We already know that the corporate acquisition of homes whose value exceeds £2mn will attract a 15% stamp duty land tax as opposed to the previous 5% before the 2012 budget.  Next week, on 11th December, we will know whether the so-called ‘mansion tax’ is going to be introduced as an annual charge for UK residential property over £2mn held by ‘non-natural persons’ at a cost of between £15,000 and £140,000 per annum.  We will also be informed that there will be an extension of the capital gains tax regime to disposals of UK residential properties, as well as shares in offshore companies owning UK residential property.  We don’t yet know whether there be a re-basing of value so that the massive increases in values to date are exempt from the new CGT regime; if this is not included in the legislation it will amount to retrospective taxation so that immediate restructuring would be essential.

What is clear is that current ownership structures must be reviewed once the new provisions are announced.  Although the ideas for restructuring may be fairly quickly prepared, implementing the changes can take a considerable amount of time, particularly where assignments from one entity to another need the consent of other parties (for example, leasehold apartments requiring landlords’ consent to assign).

And there won’t be a one-size fits all answer to problems created under the new legislation.  We have considered many possibilities, including transferring properties into personal ownership but with the consequent inheritance tax exposure; creating nominee arrangements which would need to be disclosed and would not preserve confidentiality of ownership; creating an offshore limited partnership which is inherently transparent and may not achieve the tax benefits desired; creating a double trust structure which is more complex but may meet the objectives of avoiding inheritance tax and the mansion tax; or simply maintaining the current corporate structure if the intention is to dispose of the property in the relatively short term (subject to the government introducing a re-basing provision next week).  There may be other issues that one needs to consider when examining a current structure, such as whether the ownership of UK property creates any potential UK tax residence issues, or even UK domicile issues.

With the Christmas period following next week’s revelation, it may be useful for Clients and their professional advisors to start the examination of current structures as soon as possible in order to complete restructuring prior to 5th April 2013.  IFS has put together a team of professionals who include: property lawyers to effect necessary property assignments; bankers to lend relevant finance to mitigate potential inheritance tax liabilities; commercial lawyers to effect the trust and loan documentation if required; valuation experts to provide relevant valuations of properties and corporate liquidators to oversee the liquidation of relevant companies, the distribution of assets to its shareholders and liaising with the UK tax authorities HMRC.  There are therefore several hoops to jump through before 5 April 2013!

Regular readers will know of my interest in advising on real estate worldwide ever since my book ‘Structuring International Real Estate Transactions’ was published by Sweet & Maxwell in 1991.  This title was in fact used for the third ITSAPT annual conference which I presented at the Landmark London hotel on 8th November.  As with the two previous conferences, I am glad to report that the conference was very successful and we had over 20 tax professionals from around the world (United States, Hong Kong, Singapore, India, Brazil and many European countries) to discuss issues on investments in real estate in their respective countries.   We were honoured to have Kevin Gardiner of Barclays, our ITSAPT sponsor, to talk about the investment climate generally and specifically investments in real estate both in the UK and in Asian countries.  And the role play that we arranged as a consultation with Tax Counsel Philip Baker QC on the issues relating to a property development in Mayfair was very revealing as well as entertaining.  My thanks to all those who participated.  

We are planning four more ITSAPT conferences next year, one being again in London as our flagship conference, with others covering the regions of North America, Asia and Africa.  And after four months of intensive work I am delighted to announce that ITSAPT is now open to receive members:  http://itsapt.com/account/register/. 

In addition to becoming part of a growing international multi-discipline advisory community, by joining ITSAPT members will be able to access a growing body of articles and other resources on cross-border tax, legal and commercial issues. As this body of knowledge grows we will also be able to match the content against specifically expressed preferences.

Members will also be able to seek other specialist advisors who work in defined jurisdictions and practice areas in order to help them amplify their existing professional networks.  Over time, ITSAPT will provide a diverse set of online resources, including blogs, news, webinars and discussion groups – and will also introduce features to make key elements of the knowledge base available in a form accessible to the client community of entrepreneurs, CFOs, CEOs and high net worth individuals.

Because we recognise that the value of the services available will scale through time, we are providing members who join before 31 December 2012 with 18 months’ full access.

I hope this is interesting to you and I look forward to welcoming you to our ITSAPT community.  Please don’t hesitate to contact me (click here) if you have any questions or comments.
 
With my best regards 
 
Roy Saunders

The post December 2012 (124) – UK Residential Property and New Legislation appeared first on IFS Consultants Ltd.

The two main functions of a taxation system are to provide government with the resources to fulfill its social and economic requirements, and to regulate the economy throughout its cyclical progress.  The party conferences should have asked whether the current system is achieving these aims.  We hear so much in the papers about tax schemes costing the UK exchequer £5 billion or more, and my article in last month’s newsletter entitled ‘Tax Planning and Morality‘ explains my views on these schemes.  But clever schemes using semantic interpretations of the law rather than its intended purpose are partly created because of the complexity of tax law. And partly because of the high rates of taxation.

Another recent article I wrote was entitled ‘Letter to the Chancellor‘ and was a repeat of an article I first wrote in 1996 just before Tony Blair came to power.  It advocated then, as now, a re-think of the high rates of direct taxation and a shift towards a multi-rate VAT system where luxuries attract higher VAT rates than items generally required for day to day living.  The concept?  To give taxpayers a choice of how to spend their income.  

