Editor John Riches
Law Business Research
Editor´s Preface
Chapter 1 EU DEVELOPMENTS….Richard Frimston
Chapter 2 THE FOREIGN ACCOUNT TAX COMPLIANCE ACT….Henry Christensen III and Toni Ann Kruse
Chapter 3 NOTES ON THE TAXATION OF WORKS OF ART IN THE UNITED KINGDOM….Ruth Cornett
Chapter 4 OECD DEVELOPMENTS…..George Hodgson
Chapter 5 ARGENTINA….Juan McEwan and Agustín Lacoste
Chapter 6 AUSTRIA…….Martin Ulrich Fischer
Chapter 7 BAHAMAS……John F Wilson
Chapter 8 BELGIUM…….Anton van Zantbeek and Ann Maelfait
Chapter 9 BERMUDA……Alec R Anderson
Chapter 10 BRAZIL……..Humberto de Haro Sanches
Chapter 11 BRITISH VIRGIN ISLANDS….Andrew Miller
Chapter 12 CANADA……Margaret R O’Sullivan, Jenny K Hughes and Christopher Kostoff
Chapter 13 CAYMAN ISLANDS…..Andrew Miller
Chapter 14 CHINA………Hao Wang
Chapter 15 CYPRUS…… Elias Neocleous and Philippos Aristotelous
Chapter 16 FRANCE……..Line-Alexa Glotin
Chapter 17 GERMANY…..Andreas Richter and Anna Katharina Gollan
Chapter 18 GIBRALTAR…Peter Montegriffo QC
Chapter 19 GREECE……..Aspasia Malliou and Eleni Siabi
Chapter 20 GUERNSEY….Keith Corbin and Mark Biddlecombe
Chapter 21 HONG KONG..Ian Devereux and Silvia On
Chapter 22 INDIA………..Joachim Saldanha and Megha Ramani
Chapter 23 IRELAND……Nora Lillis and Tina Curran
Chapter 24 ITALY………..Nicola Saccardo
Chapter 25 JAPAN………..Atsushi Oishi and Makoto Sakai
Chapter 26 LIECHTENSTEIN….Markus Summer and Hasan Inetas
Chapter 27 LUXEMBOURG…….Simone Retter
Chapter 28 MALTA………………Jean-Philippe Chetcuti and Priscilla Mifsud Parker
Chapter 29 MEXICO……………..Alfredo Sánchez Torrado and Roberto Padilla Ordaz
Chapter 30 NETHERLANDS…….Dirk-Jan Maasland, Frank Deurvorst and Jules de Beer
Chapter 31 NEW ZEALAND…….Geoffrey Cone
Chapter 32 RUSSIA……………..Maxim Alekseyev, Kira Egorova, Elena Novikova and Ekaterina Vasina
Chapter 33 SINGAPORE……….Chua Yee Hoong
Chapter 34 SOUTH AFRICA…..Hymie Reuvin Levin and Gwynneth Louise Rowe
Chapter 35 SPAIN……………….Pablo Alarcón
Chapter 36 SWITZERLAND……Mark Barmes, Arnaud Martin and Floran Ponce
Chapter 37 TURKEY……………..Turgay Kuleli
Chapter 38 UKRAINE…………….Alina Plyushch and Dmytro Riabikin
Chapter 39 UNITED ARAB EMIRATES….Amjad Ali Khan, Stuart Walker and Abdus Samad
Chapter 40 UNITED KINGDOM…..Christopher Groves
Chapter 41 UNITED STATES……..Basil Zirinis, Katherine DeMamiel, Elizabeth Kubanik and Susan Song
Appendix 1 ABOUT THE AUTHORS
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS
EDITOR’S PREFACE
There is no doubt that the twin recurring themes for 2015 at a global level in private wealth planning are those of transparency and regulation. The zeal of policy makers in imposing ever more complex and potentially confusing sets of rules on disclosure of beneficial ownership information seems unabated.
i Common reporting standard (CRS)
The centrepiece of cross-border automatic information exchange is CRS. This FATCA equivalent for the rest of the developed world is set to come into effect from 1 January 2016. At the last count just over 90 countries had committed to CRS. Its principal effects will be felt in two waves – among the so-called early adopters group the rules will take effect from 1 January 2016 and first information exchanges will apply in September 2017. For the second wave, there will be a year’s delay.
