tax. If you do not remain non-resident for five complete tax years, you remain subject to capital gains tax in the UK, even on sales made while living abroad, and even if your non-UK income becomes exempt.

Suffice it to say that care and professional advice are usually required to ensure that you are successful in achieving non-resident status, which is fundamental to the more valuable UK tax planning that can be undertaken.

One final point: all UK-source income remains subject to UK income tax. As a rule, if you are a British, EEA or Commonwealth national, you remain entitled to full UK tax allowances, so the first £6,035 of income is free of tax to you anyway (2008/09 personal allowances). If you live in a country with which the UK has a double-tax treaty, it may be possible to limit the extent to which dividends are taxed in the UK and most private sector or personal pensions can be exempted from tax on the basis that they are taxed in your host country. Rental profit usually remains taxable in the UK come what may.

Under certain circumstances it is possible to enjoy tax-free interest income from the UK and to limit the tax on dividends to 10%, regardless of the amount of income you receive from these sources.

The use of charities in tax planning

An interesting anomaly in tax law is the status of charities in both the US and the UK. There is almost no regulation in either country in so far as charities are concerned. Or, rather, there is some regulation of the charities but not the managers or trustees. Even more interestingly, in the US each individual state has its own definitions of what a charity is, and this is not governed by federal law.

Let’s look at the US in further detail. When an American is talking about a charity, he means exclusively the entity defined by the Internal Revenue Code as a ‘501 (C) (3)’ entity. Let’s imagine you want a vehicle that is wholly opaque and cannot be penetrated by outsiders. It must not disclose any information to any authority about its management or its purposes. It needs bank accounts. It wants to be able to remit funds around the world. It wants the complete absence of any form of regulatory activity from the authorities. The last place you would go is any of the better-known offshore financial centres as their regulatory regimes are so tight and their disclosure requirements so overwhelming that to meet all the above criteria would be impossible. Indeed, it would be almost impossible to find a corporate service provider, a trust company or a bank of any reputation willing to get involved in any such structure.

However, if you went to Delaware in the US, things would be very different. You can set up a Delaware limited-liability company (or, LLC) through the Internet. No questions are asked. The identities of the members and the officers can be entirely fictitious. No information is filed, not even an annual return. The only thing that exists on the public record is the name, the date of registration and whether it has paid its annual registration fees. So the entity is entirely opaque and wholly secretive. What about the tax aspect? Even though the law of Delaware has no regulatory requirements of any sort whatsoever, the LLC will have to pay US tax, will it not?

Not necessarily. As soon as the LLC is formed, if you are unscrupulous, a fictitious officer ‘resident’ in a foreign country will obtain from the Internal Revenue Service (IRS) an Employer Identification Number for the LLC, and then file form 8832. In this it will be stated that the LLC is to be disregarded as a single member entity. The IRS will confirm the status in due course, and will take no further interest in the LLC.

Of course, your entity needs a bank account. In the US, some banks effectively reject demands that they obtain Know Your Customer Information. It is therefore a matter of the greatest simplicity to open a bank account for the LLC. Once you have a US bank account, it is much easier to arrange banking in another country. The Far East would be a good place to look.

So, where does the idea of being a charity fit into all of this? Another way in which the opaque US-based organisation can avoid the interest of the IRS is to ensure that it meets the criteria of Internal Revenue Code 501 (C) (3). These entities, for tax purposes, are liability-free because they engage in charitable activities.

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The benefits of moving to Panama

Although Panama has been touting itself as the ideal location for would-be retirees from the UK, US and other developed countries, it is only recently that those looking for a new place to live have seriously begun to consider this tiny republic located between Central and South America.

The country has fewer than three million inhabitants and has recently become a hot spot for immigrants. Why? Because:

  • it is still possible to find a good place to live at a relatively inexpensive price
  • the weather is excellent throughout the year
  • the countryside is stunning and there are beautiful beaches on both the east and west coasts
  • there is an excellent health system and other facilities are also increasingly good
  • the cost of living is not high (although it has been rising)
  • there are direct flights from Europe, the US and South America.