Just imagine a 20% personal and corporate rate of direct taxation – certainly if that were the case the BBC wouldn’t be accused of aiding and abetting unacceptable tax avoidance through the use of personal service companies.  Tax avoidance schemes themselves often cost a significant upfront percentage of the tax saved without any guarantee that the schemes will be successful.  So a significant reduction in direct taxes would certainly eliminate much of the savings that would otherwise (perhaps but more likely perhaps not) be achieved.

A 20% direct tax rate would probably encourage more individuals to go out to work, if they were left with 80% of gross income; subject of course to more jobs being available.  The individuals would then have a choice as to how to spend their money depending upon their family or other circumstances.  And the rich?  Those ignoble individuals who are attacked by some as the unacceptable face of capitalism, yet who are in fact the bedrock of our society through the revenue they create through their entrepreneurialism and job creation?  Well they certainly wouldn’t be motivated to leave the country, nor to enter into convoluted tax avoidance schemes which have little chance of success.  And for the UK, Ireland and other countries offering the remittance basis of taxation, maybe the long standing benefits for resident non-domiciled individuals could at last be discarded if individuals have lived in the country for more than a temporary period of say 5 years – that’s what a 20% rate of personal income tax would achieve.

And finally, the tax evaders, those who justifiably incur the wrath of government and public alike – in today’s age of TIEs (Tax Information Exchange Agreements), FATCA and other bilateral and multilateral agreements, they would be incredibly naïve to expect their wealth to escape scrutiny from Revenue authorities. An amnesty offering a one-off 20% tax charge on offshore wealth repatriated to the country where they live may achieve billions of unpaid taxes and enable these miscreants to contribute again to the society in which they live.  It has been estimated that if some wealthy Greek individuals paid just half of the taxes they have evaded, Greece would not have required a bail-out from the EU nor the austerity measures now in place.

What about the tax on employment – social security charges or national insurance contributions as they are known in the UK?  A rose by any other name is a rose, as is a tax.  In many countries, such a tax is a disincentive to employment and should be limited – the UK fortunately is not in the list of countries where such disincentive is a major consideration but there are many countries whose social welfare costs need to be created in other ways which do not discourage employment.

For there is no doubt, high levels of employment are fundamental to the wealth of a nation, providing the basis for an increase in GDP and a lowering of budget deficits. Keeping costs of employment down and providing an incentive for individuals to work by providing an increased take home pay through lower rates of direct taxation, will undoubtedly stimulate employment levels.

All well and good, of course, but how do governments pay for all their social and economic requirements if they reduce their revenue by the billions lost through a lower rate of direct taxation? Well firstly, I think this is a question which merits greater examination, since how do we know that billions of revenue will be lost?  Tax avoidance schemes would certainly be less appealing, tax evasion would be viewed in a different light, greater employment would increase revenue even with a lower income tax rate (as well as stimulate consumer spending), and low corporate tax rates would encourage investment.

But even accepting that revenue from direct taxation may be decreased, higher VAT rates on certain items coupled with higher indirect taxes on other transactions including property transfers would replenish any deficit incurred. What is needed are politicians with imagination, possibly an oxymoron, but certainly not politicians who can think only of their next 5 year term of office.  Personally, I would vote for a political party who would have an overall reform of the entire tax system, even if this took more than five years to come to fruition.  And this in not a UK-centric issue – it is a global issue.  Barack Obama’s famous vote catching phrase, “yes we can” has a fairly hollow resonance four years later – more like “well we could have done if we really meant it”. 
 
With my best regards 
 
Roy Saunders 

The post October 2012 (123) – Tax planning? Why try and beat the system? Change it! appeared first on IFS Consultants Ltd.

It is unfortunate that judges themselves have laid the foundations of the tax planning industry which relies purely on complying with a particular interpretation of the law, known commonly as tax avoidance. For example Lord Upjohn said in a particular tax case “No commercial man in his senses is going to carry out commercial transactions except on the footing of paying the smallest amount of tax involved”.  And the famous Judge Learned Hand said “There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.  Everybody does so, rich or poor; all do right.  Nobody owes any public duty to pay more than the law demands; taxes are enforced exactions, not voluntary contributions!”

Running with this judicial permission to create ever more devious means of complying only with what the law demands, as interpreted by the taxpayer and his advisers, the tax avoidance industry forgot about its moral compass, if it ever had one.  Court cases have more recently adopted a purposive approach to the interpretation of the law, and governments have introduced mounds of legislative provisions to counter what they consider abusive tax planning.  The introduction of disclosures of tax avoidance schemes has helped tax administrations focus on anti-avoidance legislation, but all this really does is create a mountain of tax law which only tax professionals can interpret!  Quite clever really – advise clients on tax planning schemes, let them be discovered by tax administrations (who cares that the clients have to pay the tax they were supposed to in the first place plus interest and huge penalties), and then advise clients again on interpreting new and ever more complex legislation imposed to prevent these and other schemes from being effective.

An example of this is indeed the recent exposure of a particular scheme which in its simplicity works like this. Client: “I am due a large bonus and don’t want to pay tax on it”. Adviser: ”I can arrange for this to be paid into a structure which then gives you a loan.  Would you like to pay tax on the bonus or pay no tax because you receive a loan?” Client: “I would prefer the no tax option please.  But what about repaying the loan?  How will I do that?” Adviser: “Aah, here’s the clever part.  The loan gets transferred to another entity which never asks you to repay the loan”  Client: “Sounds too good to be true – where do I sign?”