What is interesting about CRS is that the OECD has taken a central role in producing coordinated guidance on its interpretation. The draft guidance initially published in July 2014 was somewhat sketchy in nature and we can expect, as we move towards the beginning of next year, revised and more detailed guidance on a number of key issues.
Deep concerns exist about the extent to which information exchange between tax authorities under CRS will remain secure in the hands of the ‘home’ countries of beneficial owners. While the ‘normal’ way of signing up to CRS is via the multilateral convention that provides for exchange with other signatory nations, there are indications that some jurisdictions (at this stage the Bahamas, Hong Kong and possibly Switzerland) may seek to adopt a more ‘bilateral’ approach implementing CRS. If this approach becomes more widespread, then the practical implementation of CRS could be significantly delayed by jurisdictions who negotiate treaties on a one-by-one basis with 90 other countries.
While CRS is often compared to FATCA, there are some material differences that emerge from closer scrutiny. Whatever the shortcomings of FATCA, the ability to issue a global intermediary identification number and to sponsor entities on a cross-
border basis somewhat lessens the bureaucratic excesses of its impact. What is distinctly unclear about CRS at this point is whether equivalent mechanics will emerge. As CRS is currently written as a series of bilateral treaties between jurisdictions with no domestic law ‘anchor’ (as is the case with FATCA) concerns are being expressed about the potential duplication for complex cross-border structures of reporting. In this context, the July 2014 introduction to CRS notes that the rules as to where a financial institution (FI) will be deemed resident differs between jurisdictions – in some cases this will be based on the place of incorporation whilst in others it may be based on the place of effective management.
There are concerns as to how non-financial entities (NFEs) will be dealt with under CRS. There is anecdotal evidence emerging already in the context of FATCA that financial institutions, driven by concerns about fines from regulators for NFEs and the related ownership structure are subjecting bank account applications for NFEs to additional enquiries that generate very significant costs and delay.
It is noteworthy that there has been a significant crossover from the anti-money laundering (AML) or terrorist financing regime coordinated by the Financial Action Task Force (FATF). This is expressly provided in the CRS model treaty that imports into CRS the FATF concept of beneficial ownership. In the CRS world, this is known as ‘controlling persons’. By expressly linking the definition of controlling persons to that of beneficial ownership employed for FATF purposes, there is the prospect of the beneficial ownership definition evolving over time in accordance with principles adopted in that domain. It is noteworthy that, as well as looking to ultimate legal and beneficial ownership of an entity, these definitions also look to the capacity to exert influence and control in the absence of any formal legal entitlement. Thus the expanded definition is as follows.
Beneficial owner refers to the natural person who ultimately owns or controls a customer or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.1
It is completely appreciated that, in a law enforcement context, criminals and terrorists do not typically advertise their involvement in ownership structures where they are liable to be detected by the appropriate agencies. Transporting this definition wholesale, however, into the world of tax information exchange where domestic tax authorities may draw unfair and adverse implications from an attribution of being a ‘controlling person’ is more questionable. It is not a complete response to this concern to say, in the final analysis, if someone has no ability to enjoy the benefit of assets held within a particular structure that they can demonstrate this – the potential costs and bureaucracy of an unwarranted tax audit that may arise from such a misunderstanding will be more difficult to quantify.
Another area of concern is the capacity for banks who have, in the past, misclassified or misunderstood information about ownership structures. If this information is simply
1 http://www.fatf-gafi.org/pages/glossary/a-c/ – The Recommendations were adopted by FATF on 16 February 2012. (emphasis added).
‘copied over’ from AML records for CRS purposes then there is scope for false and misleading information to be exchanged in circumstances where the ‘beneficial owners’ may be completely unaware of such mistakes or misclassifications.
What follows from this is an increased importance for professional advisers to actively engage with clients to discuss the implications of these changes. Taken together, the combined impact of these changes is likely to be seen in years to come as a ‘paradigm shift’ in international wealth structuring. It is therefore critically important that the advisory community equips itself fully to be able to assist in a pro-active manner.
ii Public registers of beneficial ownership
On 20 May 2015, the EU published the final version of its fourth anti-money laundering directive (4AMLD). This commits the EU Member States to providing a public register of beneficial ownership within the next two years. What is noteworthy about the terms of the regulation is the fundamental distinction that has been drawn between ownership information about ‘legal persons’ (including companies and foundations) on the one hand, and ‘legal arrangements’ (including trusts) on the other. There is an obligation for information on legal persons to be placed in the public domain while information relating to trusts and equivalent arrangements will be restricted so that it is only made available to competent authorities.