Although many of the new residents are coming from South America, an increasing number of immigrants are coming from the US, Canada and Europe.

What about tax? Here Panama has a considerable advantage. It has a territorial tax system. Income arising in Panama is taxable, but income arising from a non-Panamanian source is not taxed. This includes all foreign-source income that is remitted into Panama. Also, interest arising or accrued in Panamanian bank accounts is exempted.

How easy is it to move there?

Very! There are different options, including something called an investor’s visa (essentially it means investing at least US$150,000 in a business based in Panama); a second passport (this requires you to make a deposit of roughly US$180,000 in a Panamanian bank, for which you are entitled to a five-year passport; pensioned tourist visa (this requires you to show that you have a monthly pension of at least US$500); and a self-economic solvency visa, which requires you to keep at least US$200,000 in a Panamanian bank account.

You may also be interested to know that the application to move to Panama as a resident takes an average of two months.

Incidentally, while I am talking about Panama I must just mention the ‘private interest foundation’ (PIF), which is a very good vehicle if one is looking for a structure that can be used to protect the assets of an individual or a company. A PIF offers all the best features of private foundations in Liechtenstein, the Anglo-Saxon Trust and the Panama Corporation. And when properly structured can be used to achieve all the goals you set forth in terms of asset protection and estate planning. It offers a high level of confidentiality, asset protection and is extremely useful as an estate-planning tool. Incidentally, once an asset has been transferred to a PIF, creditors have a maximum of three years to make any claims against it. In other words, once you have put an asset in a PIF it will be protected from your creditors after three years.

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Watching the Directive: for expats

Notwithstanding its almost venereal acronym, EUSTD – the European Union Savings Tax Directive – has been spreading like wildfire through the accounts of expat savers for the past three years. And, given the penalties associated with non-compliance, it is sensible for all expatriates operating offshore savings accounts to brief themselves on the Directive to find out whether (a) they are affected and (b), if they are, how they can comply.

Are you affected?

This Directive affects all EU nationals residing in an EU country. If you are not an EU national, or if you are an EU national and residing outside the eurozone, then the Directive is not your concern, unless you happen to live in one of those non-EU countries which have opted to comply (see list below).

EUSTD, which became effective in July 2005, has, to all intents and purposes, turned the region’s financial institutions into tax collectors by ruling that they either withhold tax directly from savers’ balances or notify the relevant tax authorities of what those balances amount to.

EUSTD applies only to savings’ income, however, including bank deposits and interest from certain bonds and investment funds. Income earned as dividends from equities, life assurance products and pensions is not affected.

What’s the Directive all about?

Essentially, EUSTD is a weapon in the battle against low-level tax evasion, which the EU reckons costs it €1 billion each year in lost revenue. EUSTD takes the form of an agreement between the member states of the EU to either exchange information about or impose a withholding (also known as retention) tax upon individuals who earn interest in one European country but are resident in another.

The main aim of the Directive is to facilitate the collection of tax revenues from all personal deposit accounts that are held in EU member state countries (and those held in states/principalities complying with the Directive) by EU residents throughout the EU.

How does it work?

Practically speaking, the Directive works like this:any EU tax resident with a deposit earning interest in any other EU member state or states is subject to rules which require deposit-takers to either withhold tax directly or exchange information with the account holders’ relevant tax authorities about their deposits and the interest those deposits have earned.

Example

A resident of Spain holds a bank account in the UK. Being compliant with EUSTD, the bank will provide details of interest payments on the account to HMRC. HMRC will, in turn, provide that information to the Spanish tax authority. Known as an ‘automatic exchange of information’, it enables the Spanish tax authority to compare the amount of income declared by that individual on their Spanish personal tax return with the information exchanged between the tax authorities under EUSTD.

Who won’t kiss and tell?

Austria, Belgium, Luxembourg, the Isle of Man, Jersey and Guernsey have chosen to spare their customers’ blushes by not declaring the size of their nest eggs to the taxman, agreeing instead to take the alternative route and automatically withhold (retain) a percentage of any interest accrued, as tax. Standing presently at 15%, the withholding tax rate increases to 20% this coming July and will reach its ceiling of 35% in 2011. Seventy-five per cent of the tax generated from an account’s balance will go to the account holder’s home country while the rest goes to the country where the funds are held.

