I am delighted to be able to give you advanced notice of the launch of the ITSAPT Association and to invite you to be amongst the first to review our new website www.itsapt.com. As you will see, it is split into three sections, Association, Publication and Conference.
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.