The acceptance in the drafting of these regulations that there is a legitimate distinction to be drawn between commercial entities that interact with third parties, primarily in the context of business arrangements, and private asset ownership structures that are primarily designed to hold wealth for families is an encouraging one.
It should not, however, be assumed that the emphasis on privacy that underpinned this particular distinction will necessarily be a permanent one. There is a very strong constituency within the EU that still argues that a public register of trusts should be introduced at some stage in the future.
Turning to the UK, 2016 will see the introduction of a public register of beneficial ownership for companies in the UK. This legislation, to a large extent, anticipates the impact of 4AMLD although it is not completely symmetrical. The centrepiece of UK domestic legislation is the public identification of persons with influence over UK companies, known as ‘persons exercising significant control’ (PSCs). There are significant penalties for non-compliance. In particular, in circumstances where a PSC does not respond to the request for information from a company, not only can that refusal generate potentially criminal sanctions, it can also result in any economic benefits deriving from the shares as well as the ability to vote being suspended.
While it is appreciated that there are reasons why sanctions need to be applied to encourage people to comply, the harsh economic penalties may be seen as totally disproportionate to non-compliance. It is interesting to note that the PSC concept analogous to that of the ‘controlling persons’ in the context of CRS. As with CRS, the most complex area here is the extent to which those being seen to exert ‘influence’ without formal legal entitlement may be classified as PSCs.
One further interesting issue that needs to be considered as matters move forward is whether the impact of the EU public register for corporate entities will result in a ‘back door’ trust register in many cases. One of the categories for disclosure of PSCs in
the UK register is ‘ownership or influence via a trust’. In circumstances therefore where a trust holds a material interest in a company, this can result in not only the trustees and protectors of the trust, but also family members with important powers (such as hire and fire powers) being classified as PSCs and having their information placed on a public register. While this register will not give direct information about beneficiaries as such, in many cases it will provide a significant degree of transparency about family involvement. It seems likely that, over time, the EU will also look to ‘export’ a requirement for beneficial ownership information on public registered companies to be incorporated in many of the international finance centres. While IFCs have indicated that they are sceptical about the adoption of such registers in circumstances where there is not a common standard applied to all jurisdictions, it remains to be seen how long this stance can be maintained once 4AMLD is in full force.
iii Position of the United States
The United States stands out as having secured a position for itself in the context of cross- border disclosure that many feel is hypocritical. Specifically there is a carve out from CRS on the basis that the US has implemented FATCA. The constitutional position in the US where measures of this nature would tend to be introduced at a state rather than federal level also complicates the picture. In the absence of any comprehensive regime to regulate trustee and corporate service providers, the US appears to have achieved a competitive advantage in administering ‘offshore’ structures because it has exempted itself, in practical terms, from reciprocation on automatic information exchange. This is already leading to many considering the US as an alternative base from which to administer family structures in a more ‘private’ setting than is possible in IFCs once CRS take effect.
iv Global legal entity identifier system (GLEIs)2
A development flowing from the 2008 financial crisis is the introduction of GLEIs. In December 2014 a regulatory oversight committee relating to GLEIs introduced a task force to develop a proposal for collecting GLEIs information on the direct and ultimate parents of legal entities. The policy is to ensure financial intermediaries can track who they are dealing with as counterparties in investment transactions. The underlying policy that drives the creation of the GLEIs is to create transparency in financial markets. In the current phase 1 of the project, the information required to be collected is limited to ‘business card information’ about the entities concerned and will therefore be limited to a name, address and contact number. However, the ‘level 2’ data that is likely to be required will extend the reference data to relationships between entities. This could result in beneficial ownership information being required in due course. This proposal is likely to see some development in the course of the next six months but is yet another illustration of overlapping regimes for collecting beneficial ownership information that are likely to have a substantial effect on the operation of family wealth holding structures in the years ahead.
v Conclusion
The challenges of keeping abreast of changes in the regulatory and transparency arena are significant. These issues look set to be a significant driver in wealth strategy in the next three to five years. Navigating these issues will increasingly become a required skill set for professional advisers.