While the offshore finance centres have declared the withholding tax option as their preferred modus operandi, most deposit-takers in Jersey, Guernsey and the Isle of Man are offering savers a choice: you can either have the tax withheld or you can have the interest paid gross with the account details sent to the relevant tax authority.

Offshore deposit-takers based on these three islands provide extensive information on EUSTD and how their customers can comply with the rules. Expats unsure of their position or uncertain whether they should opt for exchange of information or deduction at source should seek advice from their deposit-taker or independent financial adviser (IFA). Alternatively, affected expat savers can visit www.hmrc.gov.uk/esd-guidance/index.htm and get their information from the horse’s mouth.

Exemption rights

If you are tax-exempt, because, for example, you have retired, you must obtain an exemption certificate from your local tax authority and send this to your bank. Interest on your savings will not then be deductible, and nor will disclosure be necessary.

Saving the jam for tomorrow

There are currently a number of offshore savings accounts offering expats living in EU countries the facility to defer payment of interest earned on balances, and therefore falling outside the scope of the Directive, at least for the time being. The attraction here is that interest earned is rolled up and not paid out until the depositor closes the account. It’s worth doing your sums before taking the plunge, however, and totting up what you’re likely to lose by way of compound interest if you elect for this type of account as no interest will be earned on any previous years’ interest. Offshore deposit-takers offering deferred accounts include Alliance & Leicester International, Barclays and Britannia International: all three are based on the Isle of Man.

Jurisdictions imposing
 a withholding tax

Jurisdictions opting to
share information

Austria

Denmark

Belgium

Finland

Cayman Islands

France

Gibraltar

Germany

Guernsey

Greece

Isle of Man

Ireland

Jersey

Italy

Luxembourg

Netherlands

Switzerland

Portugal

 

Spain

 

Sweden

 

UK

States and principalities opting to comply with EUSTD: Andorra, Liechtenstein, Monaco, San Marino, Switzerland and the US.

Oh and another thing about Europe!

A recently introduced EU law makes it an offence to take more than €10,000 or currency equivalent in cash out of any EU country without telling that country’s tax authorities. Anyone wishing to leave an EU country with this sum, or above, must fill out a declaration form at the airport/point of departure/border crossing, stating the “origin and intended use of the cash”. Non-declaration is not an option; offenders will be fined the equivalent of £5,000.

The intention of the new rule is to frustrate the businesses of the drug dealers, tax dodgers, money-launderers and general bad eggs who have been slipping their ill-gotten gains across Europe’s borders unhindered.

The simple answer for law-abiding Europe-based British expatriates is to plan money moving as far in advance as possible, using the assistance of the banks to transmit larger sums.

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EDITORIAL

A word about HMRC rights

HMRC has recently obtained extensive new rights from parliament allowing it to investigate the affairs of its taxpayers and citizens. Interestingly, many of these rights go against one of the most important tenets of British tax law, which was that tax returns could only be used for the purpose of the assessment of tax. Now that information shown on a tax return is being pooled with other information, there is some question as to whether HMRC’s activities are entirely legal. Notwithstanding this, here is a quick summary of some of the worrying developments that have occurred:

  • At the end of 2007, HMRC published a report entitled Researching the Very Wealthy: Results from a feasibility study. Basically, HMRC commissioned the National Centre for Social Research in the United Kingdom to carry out a report on methods that it could adopt to get close to wealthy people in the UK. Incidentally, the Revenue now classes people with more than £5 million in financial assets as wealthy. Basically, what HMRC is interested in is data-mining individual tax returns in pursuit of this hunt for the wealthy. In addition, HMRC has, since February 2008, had the right to tap taxpayers’ telephones and to intercept emails and faxes if it believes the taxpayer is engaged in tax evasion. It does not need a court order and can use the evidence obtained by this means against the taxpayer in a criminal prosecution.
  • HMRC will also have the power to enter any business premises in the UK at will. It says that it is going to use this power proportionally, but there are those who believe that since it has never used any other powers proportionally, there is no reason to believe them this time.