Well it is too good to be true, and the client’s gut feeling should have warned him not to get involved.  But greed overtook both common sense and morality.  And throughout my career, I have had so many people coming to me with schemes to reduce their tax burden, from seemingly innocuous partnership arrangements where tax losses are created in excess of amounts invested, to SDLT avoidance schemes – and I always advise that there are two issues which are relevant.  The first is that these schemes invariably fail once discovered since they rely on an interpretation of the law which was not the intent of the legislators; and the second is that they cannot be morally justified. If a tax is due and payable and you live within a particular country which imposes such a liability, then it should be paid.  Consider the Greek economy for example:  if Greek tax residents paid just half of the taxes that are due and payable, then the Greek bailout would not have been required and more important, the austerity measures now adopted could have been avoided.  Seeing our own European neighbours searching for the means merely to subsist as a result of their government failing to collect taxes that are due highlights the issue I am discussing here.

But does this mean that minimizing the tax burden is morally wrong in itself? Certainly not – tax is a cost like any other which must be considered when making an investment.  And if this and other costs are too high, the investment won’t be made. For example, a group of investors want to develop a business in the US through a partnership; personal tax rates at federal and state levels would create tax liabilities which would be prohibitive even if prospective profits could be achieved.  Instead they operate through a non-US low taxed corporate entity which licenses the technology required and finances the entire operation through arm’s length interest and royalty arrangements, resulting in an overall tax rate of half what it would otherwise have been.

Another example: a sportsman is employed by a company which has limited ability to fund a pension scheme with sufficient money to provide an adequate income subsequent to his retirement.  Taking into account the short working life as a sportsman, he becomes employed by a non-resident company which has no proscription as to the amount it can fund into a pension scheme.  Of course, the pension is taxable in the country of which he is resident at the time, but this opportunity may provide not only a deferral but indeed a minimization of tax that would otherwise have been payable on an arising basis.

And a final example: A multi-national company wishes to invest in a renewable energy plant in an under developed country which offers a 5 year tax holiday to stimulate its domestic economy. On repatriation of the profits, the multi-national is subject to domestic tax – so tax is simply shifted from the country that actually needs tax revenue but foregoes it in order to stimulate its economy, to a developed country which doesn’t have the same requirements.  The multi-national is advised to invest through a subsidiary which has a double tax treaty with the under developed country which has a so called tax sparing clause.  This means that effectively the tax holiday is preserved by using a deemed credit to offset the tax that would otherwise be due in the subsidiary’s country.  The subsidiary can now use gross (tax free) profits for reinvestment into further renewable energy plants in other countries.

These examples show that tax planning may not be immoral if the knowledge of international tax practitioner is harnessed for justifiable purposes.  I and my colleagues should no longer rely on the obiter dicta of past judgments in tax cases, nor should we use our semantic creativity to justify structures which the public would generally conceive as being unacceptable tax avoidance.  It is time for a change.

It is time for ITSAPT to be launched.  Regular readers will know that ITSAPT is the acronym for my book International Tax Systems and Planning Techniques, but it also means something – it’s apt means it is appropriate, appropriate for today’s environment. I have been developing the ITSAPT website at www.itsapt.com for the past 3 months to populate it with ‘knowledge’ articles which will help entrepreneurs and their professional advisers to plan their international tax and structural affairs in a tax efficient and properly justifiable manner.  And to do this successfully, I have entered into a joint venture with a conference and publishing group which plans to take my concept and develop it into a worldwide organisation offering specialist information in an easily accessible manner.  This will be accomplished through an intuitive and comprehensive website, several conferences around the world each year, a members’ bulletin board, links to sites where further information can be obtained to enable businesses to be efficiently structured, a non-intrusive social network, webcam training and much more.

We will be launching the ITSAPT website in its developed form in September 2012.  I would be pleased to hear from anyone who feels they may like to become ITSAPT members and will offer free membership for 6 months to the first 50 individuals who respond to this newsletter.  They will also be invited to a launch party to be held early next year which will demonstrate how ITSAPT can become the organization that entrepreneurs and their professional advisers would want to join in order to develop their relationships and their knowledge of how to structure and build international businesses.

And just one further reminder that the early bird registration for the ITSAPT Conference on November 8^th 2012 expires on 31 July 2012.  The topic is Structuring International Real Estate Transactions and the day will be presented through case studies and a conference with tax counsel on a development project, followed as always by a cocktail party where delegates will be able to discuss relevant issues with the panel of speakers.  The program can be seen on the ITSAPT website under www.itsapt.com/conference

Kind regardsRoy Saunders

The post July 2012 (122) – Tax Planning and Morality appeared first on IFS Consultants Ltd.

First some news  about the ITSAPT Association.  The website is now up and running at www.itsapt.com and we will be able to accept members  in the next month – please look out for our next newsletter with further information or visit the membership page on our website when all security arrangements have been completed. 

The ITSAPT Association is a global portal for all international entrepreneurs, corporations and professional advisers who need to understand how to structure international organisations as well as personal requirements, and to enable them to contact all those individuals and organisations in other countries who can help them.

The four major aims are:

·         The ITSAPT Association will be the portal to enter for those wanting to understand how to structure international business organisations whose Knowledge page will include information relating to international tax, trusts, company, legal and case law indexed in an accessible format

·         The ITSAPT Association will be the portal to enter for those wanting to contact  organisations in different countries which can help the international requirements of businesses and individuals.  These may be local bodies offering help to incoming businesses, such as local government sponsored organisations, chambers of commerce, international banks, universities etc etc.  These links will enable members to find out information that is not easily available elsewhere and is an invaluable facility to enable www.itsapt.comto act as the international  portal for entrepreneurs, corporations and individuals.