John Riches
RMW Law LLP
London
September 2015
Chapter 26
LIECHTENSTEIN
Markus Summer and Hasan Inetas1
I INTRODUCTION
In recent years, Liechtenstein has made numerous efforts to further improve the legal framework for wealth structuring and succession planning and to adjust to international developments.
On 1 January 2011 the new Liechtenstein Tax Act entered into force. With the new act, Liechtenstein introduced an attractive tax system, which complies with European law. In fact, the EFTA Surveillance Authority (ESA) has confirmed that the rules for private asset structures and the new IP box regime are compliant with the provisions of the European Economic Area agreement.
The specific features of the new tax system have turned Liechtenstein into an attractive jurisdiction for many purposes. With a corporate tax rate of 12.5 per cent and the reduction of the effective tax rate even further through the notional interest deduction, Liechtenstein has joined the league of most tax-efficient jurisdictions by European standards. Furthermore, the taxation of legal entities as private asset structures (PAS) offers an attractive way for individuals to structure their wealth.
Liechtenstein is also an interesting jurisdiction for individuals to take residence. The top income tax rate for
for a resident of the capital, Vaduz, is 20 per cent. Income from assets that are subject to wealth tax is not taxed directly. Instead, tax is currently levied on a notional income of 4 per cent of the tax value of these assets. Moreover, a favourable lump-sum taxation regime is available for foreigners, and there is no inheritance or gift tax. Residence permits are, however, currently issued on a restrictive basis mostly to ultra-high net worth individuals, but a relaxation of this practice is under discussion.
There were also important changes beyond tax law. On 1 April 2009 a new foundation law was introduced. One focus of the new law was on foundation governance,
1 Markus Summer and Hasan Inetas are partners at Marxer & Partner Rechtsanwälte.
implementing the checks and balances to prevent abuse and balancing the interests of the founder, the beneficiaries and the foundation itself. The favourable opportunities for asset protection have fully been preserved under the new law.
With the introduction of the new foundation law, the rules regarding the enforcement of forced heirship rights were amended and leave considerably more room for estate planning now.
II TAX
i Taxation of trusts
Trusts managed from Liechtenstein are subject to an annual tax of 1,200 Swiss francs.
No tax filings are necessary.2
ii Regular taxation of legal entities
Corporate tax rate and tax base
Legal entities that are taxable in Liechtenstein are subject to the corporate tax on their net income at a rate of 12.5 per cent under regular taxation rules.3
The net income is reduced by income from foreign permanent establishments, rental and lease income of foreign real estate, gains from selling real estate, distributions from foundations or trusts, dividends and capital gains on the sale of shares and unrealised capital gains on shareholding in companies both in Liechtenstein and abroad.4 Dividend income and capital gains from the sale of shares are tax exempt irrespective of the percentage of the shareholding. As a result, not only income and capital gains from interests in partly or wholly owned subsidiaries, but also income and capital gains from shares held as part of a securities portfolio, are tax-free.
Notional interest deduction
The new tax law introduced a notional interest deduction, which is currently 4 per cent of the modified equity as a deemed expense to ensure equal treatment of debt and equity. The modified equity is calculated by deducting the following items from the net equity:
a own equity;
b shares in legal entities;
c assets not required for the company’s purposes; and
d a deduction of 6 per cent of all assets, under exclusion of the items (a) to (c).5
The reason for the first three deductions is that they produce tax-exempt income and capital gains and, therefore, cannot be used to create a notional interest deduction. The
2 Article 65 of the Tax Act.
3 Article 61 of the Tax Act.
4 Article 48 of the Tax Act.
5 Article 54 of the Tax Act; Article 32 of the Tax Ordinance.
term ‘all assets’ refers to the balance sheet total.6 In case of 100 per cent equity funding, the effective notional interest deduction is reduced from 4 per cent to 3.76 per cent because of the deduction of 6 per cent of the total of all assets (100 per cent – 6 per cent = 94; 94 x 4 per cent = 3.76 per cent).
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