Also any residential premises where a business record is maintained will be vulnerable to the application of these powers. Business records, incidentally, include everything down to receipts and a mobile phone containing business telephone numbers.

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Andorra: can it hold out?

Andorra remains one of the very few countries in the world that is blacklisted by the OECD’s Financial Action Task Force (FATF) and has maintained, against all the odds, almost complete banking secrecy. The interesting thing about Andorra is that it keeps a relatively low profile. Although it became an independent country in 1803 and is now a parliamentary co-principality (the co-princes being the president of France and the Catholic bishop of the Urgell diocese in Spain), very few people pay it much attention except as a place to ski in winter.

If one were to move to Andorra, one would find that there were no personal income tax, no inheritance tax, no wealth tax and no capital gains tax: except on property in Andorra itself. The Andorrans regard privacy as a fundamental right. Furthermore, its privacy regime has been constitutionally protected since 1993. What is interesting about this is that it predates the OECD’s initiative started in 1998. In other words, Andorra’s privacy laws are not a response to a perceived attack. They are part of the domestic law for the benefit of native Andorrans.

For anyone looking for a safe place within Europe to keep assets, Andorra offers myriad possibilities. For instance, a number of companies and family offices are using Andorra as a location for their secure computer networks and servers. Why? Because of the country’s obsession with privacy. As it currently stands, it is inconceivable that the Andorrans would exchange information with any other jurisdiction in the world, especially as Andorra does not have any law making tax evasion, tax mitigation or tax avoidance a crime.

What of the future? Like many jurisdictions that have been put under pressure by the OECD, there is an intention to come to some sort of agreement involving a very modest acquiescence to OECD pressure. However, as one expert put it, whatever the Andorrans do they are not going to change their privacy laws any time soon. They are far too fundamental to the Andorran way of living.

Don’t forget Belize

Many people, when looking for a location for their offshore company or trust, overlook one of the most politically stable and well regulated but flexible countries in the world: Belize. The key benefits of a Belize international business company (IBC) are:

  • you can register a company within 24 hours
  • at US$100 Belize’s incorporation and annual licence fee is the lowest in the world
  • filing requirements are limited primarily to memorandum and articles of association, name of registered agent and address of registered office
  • bearer shares may be issued, subject to registered agent/professional intermediary custody requirement
  • name availability: there are only 70,000 IBCs incorporated in Belize, whereas there are over seven million in the British Virgin Islands. Obviously, this offers much greater company name options
  • a Belize IBC is totally exempt from all forms of taxation in Belize, including stamp duty
  • no currency exchange control
  • total flexibility. Only one subscriber is required for incorporation. Only one director is required. Directors can be corporate and need not be resident in the country. Furthermore, meetings of shareholders and/or directors may be held in any country at any time and may be attended by proxy.

Belize also offers competitive trusts and other vehicles and will shortly be making available a US-style LLC.

Belize was, of course, originally a British colony: Honduras. As a former colony, it has all the legislative and administrative systems that one would expect.

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Making use of PTCs

In jurisdictions such as Hong Kong and Singapore there has been a great deal of interest in establishing something called a private trust company (PTC). A PTC is a structure that allows the client to exercise a high degree of influence over his family’s future. How? Because he no longer has to trust the trustee as he will be in a position to sit on the board of directors of the PTC, administer the assets settled on trust and engage in trustee functions, and all in a cost-effective manner. The PTC has been gaining in popularity for many reasons, including the settlor’s:

  • desire to maintain greater control over the administration of assets
  • interest in reducing costs of operating a trust structure (which in older jurisdictions are prohibitive)
  • concern that the trustees may not act in the best interests of the beneficiaries
  • determination to ensure privacy in the family’s financial affairs.

Who does a PTC best suit? Undoubtedly, it is most appropriate for an international and highly mobile modern wealthy family seeking the benefits of a trust relationship in a jurisdiction that provides for sensible regulatory oversight, ensuring protection for the family from all the usual threats, such as political disturbance, unsuitable heirs and, of course, tax.

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 2008. 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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