·         The ITSAPT Association will be run for our members with increased benefits as length of membership increases including special arrangements at all ITSAPT Conferences and discounts on Publications

·         The ITSAPT Association will provide bursaries for students to attend university courses on international law around the world

Please save the date of late afternoon/early evening of Thursday September 13^th as the inaugural launch party of the ITSAPT Association where all these aims will be demonstrated.  We will be holding this at the ‘ITSAPT hotel’ – the Landmark London hotel – and will be portraying the Knowledge section of the website, accepting applications for membership, and generally doing what one normally does at launch parties – drinking, eating and socialising.  I will let you have more details nearer the time but please diarise the date.

And of course, the other important forward date is the ITSAPT Conference this year to be held on 8^thNovember, again at the Landmark London hotel, and this time the subject matter is Structuring International Real Estate Transactions.  This is a topic that I spoke on this month at a conference in Gray’s Inn, and we will be exploring in greater depth innovative Fund structures and the practical application of double tax treaties when investing in real estate around the globe.  The highlight may be a role play of a consultation with Tax Counsel Philip Baker QC on the latest structures for investment in the UK.  Barclays Bank is sponsoring the entire conference with SDM also sponsoring the cocktail party; you can find details of the Conference on www.itsapt.com/Conference/ …  and we are now accepting delegate applications.  Please note the early bird discount for applications prior to 31 July 2012.

There were two IFS highlights of this busy month of May – one was the Wentworth golf day presented by IFS in conjunction with Barclays Bank and Memery Crystal.  Miraculously it didn’t rain and equally miraculously, I was on the winning team – a fix I hear you cry!  But in spite of a good round and my jokes kindly received in an after dinner speech, I am not intending to give up the day job to be either a professional golfer or even an amateur comedian!

The second highlight was the joint presentation that IFS and Memery Crystal held in Geneva last week, entitled Seeing London More Closely (a photograph of Big Ben shrouded in fog being the centrepiece of the invitation).  We had guests attending at the Hotel d’Angleterre from many countries and we followed the presentation with a cocktail party overlooking the lake – in fabulous weather.

We also teemed up with London & Partners, a not-for-profit public private partnership, funded by the Mayor of London and a network of commercial partners to promote London, and Chris Orange spoke about London with some fascinating facts.  Such as London being the 5^th richest city in the world by GDP per capita, having 30% of its land mass as green parkland with 101 golf courses, 2 Universities being in the top 10 of the world, more US banks in London than in New York, and many other surprises.  As the song goes, maybe it’s because I’m a Londoner, that I love London Town!

Besides the corporate and personal tax benefits that London (and the UK generally) has to offer, the main thrust of the presentation was to inform the audience of the liberal UK corporate tax regime for holding companies and the financial markets available in London to raise private or public equity.  I have asked Greg Scott of Memery Crystal to prepare an article for this newsletter summarising the talk he gave, and this is our article this month which I am sure you will find very interesting.

Finally, another conference at which I spoke in May was on Corporate Tax Planning at the Millenium Hotel, where I delivered two papers, one on corporate migration and the other on EU holding company structures.  I will be putting the slides onto the ITSAPT website and these will be available to download under security arrangements for ITSAPT members.

I am now going to enjoy a weeks’ holiday after my daughter’s wedding, but I am looking forward to building the ITSAPT Association with your help and involvement in the coming months. 

Kind regards

Article re AIM at Geneva Conference

I am head of the corporate department at Memery Crystal, a central-London law firm and we are particularly well known for dealing with the legal side of bringing companies to AIM and dealing with their requirements once listed.

On 24 May, it was my pleasure to accompany Roy Saunders and my Tax Partner, Tim Crosley, together with a representative from London & Partners (partly funded by the Mayor of London’s office) at the Hotel D’Angleterre in Geneva where we discussed the advantages of living and doing business in London and the UK.  We used the case study of Mr Ivanov (it’s true, we could have been more imaginative with the name!), a Russian gentleman who decides to settle in London with his family, partly to be near his teenage children as they move into higher education and partly to develop his growing international mobile telecoms business, Telecomsk.  Whilst Roy and Tim focussed on the tax advantages of basing the business in the UK, I looked at the financing opportunities and why London is such an enviable location.

As with any business needing capital to develop and expand, Mr Ivanov has three basic choices, namely, bank debt, private equity funding (typically involving a mixture of senior debt, mezzanine funding and pure equity) and an IPO on one of London’s capital markets.  At its current stage of development, Mr Ivanov’s business will not attract much in the way of leverage as, although it is cash-generative, all revenues are being ploughed back into R&D, marketing and sales and related expenses.  The asset base is also small.  Although London is the headquarters for more private equity funders than any other city in Europe, Mr Ivanov has decided that private equity is not right in this particular case. 

We have often advised clients of the relative pros and cons of private equity as opposed to a capital markets flotation.  These are of course both legal and financial.  On the legal side, an IPO exposes Mr Ivanov to potentially onerous legal obligations and responsibilities to his shareholders and compliance with the relevant disclosure regime.  He will be putting his head above the parapet – he will be in the public domain.  Having said that, the private equity provider will require detailed and onerous warranties and indemnities from Mr Ivanov as to the running of his business.  It will also of course insist that at least one of its representatives sits on the board.  Mr Ivanov did not necessarily regard that as a good thing!  Finally and perhaps most importantly, where it is clear that the capital markets have an appetite for a business, he had to think long and hard about the price at which he was giving away his shares.  Private equity providers did not get rich by being overly generous with their money!  Of course, the capital markets will not support every kind of business and in the current cautious markets, investors will shy away from any business that is at too early a stage or unproven.  Luckily for Mr Ivanov, in this case, he has legally protected intellectual property, proof of concept, recurring and growing revenues and a strong management team.  These are all important tick boxes for investors and the brokers who pitch to them.

Having decided to bite the bullet and go for an IPO in London, Mr Ivanov then had to consider the choice of markets available to him.  A Main Market listing on the London Stock Exchange was out of the question.  The business did not have the requisite three year track record.  Achieving a free float of 25% (holdings of directors and any other shareholders holding over 10% of the shares being excluded) can also be an impediment for younger businesses.  AIM however welcomes new and younger businesses and has a more relaxed approach to free float (with none being required in the rules but with a de facto minimum 10% applying in practice).  We looked at why AIM was particularly suitable for Mr Ivanov’s business and his plans to aggressively expand it.  Principal among these were:

• AIM has proved a successful venue for technology companies;
• Because Mr Ivanov has, for sound corporate tax reasons, decided to base his holding Company in the UK, individual UK-based investors will be able to take advantage of generous reliefs available (or shortly to be available) under the Enterprise Investment Scheme even though much of the business is/will be conducted overseas.  One of the reasons is that the gross assets of the Company do not exceed £15 million and the Company has less than 250 employees.  The admission to the share register of a large number of small individual shareholders should help encourage liquidity, something that is often difficult to achieve with otherwise closely held companies with just a few institutional shareholders;
• London in general and AIM in particular has an appetite for international markets which other exchanges might regard as difficult or exotic.  In this particular case, a significant amount of growth is projected to occur in African countries such as Nigeria and Kenya where demographics, economic growth and technological improvements put the business on a strong upward trajectory.
• Companies listed on the Main Market are severely restricted from issuing shares for cash other than by way of a rights issue to all shareholders.  Typically, the limit here is 5% per annum.  With AIM companies however, shareholders take a more tolerant approach and are typically comfortable with the board having leeway to raise capital from selected shareholders up to 15% or more of the Company’s share capital (this may depend on the size and maturity of the company concerned and the type of investors on the register).  This enables Mr Ivanov to go back to the markets on several occasions as and when further cash is required (and without suffering the inevitable dilution involved when trying to raise too much cash too soon) without having to go to the expense and delay of convening a general meeting and publishing a detailed prospectus on each occasion.
• The AIM model, rather than relying on detailed monitoring of the regulatory rules by a bureaucratic authority, namely, the UK Listing Authority, delegates this responsibility to a Nominated Adviser or NOMAD.  The NOMAD works closely and proactively with the board to ensure that the AIM Rules are being complied with without announcements or documents being subject to time consuming review by a committee of remote people.

Mr Ivanov plans to build-up the business to a critical mass and to then gradually sell shares into the market from the third year post-IPO onwards.  As his shareholding starts to fall towards 30%, a bid premium may start to emerge in the share price and an offer from a third party may complete his exit.  In this way, he will exit over time and hedge his risk of the business peaking then deteriorating.

The post June 2012 (121) – Listing on AIM appeared first on IFS Consultants Ltd.

We will be sending out applications to apply for membership of the Association at a cost of £250 per annum, which will allow you access to the Knowledge section of the Association which we will be introducing in the next month (see below).  Membership of the ITSAPT Association will also allow you a 20% discount on the cost of the biannual publication of International Tax Systems & Planning Techniques whose acronym is ITSAPT and which has a pre-discount cost of £350, access to the full case study training chapter within the publication, a 25% discount on the annual ITSAPT conference the standard cost of which is £850 + 20% VAT (see below), access to past papers of ITSAPT conferences, access to the directory of members of the Association and regular updates from the ITSAPT team of global international tax lawyers.  If you would like to apply for membership, please click here. 

The Knowledge section comprises articles, documentation, precedents and other information provided by the ITSAPT team of international tax lawyers.  My company, IFS, has created the main body of Knowledge material, and some of this is demonstrated in this newsletter (instead of our regular monthly article).  Over the next few months, the ITSAPT team of international tax lawyers will be developing the Knowledge section with their own material, so that www.itsapt.com can become a portal for international tax knowledge, and indeed the first port of call when you have particular issues to consider.

Barclays Bank have kindly agreed to sponsor for the second year running the Third Annual ITSAPT conference on Thursday 8 November 2012, held again at the Landmark Hotel.  This year’s conference will be on Structuring International Real Estate Transactions.  Five case studies will be examined relating to ownership of private homes, real estate portfolios and renewable energy plants, hotel and condominium developments, property investments and shopping mall developments in over 20 countries around the world.  A post conference cocktail party is sponsored by Sociedade de Desenvolvimento da Madeira (SDM) to which delegates are invited.  The conference programme is attached to this mail out (click here) and can also be viewed under the conference page of the ITSAPT website (click here). 

An unusual addition to the conference programme is a brief summary of investment opportunities in Asia given by Kevin Gardiner Managing Director and Head of EMEA Investment Strategy, Barclays.

May is a busy month for me, starting with the IFS golf day at Wentworth on 2nd May which we are hosting with Barclays and Memery Crystal; on May 15th I am speaking at the PRT conference on Real Estate held at Gray’s Inn, on May 23rd at the IBC conference on International Corporate Tax Planning ideas where I am discussing both Corporate Migration and Holding Companies in the EU and the next day on 24th May at an IFS and Memery Crystal joint presentation at the Hotel d’ Angleterre in Geneva on the tax, fund raising, stock exchange and regulatory advantages of London.  Our Geneva presentation is entitled ‘Seeing London More Clearly’ and we are joined by London & Partners (L&P), launched by Mayor Boris Johnson in April 2011 as the official promotional organisation for London. 

All of this before my daughter’s wedding on 3rd June!  Exciting times!

With kind regards

Roy

[The following is an example of what the Knowledge section of www.itsapt.com will contain, however the formatting will differ as we have collated several sections for the purposes of presentation]

A.           Taxation of Domestic Profit — Trusts and Foundations (Switzerland)

In general

Until the ratification by Switzerland of the Hague Convention on the Law Applicable to Trusts and on their Recognition (HTC), which came into force in Switzerland on July 1, 2007, there was no specific provision dealing with trusts in Swiss law. Without having become a feature of Swiss domestic law, pursuant to the HTC, foreign trusts are now recognised as a distinct legal institution. It is however important to note that certain imperative provisions of Swiss domestic law will continue to prevail notwithstanding the fact that the HTC may apply. For example, a trust established by a Swiss resident may be attacked by an heir if and to the extent it contravenes to the Swiss forced heirship rules. In addition, creditors are protected against some effects of asset protection trusts.

The ratification of the Hague Convention has no effect on the tax treatment of trusts. According to art.19 HTC nothing in the Convention shall prejudice the powers of States in fiscal matters. The tax treatment of trusts is still determined exclusively under Swiss tax law.

It is quite common for Swiss residents (who are foregin nationals) to be beneficiaries of foreign trusts or for foreigners to set up trusts before moving to Switzerland. Although the Swiss tax authorities regularly have to deal with questions arising out of trusts, no provisions specifically relating to the taxation of trusts have been enacted yet by the Parliament.

On August 22, 2007, the Conference of the cantonal tax directors published the Circular Letter nr. 30 on the treatment of trusts for income and net wealth tax purposes. On March 27, 2008, the Federal Tax Administration issued the Circular Letter nr. 20 stating that the principles laid down in the Circular Letter dated August 22, 2007 apply at the federal level for federal income and withholding tax purposes as well, so that these principles apply at both federal and cantonal/municipal levels.

Principles of taxation

The Circular states that the concept of a trust describes a legal relationship which arises on the basis of a constitutive document (trust deed), when the founder (settlor) transfers certain assets to one or more persons (trustees) who have a duty to manage and use them for the goals established by the settlor in advance for the benefit of one or more third parties (the beneficiaries). Accordingly, the trust cannot be treated as a legal entity. Besides, there is no legal basis in Switzerland which could allow assimilating a foreign trust to a Swiss or foreign legal entity for tax purposes. The trust is thus transparent (principle of transparency) and it is not a taxpayer subject to taxation in Switzerland.

The Circular states further that for Swiss tax purposes one must analyse whether the settlor has definitely disposed of the assets attributed to the trust or whether the settlor retains control over the assets of the trust through economic or legal means. Moreover, the Circular states that trusts can be used in a lot of different situations and it is therefore not possible to list in detail the tax treatment of each specific case.

Types of trusts and tax treatment

·      Revocable and irrevocable trusts

Based on the above-mentioned criterion, the tax administration determines the revocable or irrevocable character of the trust regardless of the terms of the trust deed. The Circular adopts an economic view point to distinguish between revocable and irrevocable trusts. Particularly, the Circular provides for nine factors that can distinguish between revocable and irrevocable trust; a positive response to one of the factors will tend to qualify the trust as revocable for Swiss tax purposes. If the settlor has appointed himself as a trustee or as a beneficiary, the tax authorities will consider that the trust is revocable since the settlor retains some control over and has either rights or duties in relation to the trust assets and has therefore not definitely disposed of his assets. Moreover, a trust would also be qualified as revocable if the settlor has the right to remove the trustee and appoint another, or to add or cause to be added new beneficiaries. Similarly, if the settlor has the right to replace the protector or to modify the trust deed or to cause it to be modified, the trust is revocable. In these situations the tax authorities will consider that the settlor did not dispose definitely of the assets attributed to the trust. As a consequence, these assets and the income arising thereof remain in principle taxable in the hand of the settlor.

·      Irrevocable fixed interest trusts and irrevocable discretionary trusts

The Circular further distinguishes irrevocable fixed interest trusts from irrevocable discretionary trusts. In case of an irrevocable fixed interest trust it is considered that the settlor disposed definitely of the assets. The beneficiary is indeed assimilated to a usufructuary since he has a legally enforceable claim on the assets of the trust. As regards irrevocable discretionary trust, the Circular states that the right of the beneficiaries are only of the nature of a mere expectation.

·      Trustees and protector

Notwithstanding the fact that the trustee has full right to dispose of the assets attributed to the trust (ownership under civil law), the trustee has the obligation to manage these assets and use them for the purposes established by the settlor. The trustee has no power of disposition over these assets. As a consequence, the net assets attributed to the trust and the income arising therefrom must not be taxed in the hands of the trustee. This position is in accordance with the general principle of taxation according to economic control.

The Swiss resident trustee is however subject to taxation in Switzerland on any fees received in exchange for his trust administration services. The same treatment applies to the protector.

·      Settlor and beneficiaries

Pursuant to the principle of transparency, the Circular states that the assets and the income of the trust are attributed either to the settlor or to the beneficiaries (with the exception of an irrevocable trust created by a settlor before taking up residence in Switzerland).

According to the Circular, should the settlor be resident in Switzerland, the settlor is only be deemed to have disposed of his assets if another taxpayer has been enriched. At the time of the effective distribution, it is necessary to characterise the distribution as taxable income or a gift exempted from income tax, but possibly subject to the cantonal gift taxes.

If the settlor creates a revocable trust (the trust has to be characterised as revocable pursuant to the relevant criteria mentioned above), he does not definitely dispose of the assets attributed to the trust. The assets and income of the trust are hence attributed to the settlor for income and net wealth tax purposes. The distributions to the beneficiaries characterise as a gift, which is exempt from income tax, but possibly subject to the cantonal gift tax.

The tax authorities consider that the settlor definitely disposed of the assets only in case of the creation of an irrevocable fixed interest trust. In this case, the assets and the income of the trust are attributed to and taxed in the hands of the beneficiaries proportionally to their interests in the trust. As a consequence, at the creation of the trust there is a gift from the settlor to the beneficiaries, which is exempt from income taxes but possibly subject to the cantonal gift tax (if the settlor was Swiss resident at the time of the creation of the trust). The distributions to the beneficiaries constitute in principle taxable income. The distributions of capital gains are exempt from income tax. The distributions of the initial capital of the trust are exempt from income tax as well.

If the settlor creates an irrevocable discretionary trust, the tax treatment differs depending on whether the settlor was Swiss or foreign resident at the time the trust was created.

If the settlor is residing in Switzerland at the time of the creation of an irrevocable discretionary trust, the assets and the income of the trust remain attributed to and taxed in the hand of the settlor. The tax consequences are the same as for the revocable trust.

If the settlor is residing abroad at the time of the creation of an irrevocable discretionary trust, from a Swiss tax viewpoint, the assets of the trust can be attributed neither to the settlor, nor to the beneficiaries. Regarding the distributions to the beneficiaries, the Circular confirms that they may be characterised as taxable income or as a gift, which is exempt from income tax but possibly subject to the cantonal gift tax. Due to the fact that the assets of the trust are not attributable to the beneficiaries from a tax perspective, the distribution of the capital gains realised by the trust characterise as a taxable income. With respect to this last point though, some cantons are showing some flexibility in case a proper accounting makes the distinction between capital gains, income and initial capital. In general such a beneficial treatment requires the filing of a corresponding tax ruling request.

·      Gift and estate taxes linked to the settlement of a trust by a Swiss resident

A gift tax issue may arise if a Swiss resident settlor creates an irrevocable fixed interest trust, since he is deemed to irrevocably relinquish his rights over the assets so contributed to the trust.

·      Withholding tax

Dividend distributions made by Swiss corporations and interest paid by certain Swiss debtors are subject to a 35 per cent federal withholding tax. Having no legal personality, the trust itself is not entitled to file a claim in order to obtain the refund of Swiss withholding taxes. The Swiss resident settlor is entitled to request a refund of the Swiss withholding tax in the case of a revocable trust, since the assets and income of the trust are attributed to him for income tax purposes. As regards irrevocable discretionary trusts, a refund of withholding tax on the trust income may only be granted to the beneficiary (provided he fulfils the relevant conditions) at the time the relevant income is distributed to him. In case of an irrevocable fixed interest trust, only the Swiss resident beneficiary is entitled to claim the refund of the withholding tax.

The right of the non-Swiss resident settlor or beneficiary to claim the full or partial refund of the Swiss withholding tax is determined pursuant to the applicable double taxation treaty.

Foundations

Foundations (Stiftung or fondation) are taxed as a corporate entity on their net profits and capital. The tax rates are generally lower than the rates that are applicable to corporations. At the federal level, foundations are taxed at a rate of 4.25 per cent (whereas the applicable federal income tax rate for corporations is 8.5 per cent). Foundations are mainly used for charitable purposes. In this case, the foundation may be exempted from income and capital tax at the three levels of taxation. The foundation is generally not used for conducting a trade or a business, or for managing the assets of an individual or a family. As per Swiss civil law, the scope of a so-called family foundation has to be limited to the payment of the costs incurred by the member of the family for educational or medical purposes; a family foundation can not make regular distributions to its beneficiaries.

B.           Substantial Presence Test (USA)

You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:

1)    31 days during the current year, and

2)    183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

·           All the days you were present in the current year, and

·           1/3 of the days you were present in the first year before the current year, and

·           1/6 of the days you were present in the second year before the current year.

Example:

You were physically present in the United States on 120 days in each of the years 2007, 2008, and 2009. To determine if you meet the substantial presence test for 2009, count the full 120 days of presence in 2009, 40 days in 2008 (1/3 of 120), and 20 days in 2007 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2009.

Days of Presence in the United States

You are treated as present in the United States on any day you are physically present in the country, at any time during the day. However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial presence test.

·        Days you commute to work in the United States from a residence in Canada or Mexico, if you regularly commute from Canada or Mexico.

·        Days you are in the United States for less than 24 hours, when you are in transit between two places outside the United States.

·        Days you are in the United States as a crew member of a foreign vessel.

·        Days you are unable to leave the United States because of a medical condition that develops while you are in the United States.

·        Days you are an exempt individual.

For details on days excluded from the substantial presence test for other than exempt individuals, refer to Publication 519, U.S. Tax Guide for Aliens,.

Exempt Individual

Do not count days for which you are an exempt individual. The term “exempt individual ” does not refer to someone exempt from U.S. tax, but to anyone in the following categories who is exempt from counting days of presence in the U.S.:

·                    An individual temporarily present in the United States as a foreign government-related individual

·                    A teacher or trainee temporarily present in the United States under a “J ” or “Q ” visa, who substantially complies with the requirements of the visa

·                    A student temporarily present in the United States under an “F, ” “J, ” “M, ” or “Q ” visa, who substantially complies with the requirements of the visa

·                    A professional athlete temporarily in the United States to compete in a charitable sports event

If you exclude days of presence in the United States because you fall into a special category, you must file a fully-completed Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition (PDF).

Closer Connection Exception to the Substantial Presence Test

Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;

1)            The closer connection exception available to all aliens. Please refer to Conditions for a Closer Connection to a Foreign Country.

2)            The closer connection exception available only to students. Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students and Sample Letter.

C.                       Merger Directive (EU)

Council Directive 90/434/EEC of July 23, 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States

A merger is the fusion of two corporate entities (in the same or different jurisdictions), which allows one of the companies to be dissolved without a formal liquidation, while its assets and liabilities are absorbed by the surviving company. Thus, no taxation on capital gains will apply to the difference between the real value of assets transferred as a result of such transactions and their tax values, nor the issue of shares in acquiring companies in exchange for those of acquired companies. Such tax neutrality will apply both in the country of residence of the shareholder, and the country in which the assets or the transfer occurs.

Moreover, tax losses may be transferred within groups of companies subsequent to such an international acquisition, even if the loss transferring company is transferring such losses to a permanent establishment of a foreign (EU resident) company rather than to another local subsidiary.

To qualify under this Directive, a minimum share participation of 75 per cent must be held by the parent company, and as with the other Directives, only companies subject to tax in the EU countries will qualify. The Directive also provides for recapture of such losses once the subsidiary or permanent establishment becomes profitable.

Article 2 describes the operations falling within this Directive as follows:

“(a)         ‘merger’ shall mean an operation whereby:

–   one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company in exchange for the issue to their shareholders of securities representing the capital of that other company, and, if applicable, a cash payment not exceeding 10 per cent of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities,

–   two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, in exchange for the issue to their shareholders of securities representing the capital of that new company, and, if applicable, a cash payment not exceeding 10 per cent of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities,

–   a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities representing its capital;

(b)                      ‘division’ shall mean an operation whereby a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to two or more existing or new companies, in exchange for the pro rata issue to its shareholders of securities representing the capital of the companies receiving the assets and liabilities, and, if applicable, a cash payment not exceeding 10 per cent of the nominal value or, in the absence of a nominal value, of the accounting par value of those securities;

(c)                      ‘transfer of assets’ shall mean an operation whereby a company transfers without being dissolved all or one or more branches of its activity to another company in exchange for the transfer of securities representing the capital of the company receiving the transfer;

(d)                      ‘exchange of shares’ shall mean an operation whereby a company acquires a holding in the capital of another company such that it obtains a majority of the voting rights in that company in exchange for the issue to the shareholders of the latter company, in exchange for their securities, of securities representing the capital of the former company, and, if applicable, a cash payment not exceeding 10 per cent of the nominal value or, in the absence of a nominal value, of the accounting par value of the securities issued in exchange.”

Article 4(1) provides:

[a] merger or division shall not give rise to any taxation of capital gains calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes’.

However, Article 4(2) then goes on to define the value of the tax basis but states under Article 4(2b) that the transferred assets and liabilities are those effectively connected with a permanent establishment of the Merger company in the country of residence of the departing Merged company, so that these assets play a part in generating continuing profits or losses in the ‘departing’ State.. In other words, if there is no permanent establishment remaining, the capital gains tax exemption envisaged by Article 4(1) is not applicable. Thus the taxing rights of a particular member State are preserved through this requirement.

Moreover, Article 11(1)(a) provides that:

1. A Member State may refuse to apply or withdraw the benefit of all or any part of the provisions of Titles II, III and IV where it appears that the merger, division, transfer of assets or exchange of shares:

(a) has as its principal objective, or as one of its principal objectives, tax evasion or tax avoidance; the fact that one of the operations referred to in Article 1 is not carried out for valid commercial reasons, such as the restructuring or rationalisation of the activities of the companies participating in the operation, may constitute a presumption that the operation has tax evasion or tax avoidance as its principal objective or as one of its principal objectives’.

Therefore, it would be unusual to sanction a merger of a company in one Member State with a newly created SPV in another; one would look to existing companies for such a merger arrangement, and consider the commercial (non-tax) reasons for the merger. If, post-merger, there is no permanent establishment in the other country in the absence of business interests or assets therein (as per a relevant double tax treaty), then Article 4(2) seems to be inoperative This then negates the non-recognition rules of Article 4(1), so that the application of the Merger Directive in entirety appears to be irrelevant.

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